For the past 15 years, U.S. equity markets have dominated global investing, significantly outperformed the rest of the world and attracted record capital inflows. The next era of economic growth and equity market performance is unlikely to be confined to U.S. borders. It is not about abandoning U.S. exposure but restoring balance and positioning portfolios for the next decade.
The remarkable run of the U.S. has reinforced a deeply entrenched home-country bias among American investors, leading to an overexposure to domestic markets and an under allocation internationally. Studies point to a mix of institutional and behavioural factors responsible for this home bias. The institutional factors often stated include restrictions on capital flows, transactional costs and differential information. Behavioural factors include optimism about local markets, mistrust of foreign information and historical familiarity.
International investors also have a large exposure to U.S. equities and the dollar. This global participation underscores the confidence in the U.S., further reinforced by the strength in the dollar over the last 15 years. However, a large portion of this exposure is unhedged, leaving portfolios vulnerable to currency swings.
Historical Playbook: Global Leadership Rotates
History shows that market leadership rotates, with international stocks outperforming the US market in four separate decades since World War II, in the 1950s, 1970s, 1980s and 2000s. During these periods, international equities beat US returns by a median of +4.9% compounded annual growth rates (CAGR).
Today, U.S. market dominance is near historical extremes. U.S. equities account for 65% of global market capitalisation, approaching levels last seen in the 1970s.
In the past, international equities have outperformed the US market during times of significant global events, such as the 1970s oil shocks and a stagflation, Japan’s economic miracle in the 1980s which delivered extraordinary returns, whilst the U.S. endured a double recession. In the 2000s, the investment landscape once again tilted toward international stocks with China’s emergence on the global stage. These shifts demonstrate a critical lesson, market dominance is rarely permanent.
Global Markets Are Shifting, Your Portfolio Should Too
Now is the time to shift focus to countries with large domestic economies, robust liquidity cycles, and supportive monetary and fiscal policies, conditions that are now more favourable outside the U.S.
Fiscal and monetary policies are increasingly favourable outside the US, presenting compelling opportunities in international equities, particularly in Western and Eastern Europe, emerging markets, and Japan. These regions offer attractive valuations, improving growth fundamentals, and inexpensive currency valuations, making them an attractive alternative to the US market.
India leads as a structural story with structural reforms implemented over the last decade, a domestic demand-driven economy with low GDP per capita, and significant catch-up potential with increasing consumption and investment. The country has the ability to withstand external shocks thanks to its strong service orientation in exports, sound external position and adequate reserves.
Europe, long held back by austerity in core economies, and deleveraging in the periphery, is now pivoting to growth. Both of those trends are reversing. Core countries are now resorting to stimulus measures while the Peripheral countries, including Greece, Italy, Ireland and Spain, are pushing ahead with structural reforms, deleveraging and expanding tourism while attracting capital through EU support.
The EU Recovery and Resilience Facility (RRF) fund at 2-3% of GDP through 2027, should reignite consumer demand, which has been subdued, and support a domestic recovery. We see opportunities in Core Europe, the Periphery and Eastern Europe.
Reforms are also underway in key emerging markets like Brazil and Indonesia and a move to implement more orthodox policies in some frontier markets like Egypt, and in Kenya with currency devaluations are attractive investments.
Industry tailwinds
Several industry tailwinds are expected to drive growth in various sectors. Artificial intelligence adoption is a key area of interest, and there are also opportunities in companies that are adopters of AI rather than just enablers, as well as digital platforms across multiple industry verticals in international markets. Additionally, industrial revival presents compelling opportunities in areas such as defense, electrification, and automation, which align well with the current stage of the industrial cycle globally.
The financial sector is also poised to benefit from fiscal stimulus in Core Europe, deleveraging in Peripheral Europe, and domestic recovery in Eastern Europe. Furthermore, the silver economy is expected to create demand for healthcare, financial security, and automation due to aging populations in Europe and North Asia, including Japan, Korea, China, and Taiwan. On the other hand, the rising share of millennials and Gen Z will drive value-driven consumption and benefit digital platforms.
Restoring balance
For asset allocators, this is not about abandoning U.S. exposure, it’s about restoring balance and positioning portfolios for the next leg of the economic and stock market cycle. International equities are the underpriced call option on domestic demand recovery, policy divergence, industrial investments and currency rotation. After a decade and half of U.S. dominance, the balance of risk and reward has shifted. Now is the time to diversify globally: investors who fail to look beyond U.S. borders may risk missing the next market cycle.
Jitania Kandhari is Deputy CIO of the Solutions and Multi-Asset Group at MSIM
