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Foreign Equities Aren't as Cheap as You Might Think

Strong dollar obscures decent returns.

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Foreign equities haven't kept pace with their U.S. counterparts, in dollar terms, for quite some time. The S&P 500 has beaten the MSCI All-Country World ex USA Index (ACWI) in five of the last seven calendar years. Since equity markets hit bottom during the credit crisis in March 2009, the S&P 500 has gained an annualized 22.5% through January versus 14.9% for the ACWI. The gap has been especially pronounced during the past three years, with the S&P 500 gaining 17.5% annualized versus just 6.6% for the ACWI.

There's no shortage of reasons as to why foreign equities have lagged. U.S. companies have enjoyed far better earnings growth and higher returns on capital since the last recession. The U.S. economy has also been stronger than most developed markets, with Europe's economy stuck in neutral; emerging-markets growth is slowing, too. Plus, there's headline risk coming out of a Greece again. With the country quickly running out of money and a new government looking to end austerity measures, the Greek equity market has been in free-fall. In the nearly 12 months since its 52-week high in March 2014, the MSCI Greece Index is down more than 60%. This has little direct impact on the ACWI's returns given that Greece is just 0.1% of the index, but the country adds uncertainty to the eurozone overall.

Kevin McDevitt does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.