Commentary
Three considerations in favor of non-U.S. equities
Despite a staggering difference in performance between U.S. and non-U.S. equities in recent years, we see three primary considerations for why this tide could turn.
Three considerations in favor of non-U.S. equities
For the ten-year period ending 12/31/2022, U.S. equity markets outperformed non-U.S. markets by 7.78% annualized, with the MSCI USA Index returning 12.45% versus just 4.67% for the MSCI EAFE Index. In U.S.-dollar terms, an investor who started with $1 million in each index ten years ago would have over $1.6 million more today in the U.S. portfolio than the non-U.S. portfolio. With the significant strength in U.S. markets over the last ten years, one could see why investors may doubt their strategic allocation to non-U.S. equities.
Long-term valuations have diverged
Over time, one could argue that over a sufficiently long time horizon, U.S. and non-U.S. equities should have fairly similar performance. Nevertheless, over any period a host of factors can and do cause differences in performance:
- gross domestic product (GDP) growth
- demographics
- inflation
- interest rates
- geopolitics
- currencies
- sector composition
Extremes typically occur when investors think things “can’t get any better” in one segment of the global economy, while shunning others that have experienced tougher times. Exhibit 1 shows the rolling difference in 10-year total returns between U.S. and non-U.S. markets. Clearly, there can be wide differences in relative performance over any given time period.
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