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.
Could an Economist cover story once again signal a market top? In April, the venerable publication led with: "Riding High: The Lessons of America's Astonishing Economy." It noted the United States' sustained economic strength, high productivity, and stock market dominance. Longtime readers will recall several historical examples of Economist covers that turned out to be contrarian indicators—2003's "The end of the Oil Age"; 2009's "Brazil takes off"; or June 2022's "Europe's Winter Peril."
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 this makes sense given growth and profitability of many leading companies, the gap has widened dramatically in recent years. Meanwhile, the US market has become extremely top heavy. From a macro perspective, recession, the debt ceiling, and the dollar are all reasons that global diversification makes sense. History shows that the US does not always outperform. It was by no means obvious in 2010 that US equities would so thoroughly dominate in the years following a crisis that originated in the US housing market and financial system.
Regardless of what happens in the near term, there's a good strategic case to be made for combatting “home country bias.” A heavily US-dominated equity portfolio would lack exposure to leading European consumer businesses (luxury goods, food and drink, pharmaceutical firms, and insurers); Japan's innovative manufacturers; miners and banks from Australia, Canada, and emerging markets; as well as Indian IT and China's new economy. Many of these businesses are major players in the US. Great businesses at compelling prices can come from anywhere. There’s a long list of companies outside the US that possess durable competitive advantages and currently trade at discounts to their long-term intrinsic values in the view of Morningstar’s equity analysts.
©2023 Morningstar. All Rights Reserved. The information, data, analyses and opinions contained herein (1) include the proprietary information of Morningstar, (2) may not be copied or redistributed, (3) do not constitute investment advice offered by Morningstar, (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be correct, complete or accurate. Morningstar has not given its consent to be deemed an "expert" under the federal Securities Act of 1933. Except as otherwise required by law, Morningstar is not responsible for any trading decisions, damages or other losses resulting from, or related to, this information, data, analyses or opinions or their use. References to specific securities or other investment options should not be considered an offer (as defined by the Securities and Exchange Act) to purchase or sell that specific investment. Past performance does not guarantee future results. Before making any investment decision, consider if the investment is suitable for you by referencing your own financial position, investment objectives, and risk profile. Always consult with your financial advisor before investing.
Indexes are unmanaged and not available for direct investment.
Morningstar indexes are created and maintained by Morningstar, Inc. Morningstar® is a registered trademark of Morningstar, Inc.