Global Equities Outpace American Counterparts

U.S. stocks are climbing in 2023, and shares of companies abroad are performing even better. This is good news for investors looking to diversify their portfolios.

The MSCI All Country World ex USA index has been on a tear in 2023, gaining 7.1% on a U.S.-dollar basis. That's well ahead of the S&P 500's 4.2% gain for the year. And in the three months ended Friday, the international stock index is up 23%, while the broad U.S. average is 9% higher.

There has been a rally in global stocks recently, which is a sharp contrast to the market conditions of the past decade. For many years, investors have said that the strength of American companies made the US stock market the best place to invest their money. However, concerns about international economies have eased, making the outlook for overseas stocks look more positive.

Many investors have been hesitant to invest in international markets in recent years, but that is changing, according to Andrew Slimmon, senior portfolio manager at Morgan Stanley Investment Management.

"They're going to begrudgingly move money outside the U.S.," Slimmon said.

Mr. Slimmon said that his global equity fund is overweight in Asian stocks, excluding Japan.

One advantage of investing in overseas stocks is that they often appear to be cheaper than those of U.S. companies, even after recent price increases. Wall Street analysts often use the ratio of a company's share price to its earnings as a gauge for whether a stock is a good value or not.

According to FactSet, companies in the S&P 500 are trading at around 17 times projected earnings over the next 12 months. This is higher than the STOXX Europe 600's multiple of 13 and the Hong Kong Hang Seng Index's multiple of 10 on a local-currency basis.

Meb Faber, co-founder and chief investment officer of Cambria Investment Management, has warned that buying expensive investments is a big risk. He said that the firm's momentum funds and value-focused exchange-traded funds have been adding more international stocks recently.

Investors were largely risk-averse last year, due to concerns about Russia’s war in Ukraine, a potential energy crisis in Europe, turmoil in the U.K. bond market, China’s zero-Covid policy, regulatory pressure from Beijing and weakness in foreign currencies. In contrast, the U.S. labor market remained strong and consumers continued to spend, despite the Federal Reserve’s aggressive interest-rate increases. As a result, the U.S. was seen as a safe haven for investors.

Some investors believe that the challenges to global markets have eased up enough to start investing in overseas equities. Europe has had a warmer winter than expected, which has taken some pressure off of a constricted energy supply. Inflation is slowing down in the U.K. Beijing officials have lifted Covid-19 quarantine requirements and eased pressure on Chinese companies.

According to Jeffrey Germain, investments group director at Brandes Investment Partners, you don't need all of the concerns to clear in order for performance to improve. Mr. Germain said that his firm has noticed increased client interest in international funds of late.

The dollar's recent decline has helped boost returns for dollar-based investors. Compared with a basket of other currencies, the dollar last week closed at its lowest level since June.

Investors were net buyers of international equity funds to the tune of $2.3 billion in the week ended Wednesday, according to Refinitiv Lipper. This is the biggest weekly inflows figure since April. In contrast, investors were net sellers of domestic equity funds, withdrawing a total of $3.2 billion over the same period.

International markets are not as dominated by megacap tech companies as the US stock market, which has been dragged down by rising interest rates. Technology stocks make up only 11% of the MSCI All Country World ex USA Index, while they represent 26% of the S&P 500, according to their respective index providers. The largest segments of the international index are financial and industrial companies.

Some investors are still cautious about investing in international stocks, even though there has been a recent rally.

Anna Rathbun, chief investment officer at CBIZ Investment Advisory Services, said she believes the recent outperformance of overseas markets is only temporary. She cited underlying challenges to global economies as the reason for this belief. CBIZ remains overweight in U.S. stocks, she said.

Ms. Rathbun expressed doubts about the longevity of the current situation, citing fundamental weaknesses that she believes will eventually catch up with us. In her view, we're simply putting off the inevitable by taking this approach.