Will Foreign Stocks Beat the S&P in 2014?

The S&P 500 (^GSPC -0.88%) soared more than 32% in 2013, beating out nearly all of the markets in the rest of the world. But so far in 2014, the S&P hasn't done nearly as well, with the index off half a percent despite having set a new all-time record last week. With U.S. stocks slumping, are international markets following suit? Let's take a close look at whether the S&P 500 is still leading the pack among the world's best-known stock markets.

Europe
Stock markets in Europe have had mixed performance so far this year, with some areas seeing surprising strength. In the U.K., major-market benchmarks are up 1%, as encouraging data on retail sales pointing to signs of strength in the British economy. Similarly, German stocks are up even more sharply, gaining about 2% as investors point to recovery from the Eurozone's recession. With Europe having underperformed the U.S. in 2013, many believe that if the economy there continues to improve, European stocks should be able to catch up in 2014.

Japan
In 2013, Japan was one of the only stock markets that performed better than the U.S. market, at least in local-currency terms. So far this year, though, Japan has done even worse than the U.S., with the Nikkei falling about 3.5%. Even relative strength in the Japanese yen compared with the U.S. dollar has still left the dollar-denominated iShares MSCI Japan ETF (EWJ -0.60%) down about 1%.

Despite the slow start, many believe that Japan could again lead the world's stock markets higher in 2014. With the government there taking aggressive steps to end decades of deflationary pressure and boost growth at the expense of the local currency, Japan is doing its best to take stimulative monetary and fiscal policy to the next level. If it succeeds, then Japanese stocks have plenty of room before they'll even come close to matching their best levels from the late 1980s and early 1990s.

Emerging markets
After a terrible 2013, emerging markets have once again gotten off to a bad start in 2014, with the Vanguard FTSE Emerging Markets ETF (VWO -0.29%) down 4%. China and Brazil have been particularly weak to start off the year, as many investors once again point to the pressure from Federal Reserve quantitative-easing tapering as affecting emerging-market investment to a greater extent than activity in U.S. stocks. As a result, iShares China Large-Cap (FXI -0.29%) and iShares MSCI Brazil (EWZ 2.09%) have both seen substantial declines so far this year.

It's true that emerging-market economies face some structural challenges that developed-market countries have already dealt with, including the systemic risk of the state-influenced banking system in China and the commodity-dependent economies of Brazil and Russia. Yet compared with the U.S. and other developed-nation stock markets, emerging markets look cheap, and that could spur value investors to take a shot on the sector in 2014.

Most investors still like the prospects for U.S. stocks as a leader in the world markets for 2014. But by being aware of trends around the world, you can take greater advantage of opportunities wherever you can find them.