Goldman Sachs expects European and emerging-market equities to beat the U.S. stock market over the next decade.
Goldman Sachs recently updated its 10-year forecast for global equities. The S&P 500 (^GSPC +0.05%), a benchmark for the U.S. stock market, is projected to return 6.5% annually over the next decade. But analysts led by Peter Oppenheimer expect European and emerging-market stocks to do better.
In U.S. dollars, European stocks are projected to return 7.5% annually, supported by strong earnings growth, a relatively high dividend yield (about 3%), and stock buybacks. Similarly, emerging-market stocks are projected to return 12.8% annually, supported by particularly strong earnings growth in China and India.
For individual investors, Vanguard FTSE Europe ETF (VGK 0.06%) and the Vanguard FTSE Emerging Markets ETF (VWO 0.02%) provide cheap and convenient exposure to stocks in those markets. Here are the important details.
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1. Vanguard FTSE Europe ETF
The Vanguard FTSE Europe ETF tracks the performance of about 1,200 companies located across Europe, especially the United Kingdom, Switzerland, France, and Germany. The index fund is most heavily weighted toward stocks in three market sectors: financials (24%), industrials (19%), and healthcare (13%).
These are the top five holdings in the Vanguard FTSE Europe ETF::
- ASML Holding: 3.5%
- Roche Holding: 2%
- HSBC Holdings: 1.9%
- Novartis: 1.8%
- AstraZeneca: 1.7%
Importantly, while Goldman Sachs expects European equities to outperform U.S. stocks in the next decade, the opposite happened in the last decade. In fact, the S&P 500 achieved a total return of 335% (15.8% annually), while the Vanguard FTSE Europe ETF achieved a total return of 174% (10.5% annually).
Put differently, the U.S. benchmark has beat this Europe-focused index fund by 161 percentage points since February 2016. However, Goldman analysts argue that U.S. stocks are very expensive by historical standards, so European stocks (which generally trade at cheaper valuations) could outperform. Also, Goldman analysts expect the U.S. dollar to lose value relative to the European euro, contributing to outperformance for U.S.-based investors.
Nevertheless, I would keep a larger percentage of my portfolio in an S&P 500 index fund. But the Vanguard FTSE Europe ETF is certainly a cheap and convenient way to get exposure to European equities. It has an expense ratio of 0.06%, meaning shareholders will pay just $6 annually in fees on every $10,000 invested. That is much cheaper than the average expense ratio of 0.81% on similar funds.
2. Vanguard FTSE Emerging Markets ETF
The Vanguard FTSE Emerging Markets ETF measures the performance of about 6,200 companies located in emerging markets, especially China, Taiwan, and India. The fund is most heavily weighted toward stocks in three market sectors: technology (29%), financials (21%), and consumer discretionary (12%).
These are the top five holdings in the Vanguard FTSE Emerging Markets ETF as listed by weight:
- Taiwan Semiconductor: 11.6%
- Tencent Holdings: 4.3%
- Alibaba Group: 3.3%
- HDFC Bank: 1%
- Reliance Industries: 0.9%
Importantly, while Goldman Sachs expects emerging-market equities to outperform U.S. stocks in the next decade, the opposite happened during the last decade. As discussed in the previous section, the S&P 500 achieved a total return of 335% (15.8% annually). But the Vanguard FTSE Emerging Markets ETF returned 162% (10.1% annually).
Put differently, the U.S. benchmark has beat this emerging-market index fund by 173 percentage points since February 2016. However, Goldman analysts argue emerging-market stocks will outperform in the next decade due to stronger earnings growth, higher dividend yields, and the U.S. dollar losing value relative to emerging-market currencies.
Personally, I find this emerging-market index fund more compelling than the European fund. The Chinese and Indian economies are projected to grow three to five times faster than Euro-area economies (and about twice as fast as the U.S. economy) in the next few years. Also, the Vanguard FTSE Emerging Markets ETF has a low expense ratio of 0.06%, much cheaper than the average expense ratio on similar funds of 1.13%.
However, I think Goldman analysts may be underestimating how quickly U.S. companies’ earnings will increase in the years ahead as artificial intelligence drives profitability. Indeed, Goldman in 2015 estimated the S&P 500 would return 5% annually in the next decade, but the index actually returned 11.8% annually between 2015 and 2024. So, I would still keep a larger percentage of my portfolio in an S&P 500 index fund.
