A common misconception among US-biased investors is that US stocks always have and always will trade at a premium to shares abroad. While this has certainly been true for the last decade or so, it is not a law of nature. In fact, for much of the last 100 years US equities have traded much closer to parity and sometimes even at a discount to their global peers (Figure 7: Emerging Markets Equities at Discount to US Equities in Currencies). Over the past 15 years, however, US equities have gradually richened relative to international shares as America’s tech dominance offered investors a highly coveted segment of growth in an otherwise muted global growth environment. While global equities are unlikely to simply surge higher in the year ahead, we see both cyclical and structural tailwinds for non-US shares in the expansion that will eventually follow the present period of economic uncertainty.
As we discussed in As US dollar dominance ends, currencies may drive returns, an eventual unwind of aggressive Fed tightening should take some steam out of the US dollar’s rally vs major currencies. As US interest rates fall, investors who flocked to higher-yielding US assets and high-quality US equities may need to look elsewhere in the world to find better value.
Meanwhile, meaningful corporate governance reforms in Japan and Europe also look promising. Japanese financial authorities are actively incentivizing companies to return more cash to shareholders, catching the attention of some of the world’s largest investors. In Europe, conglomerates have been spinning off businesses at a premium while simplifying their structures. Buybacks and M&A have also picked up this year.
Lastly, long-term thematic trends can also explain US equity market dominance over the past decade. Growth in the major trends of the 2010s like social media, e-commerce, cloud computing, and smart phones were all dominated by US tech giants. But in the next decade, unstopable trends like global aging, electrification & decarbonization, and a rising Asian middle class may benefit more than just US firms. Pharmaceuticals, brands servicing emerging markets consumers, and clean energy leaders can be found across the global equity landscape. Investing with a US bias risks missing out on a key subset of these potential winners.