An escalating trade war, decelerating growth in Europe and China and an increasing dovish Fed were all factors that were supposed to make the United States a relative island of calm for investors this year.
But during January, S&P 500 index
companies that derive the highest concentration of revenue from the United States have lagged peers that get relatively large shares of revenue from either Western Europe, the BRIC countries (Brazil, Russia, India and China) or from international sources generally, according to an analysis by Goldman Sachs.
Year-to-date, the best performing of Goldman’s geographically-oriented basket of stocks are those in the S&P 500 that derive most of their revenue from Western Europe. This basket, which includes such firms as eBay Inc.
and McDonald’s Corp.
, derive a median 31% of their revenue from Western European countries and have risen 10% year-to-date.
The next-best-performing basket of stocks are those which derive large shares of revenue from the BRIC markets. This basket, which is composed of the 50 companies in the Russell 1000
index which derive a median 39% of sales from these emerging markets, have rallied 9% year-to-date.
The international basket, comprised of the 50 companies in the S&P 500 with the highest concentration of international sales more broadly — including firms like Mondelez International Inc.
and Aflac Inc.
— have gained 8% on the year.
Meanwhile, the domestic basket has lagged the rest of these groups, rising just 7% since the start of the year. The median stock in this basket, including firms like Verizon Communications Inc. and Target Corp.
, derives all of its revenue from the U.S., compared with 70% for the S&P 500 in the aggregate.
Whether this peculiar outperformance will last is another question altogether. For one, last year, companies in the domestic basket performed well above their geographic rivals, as those stocks fell 3% on the year, compared with a 6.4% decline in the S&P 500 overall.
Lamar Villere, portfolio manager at Villere & Co., told MarketWatch that the thesis for preferring companies that derive revenues domestically remains strong. By investing in these firms, “you’re avoiding the trade war, you’re not as concerned with slowing growth overseas,” he said.
That was the thinking that helped power a small-cap stock rally that marked the first three quarters of 2018, but that thesis unraveled as small-cap performance didn’t meet the expectations set by the macroeconomic environment and the predicted effects of the corporate tax cut passed in late 2017.
Meanwhile, the outperformance of domestically focused U.S. firms last year was a reversal of the previous two years, when the domestic basket rose a total of 47%, compared with a 56% increase for the international basket.
“Currently there has been more economic weakness on the margin internationally than at home,” Aaron Clark, portfolio manager at GW&K Investment Management, said in an interview. “I still think that you’ll get better growth longer-term in emerging markets, just because the fundamentals support that, as a middle-class emerges, and the internet becomes more available and consumers abroad have access to the same goods and services as we do,” he added.
Indeed, while Goldman analysts expect domestically oriented stocks to perform well this year, with earnings-per-share growth above the other baskets, that advantage will cease in 2020, while companies in the international basket will see better profit margins and return on equity over the next 12 months, they predict.
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