Forget US Stocks and Head Overseas, BCA Says

American equities are too costly, and there are better, cheaper prospects elsewhere, per the research outfit.



Domestic stocks are now too hot to handle. That’s the conclusion of a BCA Research report, which found that US stocks are “looking pricey,” but there are some real bargains abroad. Wise investors will head offshore instead of sticking around with overbought US shares, the firm advises.

Using the Shiller price/earnings (P/E) ratio, BCA chief investment strategist Peter Berezin and his team found that “valuations outside the US are more reasonable.” To its adherents, the Shiller multiple, named after Yale economist Robert Shiller, is a better gauge than the common metric, which uses 12 months trailing earnings. The Shiller version covers 10 years of past earnings and adjusts for inflation.

US stocks trade at a Shiller P/E ratio of 37, but non-US stocks change hands at a ratio of only 20, Berezin found.

The non-Shiller P/E is 25.6 for the S&P 500, which has a good performance over the past 12 months of just under 25.5%, although thus far in the new year it is down 3.5% amid concerns about the coronavirus and inflation.

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BCA is not alone in its enthusiasm for non-US stocks. Fidelity Investments, in the fund colossus’ look-ahead analysis, expects international stocks to outpace US equities over the next 20 years. Fidelity researchers wrote that “many international stocks represent relative bargains, which suggests they may offer opportunities for attractive returns as well as providing diversification for US investors’ portfolios.”

In fact, Morgan Stanley believes American stocks will finish this year 5% lower than 2021’s showing, while European and Japanese shares will power ahead. Europe’s stock will be up 8% and Japan’s ahead 12%, the firm projects.

“The persistent price outperformance of US stocks for much of the last decade has been driven by superior and more durable earnings trends,” said Mike Wilson, Morgan Stanley chief US equity strategist. “But uncertainties are mounting around cost pressures, supply issues, policy uncertainty, and tax changes.”

Indeed, there are bargains a-plenty beyond American soil. Take neighboring Mexico, whose stock index over the past 12 months is up 20.7% and ahead 0.9% in 2022. Its regular trailing P/E stands at 15.8. Mexican investments are benefiting from post-pandemic demand from US consumers, plus buoyant oil prices.

In Britain, which has had many economic woes from Brexit to an Omicron surge, the FTSE 100 is ahead 17% since mid-January 2021 (and off 3.1% this year), with a P/E of 18.2.

Germany, the industrial powerhouse of Europe, is thought to be in a good economic position once the pandemic recedes. Its DAX index is slightly in the red this year after a 15.6% return for the previous 12 months. P/E ratio: 15.4.

Japan’s economic recovery from the pandemic slowdown may finally be underway, analysts say. Its Nikkei 225 scored just a 2% increase over the past 12 months and is down 1.6% this year. The P/E is an affordable 16.1.

Beset by COVID-19 troubles that have put some economic activity in lockdown, China may see its vaunted growth engine sputter somewhat going forward. Goldman Sachs recently sliced the nation’s gross domestic product (GDP) forecast for 2022 to 4.3% from 4.8%. The hope is that the Beijing regime will crank up the stimulus in time for next fall’s Communist Party conclave, where President Xi Jinping seeks a third term.

On the stock front, China’s Shanghai Composite has eked out a mere 0.6% advance over the past 12 months, and is in the red 2.7% for 2022. The P/E is 15.1.

In all of these cases, foreign shares are cheaper than those in the US and, if the economic gods allow, may chart decent courses in 2022 to justify their purchase.

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Despite Record Returns, Kentucky’s Pensions Remain Severely Underfunded

Even after investment gains of 25%, funding levels for the state’s public pensions range from only 16.8% to 60.4%.



Despite raking in record investment returns of 25% during fiscal year 2021, the funded levels for Kentucky’s public pensions remain perilously low, according to the recently released annual comprehensive financial report from the Kentucky Public Pensions Authority (KPPA).

Collectively, all funds operated by the KPPA earned an investment return of 24.95% net of fees for the fiscal year ending June 30, compared with a meager 0.48% return in fiscal 2020. The five pension funds KPPA manages are the County Employees Retirement System (CERS) Hazardous and Nonhazardous funds, the Kentucky Employees Retirement System (KERS) Hazardous and Nonhazardous funds, and the State Police Retirement System (SPRS).

KPPA ended the fiscal year with $22.9 billion in assets, based on market value, compared with $18.4 billion at the of fiscal year 2020. Its overall performance also easily topped its assumed rates of return, which are 5.25% for the KERS Nonhazardous and State Police pension funds, and 6.25% for the other pension funds.

And according to valuations conducted by KPPA’s actuary, the funded status of each of the plans improved during the fiscal year, which means employer contribution rates for fiscal years 2023 and 2024 will be lower than in recent years in all but one case. However, while this is certainly good news for the state’s long-underfunded public pensions, the funded levels for each of the five state pension funds remain well below what is generally considered to be a healthy funded position.

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KERS Hazardous was the best funded among the state pensions, as its funded ratio rose to 60.4% from 55.3% in fiscal 2021. CERS Nonhazardous’ funded level increased to 51.8% from 49.4% during the year, while CERS Hazardous saw its funded ratio move up to 46.7% from 45.1%. The funded level for SPRS grew to 30.7% from 28.1%, while KERS Nonhazardous remained a paltry 16.8%, though this was better than the 14.2% it reported at the end of fiscal 2020. Pension funds are generally considered to be in “critical status” if they have funded levels lower than 65%.

The actuary projected that all of the state’s pension and insurance plans could reach fully funded levels by fiscal year 2049, but that would only happen if KPPA receives the full actuarially determined contributions and all actuarial assumptions are met every year until then. That might be a lot to expect considering that many forecasters expect a low return environment in the coming years, while the number of active retirees paying into Kentucky’s retirement systems continues to decline.

“All retirement systems continued their downward employment trends,” the report said, led by the KERS Hazardous plan, which saw its active workforce drop 7.4% from the previous year. The number of KERS Nonhazardous plan employees fell by 4.7% in fiscal 2021, followed by CERS Nonhazardous, SPRS, and CERS Hazardous, which saw employment fall 3.7%, 2.9%, and 2.3%, respectively, for the year.

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