ContactNon-U.S. Large Cap Equities
Opportunities & Considerations for 2024 & Beyond
February 26, 2024- The combination of rising stock prices and lower earnings for U.S. equities (S&P 500) has resulted in significant valuation premiums relative to non-U.S. equities.
- International stocks (MSCI ACWI ex US) are trading at a 38% discount to U.S. equities on P/E FY1 Est. The current discount is 45% greater than the 10YR average discount of 21%.
- Additionally, non-U.S. stocks have significantly lower levels of long-term debt-to-equity and double the yield of U.S. stocks, which could provide a buffer should the market experience future downside volatility.
- While non-U.S. equities have lower 3-5 year EPS growth estimates, the asset class appears very attractive on price per unit of growth measure (PEG Ratio).
Source: FactSet Research Systems. Performance data shown represents past performance and is no guarantee of future results.
- The U.S. equity market has become increasingly concentrated, particularly over the last five years.
- The top five companies in the S&P 500 now represent 27% of the Index.
- Conversely, the MSCI EAFE Index is less concentrated than it was 20 years ago. The top five companies in the MSCI EAFE Index represent just 10%.
- Non-U.S. markets have very different sector and style compositions relative to U.S. markets, leading to natural diversification benefits.
July 2004 - June 2024
June 2024
Value: Industrials, Financials, Materials, Consumer Staples, Utilities, Real Estate, Energy
Growth: Consumer Discretionary, Health Care, Communication Services, Information Technology
Source: FactSet Research Systems.
- Between 2001-2010, the U.S. dollar weakened and provided a tailwind for international equities, boosting EAFE returns by +40% (MSCI EAFE USD vs. MSCI EAFE Local).
- Between 2011-2022, the strength of the U.S. dollar served as a headwind for international equities, accounting for -54% of the cumulative performance for EAFE during the period (MSCI EAFE USD vs. MSCI EAFE Local).
- As we move closer to a potential shift in Fed policy, dollar weakening may prove a tailwind for international equities looking ahead.
Jan 2001 - Jun 2024 (Monthly)
Source: Ycharts. Performance data shown represents past performance and is no guarantee of future results.
- While U.S. equities have outperformed over more recent periods, the majority of the MSCI ACWI's best-performing companies in the world over the past decade were domiciled in non-U.S. markets.
- On average, 79% of the top 50 calendar-year performers within the MSCI ACWI Index were located outside of the U.S.
Jan 2014 - Dec 2023
Source: FactSet Research Systems. Performance data shown represents past performance and is no guarantee of future results.
- At a sector level, certain sectors like financials and communication services have structurally underperformed over time.
- The chart below shows the rolling 10YR excess return of MSCI EAFE sectors vs MSCI EAFE overall, dating back to the common inception period of 1994.
- Specific to financials, this also has represented the largest average sector exposure within the benchmark over the last decade, averaging a 20%+ weight.
- There are likely several reasons for this chronic underperformance, but one likely component is Europe's tendency to maintain too many state-supported banks (and telecoms within communication services) relative to their geographic footprint. As an example, there are 4-5 mega banks in the U.S., and each major country in Europe tends to have 3-5 of their own mega banks, resulting in an overly fragmented landscape that has struggled to earn attractive returns on capital over time.
Common Inception Dec 1994 - Jun 2024
Source: FactSet Research Systems, Morningstar. Performance data shown represents past performance and is no guarantee of future results.
Important Information
The views expressed herein may not be reflective of current opinions, are subject to change without prior notice, and should not be considered investment advice or a recommendation to purchase or sell a particular security.
The Standard & Poor's 500 Index (S&P 500) is an unmanaged index generally representative of the U.S stock market. The MSCI All Country World Ex. US (ND) Index is a free float-adjusted market capitalization weighted index that is designed to measure equity market performance in the global developed and emerging markets, excluding the U.S. The MSCI EAFE (ND) Index is an unmanaged index generally representative of major overseas stock markets. The ICE US Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. The MSCI All Country World Index (ACWI) is a stock index designed to track broad global equity-market performance. The MSCI EAFE Index, or Europe, Australasia, and Far East Index, is a stock market index that measures the performance of large and mid-cap companies in 21 developed markets. The MSCI EAFE USD Index reflects the performance of the MSCI EAFE Index with currencies hedged back to the USD. The MSCI EAFE Local Index reflects the performance of the MSCI EAFE Index measured in local currency terms. These unmanaged indices do not reflect fees and expenses and are not available for direct investment.
In relation to any data attributed to Morningstar, please note the following: © Morningstar 2024. All rights reserved. Use of this content requires expert knowledge. It is to be used by specialist institutions only. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied, adapted or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information, except where such damages or losses cannot be limited or excluded by law in your jurisdiction. Past financial performance is no guarantee of future results.
Investing entails risks and there can be no assurance that any investment will achieve profits or avoid incurring losses.
Stock markets are volatile and equity values can decline significantly in response to adverse issuer, political, regulatory, market and economic conditions. Investing in international and emerging markets poses special risks, including potentially greater price volatility due to social, political and economic factors, as well as currency exchange rate fluctuations. These risks are more severe for securities of issuers in emerging market regions.
P/E FY1 or Price to Earnings ratio, current year. Current prices divided by estimated future earnings over the next 12 months.
The Est 3-5 Yr EPS Growth (%) is the estimated growth of earnings per share over the next 3-5 years, using precalculated mean long-term EPS growth rate estimates, which are calculated using each individual broker's methodology, from FactSet, First Call, I/B/E/S Consensus, and Reuters. Forward looking estimates may not come to pass.
Long-term Debt to Equity is a financial ratio that measures the proportion of a company's long-term debt in relation its total capital. It is calculated by dividing long-term debt by total available capital (long-term debt, preferred stock, and common stock).
Dividend yield is a percentage that represents the dividend-only return of a stock investment. It is calculated by dividing the annual dividend per share by the stock's price per share.
PEG Ratio or Price/Earnings to Growth is calculated by dividing a stock's price-to-earnings (P/E) ratio by the growth rate of its earnings over a specified time period.
EPS or Earnings Per Share is an indicator of a company's profitability.
Federal Funds Rate refers to the target interest rate range set by the Federal Open Market Committee (FOMC).
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