Weekly Wisdom – April 27, 2023

By Hightower Great Lakes on April 27, 2023

Why Should You Care About Non-U.S. Markets

U.S. equity markets have outperformed non-U.S. markets for eight out of the last ten years. The past decade has been a bull run of outperformance for U.S. equity markets.

Chart 1: U.S. Equity Market Outperformance During Past Decade¹

While this familiarity with the past ten years of outperformance is front-of-mind – making it easy for investors to ignore non-U.S. markets – the U.S. has outperformed non-U.S. markets 59% of all 10-year rolling periods going back to 1973.

A much closer spread than we have experienced over the past decade. When U.S. returns were <4% over a 10-year period, non-U.S. markets outperformed 100% of the time. When U.S. returns were <6% over a 10-year period, non-U.S. returns outperformed 96% of the time. This includes 2022.²

We are nearly four months into 2023, and while most major equity indices are positive year-to-date, the global dispersion is notable.

Table 1: Year-to-Date Index Performance³

This table consists of all large-cap indices, covering different global regions. Country-specific indices, primarily in Europe (including Sweden, Spain, Germany, Denmark, Italy and France) are all outperforming the S&P 500 year-to-date.

This in not only true over the past four months, but over the past year as well, where the Europe, Japan and China indices have been particularly strong. Over the past three years, the Euro Stoxx 50 and Japan Nikeii 225 are outperforming all U.S. large-cap indices included in the table above.

We are not highlighting that the U.S. is out of favor – quite the opposite, actually, when it comes to active management – but we are highlighting that global diversification has a role to play within portfolios. We are too often drawn towards U.S. headlines flashing Wall Street and Silicon Valley, and it is easy to ignore themes abroad.

Diversifying Across a Total Market of Investable Securities

The majority of large-cap companies generate global revenues, and as a factor of daily operations they are exposed to different geographies. While this offers investors exposure via U.S. multi-nationals, it is prudent for investors to diversify across the entire global equity market, not just U.S. equity markets. The MSCI All Country World Index (ACWI) is roughly 60% U.S. and 40% non-U.S. companies. That is meaningful diversification.

While pre-COVID trends were mostly towards globalization, shifting geopolitical dynamics – including China tensions, Russia/Ukraine war, U.S. monetary policy and supply tightness – are underscoring the importance for global diversification because companies exploit these scenarios by their geographic locations. Consider politics, natural resources, regional trade, currency, language and other dynamics that are dependent on location.

Expectations and Drivers Abroad

There are a few key dynamics driving international markets that we will quickly highlight. However, it is important to stress that while top-down macro views are important, bottom-up company fundamentals are paramount to performance and at the end of the day, performance is driven by the underlying investments. Just like U.S. markets, we believe the current environment favors active management globally.

Peak Policy Rates and U.S. Dollar Softening

The Fed is nearing the end of its rate hike regime after 14 months. Markets expect one more rate hike in May, followed by a rate cut sometime in Q4. As interest rates increased rapidly, investors sought safety in U.S. markets while capturing higher yields. This flow of capital placed upward pressure on the U.S. Dollar (USD).

Now, as markets predict that we have already experienced peak market rates, the USD strength has subsided. A weaker USD creates buying power for non-U.S. companies and capital flows are reversing. U.S. investors can earn greater returns on non-U.S. investments with a weaker USD because conversion from local currencies back into USD is more favorable.

Chart 2: USD Strength Peaked in September⁴

Non-Parallel Re-openings and Idiosyncratic Country Opportunities

China’s extended lockdowns are the biggest example of the out-of-sync post-COVID reopening dynamics. COVID spurred companies to reevaluate global supply chains. From these changes, some geographies will benefit, and others will be hindered. Oil, natural gas and semiconductors represent just a few of the ongoing supply/demand inefficiencies across global markets that impact a wide variety of industries.

U.S. Tech Exposure and Valuations

U.S. markets are heavily-weighted towards technology – representing roughly 35% of the S&P 500. Alternatively, non-U.S. markets are much more balanced, with technology representing just 10% of the MSCI EAFE. Non-U.S. markets offer opportunity for diversification, not purely geographically, but across industries too.

Similarly, U.S. markets tend to be priced at premium valuations to non-U.S. markets as a function of access, familiarity and size. Currently, the S&P 500 is trading at 18.2x forward earnings, while the EAFE is trading at 13.2x forward earnings. This dynamic partly explains why non-U.S. markets tend to outperform during flat/down periods.

Ways to Access Global Markets

U.S. fund managers can access global markets via U.S. multi-nationals that maintain significant presence in other nations. U.S. companies with global exposures include MCD, PEP, KO, SLB or GE. Favorable currency trends should support forward earnings as the USD weakens relative to local currencies. Exposure to China’s recent reopening and Europe’s better-than-expected industrial production can support revenue and earnings for U.S. companies that do business abroad.

We like non-U.S. fund managers that view the global opportunities, not just regionally, but as a collective basket of investable opportunities. We encourage investors to find knowledgeable, experienced non-U.S. managers. Diversified global ETF strategies also offer a great solution to gaining exposure to non-U.S. markets.

Click here to read last week’s Weekly Wisdom (4/20).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors.

All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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¹ Source: FactSet (chart). As of April 26, 2023.

² Source: Blackrock. As of December 31, 2022.

³ Source: FactSet (chart). As of April 26, 2023.

⁴ Source: FactSet (chart). As of April 26, 2023.