The Takeaway
The US equity market looks high-priced, top-heavy, and low-yielding compared with global counterparts.
Markets are cyclical, currencies fluctuate, and valuation differentials can create opportunity. A number of catalysts could favor equities outside the US, some macro some micro.
Ultimately, the strategic case for global diversification is less about noncorrelated assets and more about broadening the investment opportunity set to the fullest. Many leading global franchises, including companies dominant in the US market, are found across the globe. Great businesses at compelling prices can come from anywhere.
The Morningstar Global Markets Index, a broad gauge of equities spanning 48 developed and emerging markets, has been dominated by the US for years. The US share of global stock market value has climbed to near 60%—far out of proportion to its 25% share of the global economy. History suggests a cyclical nature to geographic leadership, for both markets and currencies. Global diversification may not have paid off lately, but US investors have good reason to broaden their opportunity set across borders.
From a tactical perspective, valuation and concentration should be concerns for investors in the US market. Though US equities have long traded at a premium, which makes sense given the growth and profitability of many of its leading companies, the gap has widened dramatically in recent years. Meanwhile, the US market has become extremely top heavy. From a macro perspective, inflation, potential recession, and a long run of US dollar strength are all reasons that global diversification makes sense. History shows that the US does not always outperform.
Regardless of what happens in the near term, there's a good strategic case to be made for combatting “home country bias.” Just because equities in different geographies are more correlated than stocks and bonds doesn't mean that combining them doesn’t lower a portfolio’s risk profile. Plus, the composition of markets differs across geography. A heavily US-dominated equity portfolio would lack exposure to businesses that might be competitively advantaged, compellingly valued, and exposed to growth trends. They may even derive significant revenues from the US market.
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