00:00Joining me now, Brett Schiele, head of ETF specialists at Alliance Bernstein.
00:04Brett, thanks so much for joining me at the desk.
00:06Thank you for having me today.
00:07So we have seen really impressive returns from U.S. stocks.
00:12Fourth quarter is historically the strongest quarter of the year,
00:16and you're telling us that we should be investing internationally.
00:20Make the case. Why should we be putting money abroad?
00:22Well, you know, it's been a really strong year for U.S. stocks.
00:25It's also been a very strong year for international equities.
00:30And so if I actually think about performance year to date,
00:33we see that international equities have been outperforming pretty sizably relative to the U.S. equity market.
00:39Now the question really becomes, like, is it already baked in?
00:43And I think the answer to that is we don't believe so.
00:46We believe there's still room to run within international equities for many reasons.
00:50Looking out 12 to 24 months, what is your bull case for international stocks?
00:56So I don't have a number to give you,
00:59but what I can tell you is that there are a number of catalysts that are taking place right now
01:07that are unique to this period of time, and we still see those running forward.
01:14I'll give you a couple examples.
01:16So if we think about, you know, what's occurring in Europe today,
01:21we see a number of catalysts, right, within the European markets for equities.
01:27One of those being, for example, defense spending, right?
01:30We see that NATO members are coming out and saying,
01:32OK, you know, we've been having to hit our 2% of GDP target for defense spending.
01:38Traditionally, we weren't there.
01:39But since 2014, they've kind of doubled their defense spending and they're there.
01:43But now, now the EU is coming out and saying we actually want to hit more of like a 5%
01:47of GDP target for defense spending.
01:50That means additional stimulus being put into the market.
01:53So that's one example.
01:54But even if I think about ECB, the ECB and rates, you know,
01:57we've seen that the ECB has really kind of led the U.S. in terms of rate cuts.
02:01So they've brought, you know, their, essentially their rate,
02:05their lending rate down by half, right, in the past year.
02:08And now we just see the U.S. start to kick up, you know, pick up there.
02:11So between, you know, stimulus, rate, environment,
02:15we really think there's like a number of different catalysts kind of promoting,
02:18you know, international equity investing.
02:21That's specific to Europe.
02:23What about other international markets?
02:26That's a great question.
02:27So, you know, I'll give you another example.
02:29If we think about Japan, right, let's take it to Asia.
02:31If we think about the Japanese market, you know, within Japan,
02:35we've actually seen a change in sort of governance, right?
02:39And not to get too kind of in the weeds on this,
02:42but, you know, there were structures within Japanese investing
02:45where you saw companies sort of investing in each other.
02:47We're seeing that start to go away.
02:49What does that mean?
02:50It means that there's a more kind of market-friendly,
02:53competitive environment in Japan within the Japanese equity market.
02:57Like, that's different.
02:58And if I think about also within AIPAC, China, right?
03:02A huge component of emerging market investing.
03:05You know, we see that the Trump administration
03:07and the Chinese government are coming together
03:09and thinking about how they can, you know, work out a deal there.
03:12I think that's kind of an open question,
03:14but sort of leading towards a yes at some point, we would expect that.
03:18So I think that there's a number of kind of catalysts outside Europe
03:22that are also supporting that.
03:22So the catalysts are there, but what if I'm an investor and I'm like,
03:26but, you know, U.S. big cap, large cap tech is doing so well.
03:31Why diversify if that's maybe what I know and I'm more familiar with?
03:35So maybe speak to the importance of diversification,
03:37especially if the market does get choppy.
03:40Yeah.
03:40And I wouldn't tell everyone to sell all their tech today,
03:43but I do think there's more room for international equities today.
03:46And, you know, I think about diversification as a key point, right?
03:49You said the word.
03:50I think you kind of nailed it on the head.
03:52If I look at the S&P 500 today, the 10 largest names within that index
03:59account for like 40% of the S&P 500.
04:03If I look at the IFA index, right?
04:07So non-North American companies, and I look at the top 10 largest names
04:12within that index, it's more like 10 to 15% of the index.
04:15Like there is just such concentration within U.S. large cap equities today.
04:21And if anything, that concentration is growing.
04:24It's not reducing.
04:25And so if you want to think about diversifying your portfolio,
04:29international equities is a great way to do it.
04:31And despite the fact that we have seen outperformance
04:34in some of the international markets this year alone,
04:38they're still trading at a meaningful discount to U.S. stocks.
04:41Do you expect that gap to close then?
04:43I mean, we could, right?
04:44And so it's interesting, if you look back over the past several years,
04:48European stocks and international stocks have been trading at a discount to U.S. stocks.
04:52So that's not necessarily new, but I think the magnitude of that discount has grown.
04:58I mean, we're at like a 20-year, you know, we haven't seen discounts this high
05:02within the past 20 years, right?
05:05International equities are trading at something like 30-ish percent discount
05:09relative to U.S. equities.
05:11So there's something there.
05:13So talk about the best ways to do this.
05:15Talk about the best ways to put money to work abroad.
05:18Yeah.
05:18So I think there's a number of different ways that you can invest in international equity markets.
05:22I mean, at Alliance Bernstein, I spend my time talking to clients about different ETFs that we offer.
05:28We have several in that space.
05:30As sort of like our core international equity product, we have the ticker ILO, I-L-O-W, listed on the New York Stock Exchange.
05:38That product really provides about 90% upside capture, 70% downside capture, and really focuses on three things.
05:45That is quality, stability, and reasonable price point.
05:48So that is sort of a core building block that you can use within your portfolio.
05:53Outside of that, if you're more of a growth investor, we recently launched on the New York Stock Exchange the AB International Growth ETF, IGGY, I-G-G-Y.
06:02Not Iggy Pop.
06:03But that is much more of a pure growth focus, great team behind it, with over 15 years of experience in that space.
06:12What's the most overlooked opportunity right now when it comes to international markets?
06:17Yeah, that's a very good question.
06:20I think that if I don't think about it from like a sector play, because I think we can spend some time talking about that.
06:26I actually, you know, I'm a strong believer that the emerging markets are kind of an interesting opportunity right now.
06:32I think a lot of the tariff uncertainty has been priced in.
06:37We see, again, as I mentioned, you know, the Chinese coming to the table in terms of trying to cut a deal.
06:42We see the U.S. dollar weakening, which bodes well for emerging market economies, many of whom are financing their businesses and U.S. dollars.
06:51They're getting essentially like some debt relief, right, just because of the effect.
06:55So I think that's a really interesting part of international markets to look at today.
06:59Okay. And then just kind of final takeaways for investors who maybe now understand the importance of diversification, understand the importance of putting some money to work abroad.
07:10What's your best advice for them as they kind of think about adding this to their portfolio?
07:15Look, I think think about risk management, right?
07:18It's not like always the most exciting thing to talk about, but I think it's critical.
07:22Like when you are looking at your total portfolio, you need to consider all of your risks and diversification is going to help you balance out your risks.
07:30And, you know, without realizing it, you're probably more exposed to U.S. large cap names than you anticipated.
07:36So as you're thinking about rebalancing your portfolio, maybe take some of the run-up that you've had there and start to apply it elsewhere to diversify your portfolio.
07:44All right. We'll leave it there.
07:45Brett, thanks so much for sharing some insights on the international markets.
07:49Appreciate it.
07:49That's Brett Scheele, head of ETF Specialists at Alliance Bernstein.
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