14 Contrarian Stock and ETF Picks for Global Exposure

Despite challenging markets at home, many advisors have pointed to the fact that U.S stocks have nevertheless been an outperformer relative to many global markets. Could the tide turn? Several MoneyShow.com contributors think risk-oriented investors should consider stepping into emerging and international positions. Chuck Carlson, DRIP Investor I have been expecting foreign stocks to outperform U.S. stocks in recent years, but I'm still waiting. Covid hit overseas economies especially hard, causing foreign stocks as a group to woefully underperform the rebound that U.S. equities posted in 2021. And 2022 turned into a lousy year for all stocks, with foreign stocks doing even worse than U.S. stocks year to date. If foreign stocks underperform U.S. stocks for 2022 overall, it will be the ninth year out of the last ten that foreign stocks have underperformed U.S. stocks. So, is the setup finally improving for foreign stocks? The answer is no. Covid continues to be a problem in parts of the world, especially in China. The war in Ukraine has been a destabilizing factor. And the strong U.S. dollar puts added pressure on certain foreign economies that require U.S dollars to repay their debts. To be sure, valuations on foreign stocks are discounting at least some of these troubles. The P/E ratio on the benchmark MSCI EAFE Index is approximately 12 versus 17 on the S&P 500. And the dividend yield on the MSCI EAFE is over 4% versus 1.7% on the S&P 500. So, the valuations and cash flows are enticing. However, international stocks, as a group, have probably been one of the bigger value-trap investments in the last decade, so it is dangerous to say that this time around will be different. Still, I don't think investors should be abandoning overseas exposure either. Factors that would provide a boost to foreign stocks would be a resolution to the Ukraine war and some softening in the dollar. Also, a sustained improvement in value stocks would help. Despite the significant underperformance of international investments for the last several years, I still maintain exposure to international stocks, primarily through my company's 401(k) plan as well as a few individual international stocks. I still think the pendulum will swing back at some point in favor of foreign stocks, and I want to have exposure when the swing occurs. Said differently, I believe in reversion to the mean, and I can see a time that value will matter again. But I think it is important to moderate your exposure to international stocks. In a long-term investment program, 10%-15% international exposure, with the bulk in developed countries and a smaller position in emerging markets, is a reasonable target level for a portfolio that is 100% invested in stocks. If you have a balanced portfolio (say, 50% to 60% in stocks), cut that 10%-15% exposure in half. The most common way to invest overseas is via global mutual funds and exchange-traded funds. With one investment you can diversify your funds across many stocks and countries. Vanguard offers two broadly diversified international funds, the Vanguard International Growth mutual fund and the Vanguard FTSE Developed Markets exchange-traded fund. For coverage of small and mid-cap international stocks, consider the iShares MSCI International Small-Cap Multifactor exchange-traded fund. And for emerging markets, the Vanguard FTSE Emerging Markets Index exchange-traded fund offers a low-cost option. While using mutual funds and ETFs is certainly the easiest and simplest approach, you will probably have a better chance of beating U.S. stocks by investing in individual international stocks. Because of the breadth of choices across the globe, I think international stocks are probably less efficient and under-researched, which may present opportunities. Thus, when investing overseas, I prefer a hybrid strategy, which considers funds and ETFs along with individual foreign stocks. Think of it as a hub-and-spoke approach to international investing. The hub of the portfolio consists of mutual funds and ETFs. The spokes represent individual stocks. The good news is that it is extremely easy for any U.S. investor to buy individual foreign stocks via American Depositary Receipts. ADRs are securities that trade on U.S. exchanges and represent ownership in shares of foreign companies. Investors buy and sell ADRs just as they buy and sell U.S. stocks. ADRs are quoted in U.S. dollars and pay dividends in U.S. dollars. And those dividend payments, in many cases, receive the current preferential tax treatment afforded qualified dividends paid by U.S. companies. Among individual stocks, two that I own and recommend for long-term returns are Novo Nordisk and Ryanair Holdings . Novo Nordisk, based in Denmark, is a global leader in the treatment of diabetes. According to the International Diabetes Federation, the number of adults living with diabetes is expected to rise to 780 million by 2045. The stock is one of my favorite plays in the healthcare space. Based in Ireland, Ryanair is Europe's largest airline group. The company is targeting 166.5 million passengers for 2023 versus 97.1 million in 2022. The stock has taken a substantial tumble this year and is down 50% from its 52-week high. However, I like the company's business model, its strong hedges against higher fuel prices, and its ability to gain market share from weakened airlines in Europe. Two additional stocks I find particularly interesting include MercadoLibre , the Amazon of Latin America due to its fast-growing e-commerce platform; and Deutsche Telekom , a German telecommunications company with a 48% ownership stake in T-Mobile . Gavin Graham, Internet Wealth Builder The U.K. is essentially the first shoe to drop as investors adjust to the new reality of higher long-term interest rates. The selloff was exacerbated by the structure of U.K. pension funds, where defined benefit plans that pay out a certain percentage of final salaries are required to match assets with liabilities and increase their percentage invested in gilts regardless of their yield. As a result, when the price of bonds began sliding, their losses grew rapidly. This was reinforced by the fact that the very low yields had meant many pension funds had used leverage to increase their returns and were effectively hit by margin calls. I have recommended buying U.K. large capitalization stocks including such multinational stalwarts as drinks giant Diageo , consumer products leader Unilever , drugs maker GSK plc , and U.S. and U.K. power company National Grid . All of these derive at least 40% and in some cases much more of their revenues and earnings from outside the U.K. As a result, they benefit from a weaker pound, plus they pay attractive and rising dividends. They remain defensive stocks in a slowing global economy and are attractive at present levels. Previously, I recommended the iShares MSCI United Kingdom ETF . It invests in the U.K.'s largest listed companies, which on average derive over 65% of their revenues and earnings from exports or overseas operations. This ETF is down 19% over the last year. The recent selloff allows them to buy world class companies that trade at lower valuations than their North American competitors simply because they have their listing in the U.K. Should the negative reaction be overdone, then buyers would have the additional tailwind of a domestic economy that isn't as badly affected as more pessimistic commentators believe. Carl Delfeld, Cabot Explorer Stocks have pulled back sharply this year for multiple reasons including interest rates rising, but a key reason is that valuations were stretched a bit far relative to earnings, book value and dividends. This was not the case for many international markets and the strong U.S. dollar has made them extremely cheap. Sir John Templeton, the dean of international investing, called this sort of market situation a sign of maximum pessimism, and a good time to buy. This brings us to the WisdomTree Emerging Markets High Dividend ETF , a basket of high dividend stocks based in Latin America, Eastern Europe, and Asia. Emerging markets make up about 80% of the countries in the world, representing 77% of the world's landmass and 85% of its population. These countries now represent roughly 60% of total global GDP while just two decades ago they accounted for only 23%. Every day, approximately 150,000 people in emerging markets move from the countryside to cities in search of better opportunities. From education to health, infrastructure to financial markets, these nations have made major strides. Companies, domestic and international, are making a lot of money meeting the wants and needs of these 6.6 billion people, as they become an upwardly mobile world middle class. Yet it seems that most investors have zero or little direct exposure to these dynamic markets while I recommend that you have about 10% of your equity portfolio in emerging markets. WisdomTree Emerging Markets High Dividend ETF covers 17 different emerging markets and gives broad exposure to large caps, mid-caps and small caps in these countries. This ETF has a clear income and value strategy. The stocks in its basket tend to be conservative, defensive companies with low valuations and high dividends. And WisdomTree makes adjustments to the portfolio every year to make sure the companies in the ETF basket are in the top 35% of emerging market companies by dividend yield. Furthermore, this ETF holds some of the cheapest quality stocks in the world with an average price-to-earnings ratio of 5.5 (vs. 12 for the MSCI Emerging Markets Index and about 20 for the S&P 500). And its average stock holding trades at only 1.2 times book value and yields 7.7% (versus 1.4% for the S&P 500). To sum it up, the stocks in this ETF could more than triple in value and they would still be cheaper than the S&P 500. The fund, while down 16% so far this year, was up 11.7% in 2021 versus negative-2.5% for the MSCI Emerging Markets Index. It does take a leap of faith to be a contrarian and buy assets like these that are out of favor and largely ignored. But that is how smart investors often earn higher returns with less risk. Also keep in mind that blending emerging market stocks with U.S. stocks actually reduces your portfolio's volatility since the two asset classes don't move together. Emerging markets beat to their own drummer. In my opinion, emerging market equities are the world's most undervalued asset class.

14 Contrarian Stock and ETF Picks for Global Exposure

Risk-oriented investors should consider stepping into emerging and international positions.

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