The Case for International Diversification

After more than a decade of U.S. equity market dominance, developed international markets are showing signs of renewed strength. Attractive valuations, supportive monetary policies, and improving fundamentals are creating a compelling case for investors to look beyond the U.S. for growth and diversification opportunities.

So far this year, European equities have led global equity performance, while Asian markets have delivered solid gains ahead of U.S. stocks. This shift reflects a growing investor appetite for international diversification and is a consequence of the policies employed by the Trump administration to reshuffle global trade and capital flows.

Addressing the U.S. trade imbalance will require a lower US dollar, and as the long post-GFC period of USD strength unwinds, the stage is set for global equities to outperform U.S. stocks – a similar setup than in the early 2000s. 

With inflation cooler outside America, policy turns supportive. The ECB has cut rates eight times, while China, India and peers enjoy falling financing costs. The Fed, by contrast, remains wary of price pressures. Easier monetary stances abroad give international earnings an extra tail-wind.

The MSCI All Country World Index remains heavily weighted to the U.S (~65%). In times of heightened uncertainty, diversifying into international equities can help investors reduce concentration risk and tap into opportunities across different economic cycles. The latest BofA global survey indicates that 54% of asset managers believe international stocks will be the best-performing asset class over the next five years.