Investing | international stock outlook

Opportunities in developed markets

While EMs may present the most attractive investment opportunity for those looking to venture outside the US, stocks of high-performing companies listed in Europe, Japan, and other developed markets (DMs) may also be increasingly attractive.

DM stocks such as those of European companies have experienced lower prices than the US partly because European Union countries have experienced slower growth. But unlike the US, where the Federal Reserve has kept interest rates steady since December, the European Central Bank, Bank of England, and Bank of Canada have all been cutting rates. Households and businesses in DMs such as Europe and Canada tend to be more sensitive than the US to changes in interest rates, and they are likely to benefit from rate cuts which may lift stock prices.

Bill Bower, manager of the Fidelity® Diversified International Fund (), focuses on finding high-quality companies in developed markets. “They’re home to high-quality companies with some unique investment ideas that are adapting as trade and security relationships between Europe and the US continue to shift,” he says. “If Europe is looking to be more independent, its companies will have to make business and cost-structure decisions. They have to identify what they do best—and it’s my job to find the companies that will benefit the most from that process.”

For his part, Kennedy likes European luxury goods companies which deliberately keep their products scarce and prices high, helping the business to thrive, irrespective of consumer spending trends. These include Hermes International, one of the world’s largest and most admired makers of upscale luggage, apparel, and accessories and Italian sports car manufacturer Ferrari which produces fewer cars than it could sell, creating a perception of brand exclusivity and driving demand.

Jed Weiss, who manages Fidelity® International Small Cap Opportunities Fund (), is seeing opportunities as another DM also makes long-term changes to the status quo. “In Japan, long-hoped-for corporate governance reforms are finally taking hold,” he says. “Crucial changes in Japan’s Corporate Governance Code will yield promising opportunities. Historically, Japanese corporate culture has not always prioritized alignment of management and shareholder interests as highly as in the US or Europe, nor has it placed a lot of emphasis on board accountability and independence,” he explains. “Now that’s changing.”

Weiss says another critical change is the reduction in the number of publicly traded companies holding shares in other publicly traded firms, which frees up cash for them to buy back their own stock or pursue other shareholder-friendly activities, a potential game-changer, in his view. “I’m eager to capitalize on reform-driven investment opportunities as they arise,” he says.

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