June 28, 2019—If you’ve been invested in international developed country stocks over the last ten years, you would have done much better investing in the international consumer staples, health care, and information technology sectors, rather than in financials or energy  (see Figure 1). Why has this been the case?

Figure : International developed stocks (MSCI EAFE) by sector

10-year annualized returns



Data as of May 31, 2019

The MSCI EAFE Index returned 6.2% over the same time period, 10-year annualized ending May 31, 2019.

Source: Bloomberg

Past performance cannot guarantee future results.  Indices are not available for direct investment. Investment in a security or strategy designed to replicate the performance of an index will incur expenses, such as management fees and transaction costs that would reduce returns.

Consumer staples, health care, and information technology have offered structural advantages

European stocks in the consumer staples and health care sectors (in particular, the pharmaceuticals industry) have offered sustained high rates of earnings growth.  In the information technology space, European and Japanese stocks have been participating, and in some cases leading, in smartphone, cloud, and industrial automation development.

The earnings growth of many stocks in the consumer staples, health care, and information technology sectors have been supported by high and/or strengthening profitability, combined with low leverage. Additionally, earnings from sales to, or within, the U.S. and emerging markets have helped to protect such stocks’ earnings from weak domestic economic activity in Europe and Japan.  Further, as the global economic cycle matures, investors have been willing to pay more for stocks which have offered less economically-sensitive earnings growth.

Likewise, sustained low interest rates have supported high valuations for stocks with long-term earnings growth prospects.  Low interest rates mean that investors apply a smaller discount to expected distant future earnings.

Financials and energy stocks have been structurally disadvantaged

Earnings of European and Japanese banks and diversified financials have been constrained by weak domestic economic activity, which impacts loan demand.  Some European banks remain saddled with loan quality problems arising from the Global Financial Crisis of 2008-2009, Eurozone debt crisis, and subsequent austerity measures.  Moreover, earnings of European and Japanese financials have been adversely impacted by negative interest rates across most of the yield curve.  As for European energy stocks, their earnings are highly sensitive to volatile oil prices. It is difficult for energy stocks to sustain high earnings and returns.   With earnings from financials and energy stocks weak or volatile, investors must rely on dividend yield to provide the bulk of such stocks’ total return.

Core narrative

There have been lengthy periods in the past—prior to the last dozen years—when international financials and energy stocks have outperformed those in consumer staples, health care, and information technology.  However, these periods have generally been early-cycle, when global economic growth is recovering, inflation is rising, yield curves are steep, and oil prices are at sustained high levels.  Perhaps needless to say, we are currently in a late-cycle environment where global economic growth is uncertain or perhaps faltering, inflation is well-contained, yield curves are flat or negative, and oil prices are volatile.  Although no one can predict how the markets will perform,  we believe that international consumer staples, health care, and information technology stocks may continue to outperform financials and energy, at least for the near future.  However, as a caveat, we would note that even during the last dozen years, there have been periods when such quality growth stocks have sold off, after reaching too-high valuations, or when oil prices have risen, buoying energy stocks. However, these periods have been fairly brief, persisting only a quarter or two.


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