Podcast: Is It Time to Buy International Equities?

A shift toward international equities is seemingly underway, but what is the catalyst for this movement? In today’s episode, portfolio managers Chris Heakes, Omanand Karmalkar and your host, Mckenzie Box, analyze valuations and look for opportunities abroad. They also discuss U.S. and Canadian banks, mega-cap Tech stocks and infrastructure. 

Mckenzie Box is Director of Product and Strategy at BMO Global Asset Management. She is joined on the podcast by Chris Heakes and Omanand Karmalkar, Portfolio Managers and ETF Specialists at BMO Global Asset Management. 

The episode was recorded live on Wednesday, July 19, 2023.

International Equities

Asset allocators have been moving equities to internationals exposures. Good returns around the globe with MSCI EAFE up 12%, MSCI Europe up 13%, and Japan up 24% in local terms. The only free lunch is diversification and there are attractive diversification opportunities in international markets. Another reason investors are attracted to the region is the lower valuations relative to the US. Some of that can be justified with the uncertainty in Europe, in regards to the Russia Ukraine conflict. To reduce risk and potentially increase income, investors can consider BMO Europe High Dividend Covered Call Hedged to CAD ETF (Ticker: ZWE). Here you invest in blue chip, large cap dividend based companies and also employs a covered call overlay. Investing in higher quality companies with higher amounts of income can help address some of the risks in the region. Another option for exposure to Quality is BMO MSCI Europe High Quality Hedged to CAD Index ETF (Ticker: ZEQ), which again looks for high quality companies defined by a consistency of earnings and low levels of debt. Final thought on playing the region, Japan has had a fantastic year and investors could use BMO Japan Index ETF Hedged Units (Ticker: ZJPN.F) for exposure, it is up almost 25% YTD. Investors can broaden their portfolios using ETFs to get exposure to enter international markets at attractive price points.

US Banks

Back in March 2023, we saw some US regional banks go under receivership as the Federal Reserve’s raised rates aggressively. The crisis was relatively short lived, but it highlighted certain risks. As a result the Federal Reserve conducted stress tests which concluded that larger banks are well prepared to weather economic storms. The federal government also stepped in to provide liquidity and increase oversight over regional banks to prevent further issues. This week, bank earning releases paint a more positive overall picture. Majority of earnings have surpassed analyst expectations. This indicates a healthy US banking system, good news for the broader economy. It is also crucial to realize that there are still headwinds in the equity market with a potential recession potential down the road. For investors looking to get exposure to US banks, you can look to BMO Covered Call US Banks ETF (Ticker: ZWK) which yields about 10%. Or BMO Equal Weight US Banks Index ETF (Ticker: ZBK) for full beta exposure and a 3% to 4% yield.

Canadian Banks

BMO recently completed the largest acquisition in Canadian banking history by buying Bank of the West. A US based bank operating primarily in California. How US banks fare is becoming a more important barometer for how Canadian banks perform. This strong earnings cycle is playing well for Canadian banks. BMO Equal Weight Banks Index ETF (Ticker: ZEB) is showing some technical strength, and still has an attractive dividend yield of about 4%. The banks are trading under 10x forward P/E. On average analysts are expecting a one year upside price increase of 6%. Canadian banks are a great buy and hold, but the US banking strength is also playing well into the performance of the Canadian banks.

Technology

Mega cap technology stocks are leading the way for US equity markets in 2023. AI, cybersecurity and cloud computing are among the top drivers of performance within the technology sector. This earning seasons will provide more clarity on how they will be able to monetize this new technological boom. In terms of exposure, for a higher beta option investors can look to BMO ARK Innovation Fund ETF Series (Ticker: ARKK), which has outperformed the broad NADAQ index significantly. For more conservative investors, BMO Covered Call Technology ETF (Ticker: ZWT) provides upside participation as well as a yield of about 5% for monthly income. The covered call overlay helps turn volatility into additional income. It has returned about 48% YTD. So depending on the clients needs you have two options for more upside participation or for more income.

Global Infrastructure

Tech is exciting and it deserves to be in its growth area. But boring can work quite well. So thinking of infrastructure in a barbell approach, you can balance that AI excitement with copper wires and energy pipelines in your portfolio. BMO Global Infrastructure Index ETF (Ticker: ZGI) has a track record of over 10% return on a nearly a 13 year basis. The demand for infrastructure is always growing, roads needs to be paved and electricity lines needs to put in a cell tower across the globe. In higher inflation environments, some of these companies have revenue streams that are tied to inflation. As a portfolio completion tool it has a lower correlation to broad equities. ZGI has an approx 0.6 two-year correlation to the S&P 500 and TSX. Infrastructure equities are known to be defensive, probably why they’ve underperformed a bit this year as we’ve seen growth more in favor. But with a possible economic slowdown later this year or into next year, ZGI can be thought of a defensive satellite to complete a portfolio and enhance diversification.

Source: Bloomberg, All returns and data points June 2023.