Investing in Stocks: The Case for a Broader Global Focus | Lord Abbett
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Market View

An allocation to non-U.S. equities could provide an effective complement to a U.S.-focused stock portfolio. Here’s why

Read time: 3 minutes

Investors have been firmly focused on the strong gains in the U.S. equity market this year, with the large-cap benchmark S&P 500® Index up 18.23% year to date through August 18. But should they broaden their horizons? We think so. In our view, U.S.-focused investors may be missing out on the potential non-U.S. stocks have to offer.

Here, we offer five reasons why we think an allocation to non-U.S. stocks could provide an effective complement to a U.S.-focused portfolio:

  1. Performance Trends

U.S. and international equity markets have each had long periods of outperformance over the long term. The current period of U.S. outperformance is very long by historical standards, suggesting a reversal in favor of international equities may be on the horizon.

 

Figure 1. International Equities May Be Poised for a Turnabout versus U.S. Counterparts
Excess return of S&P 500® Index versus MSCI ACWI (ex-US), January 1, 1991–June 30, 2021

Source: Zephyr StyleADVISOR. Data as of June 30, 2021. MSCI ACWI ex US=MSCI ACWI (All Country World Index), excluding U.S. equities.
Past performance is not a reliable indicator or guarantee of future results. For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment.

 

Furthermore, one country rarely repeats as a global market leader in any given year, so expanding outside the United States offers a potential opportunity for higher returns. As seen in Figure 2, the United States has been the leader among major global equity markets for only two of the last 12 calendar years from 2009-2020.

 

Figure 2. Mapping Global Equity Market Leadership over the Past Decade

Equity market performance by country, 2009-2020

Source: Bloomberg. Chart depicts the performance of specific country subindexes within the MSCI All Country World Index for the calendar years 2009-2020.
Past performance is not a reliable indicator or guarantee of future results. For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment.

 

  1. Valuation Metrics

International equities have tended to be cheaper than their U.S. counterparts, often by a wide margin. This valuation case can be made at the company level, by sector, and in aggregate. As seen in Figure 3, the MSCI ACWI ex-U.S. Index, a proxy for developed and emerging market non-U.S. equities, has a current P/E ratio of 15.3x, which is significantly less than the multiple of 25.6x for the S&P 500, and this gap has been widening recently.

 

Figure 3. Valuation Gap versus United States Suggests Opportunity in International Equities
Price-to-earnings ratios for the trailing 12 months for the indicated indexes, December 31, 2004 – July 31, 2021

Source: FactSet. Data as of July 31, 2021. MSCI ACWI ex US=MSCI ACWI (All Country World Index), excluding U.S. equities.
Past performance is not a reliable indicator or guarantee of future results. For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment.

 

  1. Dividend Yield

In a world of low interest rates and low investment returns, we think dividend yield likely will account for a greater share of an investor’s total return. International equities have consistently delivered dividend yields superior to those of U.S. equities. As of July 31, 2021, the yields on the MSCI ACWI ex-U.S., the S&P 500, and the 10-year U.S. Treasury are 2.25%, 1.36%, and 1.47%, respectively.

  1. Diversification Characteristics

International equities offer a broader opportunity set of companies, economies, currencies, and markets, proving investors with the potential opportunity for lower correlation, comparable risk and often higher returns. Adding international equities to a portfolio of only U.S. equities historically has improved the total portfolio’s expected risk adjusted return profile and added diversification benefits. Based on a historical study by Zephyr StyleADVISOR, international stocks, as measured by the MSCI ACWI ex-U.S., international stocks had had a 0.76 correlation with U.S. equities over period the covering January 1988–November 2020.

  1. ESG Profile

As we noted in last week’s Market View, the global appetite for investments incorporating environmental, social, and governance (ESG) criteria has seen strong growth over the past few years. Given mounting concerns about climate change, investors might be interested to learn that the global leaders in renewable energy are predominantly international companies. Among the leading global firms in key renewable categories, international companies accounted for:

  • Nine of the top 10 electric vehicle producers
  • Nine of the top 10 wind turbine manufacturers
  • All of the top 10 solar module makers

In addition, international companies are leaders in offshore wind, battery storage, green hydrogen, and other emerging technologies. *

Summing Up

History shows that global stock market leadership alternates among nations. A global portfolio may provide smoother performance over the long term than a portfolio invested entirely in one market. Other factors contribute to a positive backdrop for non-U.S. equities, in our view: compelling relative valuation after multi-year underperformance versus U.S. equities, attractive dividend yields in a low interest rate environment, and exposure to leading companies that align with ESG criteria.  We think a carefully considered global allocation to both international equities and U.S. equities may allow investors to participate in the potential upside of future global growth.

 

*Sources for information on renewable energy companies: McKinsey & Company, BlooombergNEF, Energy Intelligence, Bernstein.

 

Unless otherwise noted, all discussions are based on U.S. markets and U.S. monetary and fiscal policies.

Asset allocation or diversification does not guarantee a profit or protect against loss in declining markets.

No investing strategy can overcome all market volatility or guarantee future results.

The value of investments and any income from them is not guaranteed and may fall as well as rise, and an investor may not get back the amount originally invested. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon, and risk tolerance.

Market forecasts and projections are based on current market conditions and are subject to change without notice.

Projections should not be considered a guarantee.

Equity Investing Risks

The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy. While growth stocks are subject to the daily ups and downs of the stock market, their long-term potential as well as their volatility can be substantial. Value investing involves the risk that the market may not recognize that securities are undervalued, and they may not appreciate as anticipated. Smaller companies tend to be more volatile and less liquid than larger companies. Small cap companies may also have more limited product lines, markets, or financial resources and typically experience a higher risk of failure than large cap companies.

Fixed Income Investing Risks

The value of investments in fixed-income securities will change as interest rates fluctuate and in response to market movements. Generally, when interest rates rise, the prices of debt securities fall, and when interest rates fall, prices generally rise. High-yield securities, sometimes called junk bonds, carry increased risks of price volatility, illiquidity, and the possibility of default in the timely payment of interest and principal. Bonds may also be subject to other types of risk, such as call, credit, liquidity, and general market risks. Longer-term debt securities are usually more sensitive to interest-rate changes; the longer the maturity of a security, the greater the effect a change in interest rates is likely to have on its price. 

The credit quality of fixed income securities in a portfolio are assigned by a nationally recognized statistical rating organization (NRSRO), such as Standard & Poor’s, Moody’s, or Fitch, as an indication of an  issuer’s creditworthiness.  Ratings range  from ‘AAA’ (highest) to ‘D’ (lowest).  Bonds rated ‘BBB’ or above are considered investment grade. Credit ratings ‘BB’ and below are lower-rated securities (junk bonds). High-yielding, non-investment-grade bonds (junk bonds) involve higher risks than investment-grade bonds. Adverse conditions may affect the issuer’s ability to pay interest and principal on these securities.

This material may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

The views and opinions expressed are as of the date of publication, and do not necessarily represent the views of the firm as a whole. Any such views are subject to change at any time based upon market or other conditions and Lord Abbett disclaims any responsibility to update such views. Lord Abbett cannot be responsible for any direct or incidental loss incurred by applying any of the information offered.

This material is provided for general and educational purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or any Lord Abbett product or strategy. References to specific asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or investment advice.

Please consult your investment professional for additional information concerning your specific situation.

Glossary & Index Definitions

 

Environmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially- conscious investors use to screen potential investments.

Price-to-earnings (P/E) Ratio is a valuation ratio of a company's current share price compared to its per-share earnings.

The MSCI ACWI (All Country World Index) ex-U.S. Index is a subset of the MSCI ACWI Index.  The MSCI ACWI (All Country World Index) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets.

The S&P 500® Index is widely regarded as the standard for measuring large cap U.S. stock market performance and includes a representative sample of leading companies in leading industries.

Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.

This material is the copyright © 2021 of Lord, Abbett & Co. LLC. All Rights Reserved.  

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