For Top Returns, Investors Are Looking Abroad

Make the world your investing oyster. Image: NASA.

One thing many beginning investors don't understand is that the stock market doesn't always perform in line with the overall economy. Even as the Dow Jones Industrials remain near record highs, U.S. investors' returns pale in comparison to what international investors are seeing so far in 2015. Surprisingly, some of the best stock market performance is coming from areas that have experienced the most economic pressure.

Where the returns areAs strong as the U.S. economy has been lately, stocks have only climbed slightly from their already-high levels at the end of 2014. The Dow is up only between 1% and 2% since the beginning of the year, and although certain areas of the market have done better, energy-related problems have held back broader indexes such as the S&P 500 as well.

By contrast, you can find huge stock market returns in hard-hit economies across the world. In Europe, German stocks have made huge gains, with the DAX index rising more than 21% so far in 2015. French stocks are up by 18%, while returns in even weaker parts of the eurozone like Italy have risen by solid double-digit percentages. Overall, broad-based measures of the European stock market are up about 17%. Meanwhile, in Asia, Japanese stocks have climbed 12%, and China is up 11% in the first three months of the year. In Latin America, the Argentine stock market has jumped 31%, leading all major markets worldwide.

Europe has seen huge returns. Image: Wikimedia Commons.

One important note is that just because these stock markets are performing well in local-currency terms doesn't mean U.S. investors are reaping the full rewards. In particular, the drop in the value of the euro has eaten away nearly all of the eurozone's stock market gains for those investing in U.S. dollars. U.S. investors have seen about 14 percentage points of return evaporate due to euro weakness, although the European currency's bounce over the past week has given some of that lost return back. Many businesses in foreign markets have benefited from local-currency weakness, as it makes their exports less expensive and more attractive to foreign purchasers.

Nevertheless, currencies aren't solely responsible for the moves, as returns in Japan, China, and Argentina have all minimally eroded even when measuring them in U.S. dollar terms. Of equal importance is the policy stance that central bankers and other economically influential officials have taken. Specifically, Europe and Japan have wholeheartedly embraced quantitative easing efforts in order to forestall the possibility of systematic deflation; just as we saw in the U.S. from 2009 to 2014, the positive impact on local stock markets has been predictably sharp. With negative interest rates in Europe and near-zero conditions in Japan, alternatives to stocks offer little interest and plenty of rate risk once economic conditions improve.

Many U.S. investors avoid international markets due to their lack of familiarity and the currency exposure they entail. Yet going beyond borders to find the best investing opportunities in the world could do a lot to enhance your long-term returns.

The article For Top Returns, Investors Are Looking Abroad originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.