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Markets almost always misprice the obvious.

That’s worth bearing in mind as you think about the U.S. stock market’s nerve-racking 5% decline this week. It’s worth remembering as you size up the behavior of stocks in the rest of the world, too.

Stock prices impound the expected. If the future unfolds according to the consensus, markets won’t move much. Surprise is the source of extra returns, magnifying gains and losses alike.

Enterprising investors—those who are willing to put time and effort into diverging from the crowd—should always be thinking about where the potential for surprise is the greatest. For U.S. investors right now, that could mean venturing abroad.

On just about every dimension, international stocks look and feel miserable. The economic news is dismal, currencies are crippled and returns have been rotten for years. Things are likely to get even worse before they get better.

Europe is caught up in a war that could escalate without warning or limit—as well as an energy crisis that’s all but certain to cause a severe recession. Fierce energy inflation will also make European manufacturers less competitive.

Japan, hobbled by a geriatric population, has been sluggish for years. In China, economic growth is shriveling as the nation fights Covid and tries to manage the collapse of its formerly feverish real-estate market. Other emerging markets are suffering from the soaring costs of energy and food.

Meanwhile, the U.S. dollar is dominant.

The dollar is near its highest value relative to the Japanese yen in a quarter-century; it recently rose past the euro for the first time in two decades.

For unhedged U.S. investors, the dollar’s 13% gain so far this year has hammered international stocks. A rising dollar generally means falling returns on stocks denominated in other currencies; a falling dollar tends to raise returns.

The MSCI index of all non-U.S. markets is down 20% this year, nearly 3 percentage points behind the U.S. The long run is more painful, with international stocks lagging behind the U.S. by a ghastly average of almost 9 percentage points annually over the past decade.

Results for emerging markets have been even worse. “When economies are slowing and earnings have been poor, that’s driven down currencies in tandem," says Andrew Foster, chief investment officer at Seafarer Capital Partners, an asset manager in Larkspur, Calif., that specializes in emerging markets. “Investors who held the equities and currencies together have gotten whacked with two clubs at the same time."

At this point, it’s obvious: International shares are priced for almost nothing but negativity.

U.S. companies may be so much more innovative that they deserve to be more richly valued than stocks elsewhere in the world. But how much of a premium do they deserve? Could the vast outperformance of U.S. stocks be blinding investors to the simple fact that international stocks are cheap?

“As humans, we like to look in the rearview mirror, and what has worked is always more appealing than what should work," says Sarah Ketterer, chief executive of Causeway Capital Management, a global investing firm based in Los Angeles.

By nearly every measure, stocks listed on overseas markets have become much less expensive than those in the U.S. In the late 2000s, international and U.S. stocks were valued by investors at similar multiples of earnings, net worth, cash flow and revenues. Now, however, other markets trade at roughly half the valuation ratios of the U.S.

The disparity isn’t driven just by geography. International stocks are more likely to be in such economically sensitive, “cyclical" industries as banking and manufacturing, while the U.S. market is tilted toward technology and healthcare.

If you think one step ahead, toward the recession that feels so obvious, that’s bad news for international stocks. A down cycle will hit them harder. If, however, you think beyond that, toward an eventual economic recovery, the story changes.

“Once markets reach their nadir, cyclicals tend to perform the best," says Ms. Ketterer. Consider the bounceback over the five years ending in late 2007, for instance. U.S. stocks gained an average of 15% annually; international stocks grew by more than 24% annually. The value of the dollar also fell over that period, raising returns for unhedged investors.

That interlude didn’t last, and the past decade-plus has made a monkey out of anyone predicting a renaissance for investing outside the U.S., including me.

Turning your back on international stocks today, however, is a bet that their lousy performance is pretty much permanent. And not many things in markets last indefinitely.

Over the 10 years ended in December 1986, international stocks outperformed the U.S. by an average of 6.2 percentage points annually—even though foreign currencies weakened for much of that period.

Now international currencies, and stocks, are simultaneously depressed relative to the U.S. If the dollar ultimately declines from its recent record highs, that drop would give a double boost to the returns on overseas stocks. I can’t tell you when that will happen, but I think it probably will.

The obvious negatives are already priced in: a prolonged war in Ukraine, an acute energy crisis and raging inflation, a brutal recession, floundering currencies.

With pessimism this pervasive, it wouldn’t take many positive surprises to overturn the obvious—and make global diversification lucrative again.

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