Written by Dan Lefkovitz, Strategist, Morningstar Indexes
U.S. equities have dominated global markets ever since the 2008 financial crisis. Seventeen of the largest 20 public companies in the world are now American, as the likes of Apple, Microsoft, Amazon.com, Alphabet, Nvidia, and Tesla have left their global counterparts far behind.
The U.S. share of the Morningstar Global Markets Index, a broad gauge of equities spanning 48 developed and emerging markets, is near 60%—far out of proportion to America’s 25% share of the global economy and a level not seen since the late 1990s.
| The U.S Share of Global Equities Grew from Sub-40% 15 Years Ago to Near 60% Today
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| Source: Morningstar Direct and Morningstar Indexes. |
Meanwhile, ‘King Dollar’ is ascendant. The euro fell below parity in 2022 for the first time in two decades; the yen hit at an all-time low versus the greenback; and sterling has not having recovered from Brexit.
Investors would do well to examine their portfolios for overexposure to the U.S. The tide may be shifting.
Changes is the Only Constant in Markets
Macro factors, including recession, the debt ceiling, and the dollar, are all reasons to be wary of US equities. From a bottom-up perspective, the U.S. equity market looks high-priced, top heavy, and low-yielding compared to its global counterparts. American stocks have long traded at a premium, though the spread has widened in recent years—with Morningstar US Market Index now 57% more expensive than the Morningstar Global ex-US Index at the end of 2023’s first quarter.
Leadership in both markets and currencies is cyclical. From 2003-2007, stocks outside the U.S. led, with emerging markets especially strong. Back in 2010, few predicted U.S. equities would dominate in the years following a crisis that originated in the country’s housing market and financial system.
Potential Macro Catalysts for a Shift:
- China’s non-correlated economy and recovery potential
- Europe’s increased fiscal integration
- Japan’s continued corporate reforms
- Commodities demand driven by clean energy transition
- Supply chain reshuffling/reshoring/near-shoring/friend-shoring
- Emerging markets growth
At the micro level, companies outside the US are benefiting – alongside their US counterparts – from trends like artificial intelligence, industrial automation, fintech, and innovative medical therapies.
The Strategic Case for Global Diversification
The case for global diversification is less about noncorrelated assets—though at times global markets do move in different directions—and more about broadening the investment opportunity set to the fullest. ‘Home bias’ can lead to missed opportunities. A heavily US-dominated 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 U.S. After all, less than half the revenues from the Morningstar Europe Index are sourced from Europe, while the U.S. market is only 62% domestic.
Great businesses at compelling prices can come from anywhere. The below list is a small subset of companies outside the U.S. that possess durable competitive advantages and currently trade at discounts to their long-term intrinsic values in the view of Morningstar’s equity analysts.
| Great Companies at Compelling Prices can be Found Around the World.
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