Geopolitical headlines are reaching a fevered pitch. The situation in Greece has solidified its place in history via the acrimonious "Grexit" moniker. A bear is raiding the campsite in China’s A-share markets. Who would have thought a pot of honey-doused oversubscribed IPO's and astronomical valuations would be enough to attract such a beast? Iran could be days away from releasing the annual equivalent of 700,000 barrels of oil into daily global supply, thus, further complicating OPEC's strategy in the midst of a global glut.
Disciplined investors know to never let a crisis get in the way of a good opportunity. Patient, long-term investors may soon have occasion to pick up select foreign investments at deep discounts. Just as stocks and bonds come in and out of favor, a similar rotation happens among foreign (Ex-U.S.) and domestic (U.S.) stocks. Since the 1970’s, there have been four prior cycles of U.S. outperformance. Each leg of the cycle tends to last several years. We are now over five years into the current cycle of US outperformance. Assuming the cyclical nature of global markets remains intact, U.S. outperformance is long in the tooth.
The previous cyclical peak for U.S. outperformance was around 1997, as can be seen in the chart above. At the time, the Asian Financial Crisis was in full swing. An over extension of credit and crushing debt-to-GDP ratios resulted in removal of currency pegs to the U.S. dollar—de facto currency devaluations—across Asia. Sound familiar? Thailand, Indonesia, and South Korea bore the brunt of the market impact from the Asian Contagion, but all foreign markets suffered relative to the U.S. Those events set the stage for an inflection point in global markets that handsomely rewarded investors in foreign markets over the majority of the next decade.
The point of maximum pessimism is the long-term investor's day to shine.