Where Are the Best International Opportunities?

Russia’s invasion of Ukraine in February 2022 had far-reaching consequences across Europe.

European emerging markets, like Hungary, Poland and Turkey, have been the worst performers due to their reliance on Russian energy and food imports. For example, the iShares MSCI Poland ETF (EPOL) is down about 27% since January – significantly worse than the Vanguard European Stock Index Fund ETFs (VGK) more modest 19% decline.

While many European stocks have had subpar performance, the Global X MSCI Portugal ETF (PGAL) is up 3% on the year, and several other economies posted above-average performance. At the same time, the fall in many European indices has also pushed valuations to about 13x – well below their long-term average and developed market peers.

Russia’s invasion of Ukraine also pushed up the price of many commodities, benefiting countries that are net exporters.

The Russian economy made up less than five percent of the MSCI Emerging Markets Index at the beginning of 2022, but it produces about 10% of petroleum, 20% of natural gas, and 17% of wheat. Russian companies also make enough steel, platinum, palladium and other materials to affect specific global markets.

Brazil, Chile, Colombia and Peru have been big beneficiaries of higher commodity prices over the past few months. For example, the iShares MSCI Brazil ETF (EWZ) is up nearly 12% this year, while the iShares MSCI Colombia ETF (ICOL) isn’t far behind, with an 8% gain for the year. And these markets could continue to benefit from elevated prices.

Chinese stocks remain uncertain amid increasingly tense geopolitical relations and the SEC’s crackdown on Chinese ADRs.

The SEC has begun identifying Chinese companies that trade in the U.S. as ADRs but fail to comply with the 2020 Holding Foreign Companies Accountable Act (HFCAA). While many believe the agencies will force these companies to delist, these delistings wouldn’t occur until 2023 at the earliest, meaning there’s a limited near-term risk.

But, in addition to regulatory hurdles, China’s aggressive COVID-19 lockdowns continue to hurt its domestic economy. Moreover, while the government promised action to relax its zero-COVID policy and boost its economy, there’s a lot of uncertainty surrounding the timing of these actions and their ultimate implementation.

Investors looking for simpler exposure to international markets may want to consider actively-managed ETFs.

The Dimensional International Value ETF (DFIV) is down less than five percent over the past year – handily outperforming the broader U.S. stock market. And by focusing on undervalued opportunities, the fund managers are well-positioned for a potential global bear market with a significant margin of safety relative to growth stocks.

Another option is the Avantis International Small Cap Value ETF (AVDV), which is down about 8% this year and is again better than the broader U.S. market. With a focus on smaller companies, the fund’s portfolio may be less impacted by interest rate movements and less correlated with global macroeconomic trends.

The U.S. stock market is down nearly 20% since the beginning of the year, which is on par with many other developed markets. As a result, investors may want to consider diversifying into international markets where commodities exposure and other factors could offer upside. Or alternatively, consider active managers capable of making these moves.

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