Is It Time to Consider Non-U.S. Equities?

Is It Time to Consider Non-U.S. Equities?

Equity | February 2021

Notes from the Global Growth Equity Desk

By Rajesh Gandhi | 5 - 10 minutes

Key Takeaways

  • U.S. stocks' outperformance has resulted in a wide dispersion in relative valuations to non-U.S. stocks. Investors may be overexposed to U.S. companies
  • We believe the earnings outlook, positive economic data and secular trends suggest non-U.S. stocks may outperform U.S. stocks in the near term.
  • Investors might consider positioning their portfolios in an effort to take advantage of these potential opportunities.



Rotation of Market Leaders Favors Non-U.S. Stocks

Following the global financial crisis of the late 2000s, U.S. stocks began one of the longest runups ever recorded. Only a short, sharp correction in early 2017 (trade wars) and the brief, V-shaped downturn at the outset of the COVID-19 pandemic have interrupted this unprecedented appreciation.

Large-cap technology companies, including the FAANGs (Facebook, Apple, Amazon, Netflix and Google parent Alphabet), helped fuel this outperformance. The information technology (IT) sector is more prominent in U.S. indices than in non-U.S. indices. For example, as of Dec. 31, 2020, IT accounted for almost 28% of the Russell 1000® Index versus less than 13% of MSCI ACWI ex- USA. (Source: FactSet). These companies saw tremendous appreciation as investors sought defensive firms positioned to benefit from stay-at-home trends during the worst of the pandemic.

As countries emerge from the global health crisis, we are seeing a broadening of market leaders to include more cyclically oriented companies. Such businesses may be positioned to benefit from a global recovery.

We believe this is positive for non-U.S. regions with more exposure to such companies, including the eurozone, Japan and emerging markets. Aside from greater cyclical exposure, non-U.S. regions can provide greater exposure to specific growth areas such as renewable energy, factory automation, electric vehicles (EVs), luxury goods and innovation in banking markets.

Non-U.S. Stocks May Be Poised for Outperformance

Lower Valuations

The long appreciation of U.S. equities has resulted in historically low valuations for non-U.S. equities relative to the U.S as shown in Figures 1a and 1b. In fact, forward P/Es for Europe are near 10-year lows relative to the U.S. The combination of historically high valuations in the U.S. and notably low relative valuations beyond the U.S. may mean non-U.S. stocks are attractively priced.

Figure 1a | U.S. Stocks Have Had a Long Run …

Data from 7/31/2014 – 12/31/2020. Source: FactSet.

Figure 1b | … Resulting in Historically Low Valuations for Non-U.S. Stocks

Data from 1/31/2001 – 12/31/2020. P/E in USD. Source: FactSet.

The Potential for Higher Earnings Growth

With the expectation that growth will broaden to include multiple sectors, we believe non-U.S. companies, with higher cyclical exposure, could see stronger earnings growth than U.S. companies over the next few quarters. As seen in Figure 2, earnings per share (EPS) growth estimates for Europe (Stoxx 600 Index) exceed those for the U.S. (S&P 500® Index) into 2022. Analysts' positive earnings revisions outside the U.S. have also been higher for cyclical/recovery-related names than for more defensive/stay-at-home companies. While analysts have forecasted all sectors to deliver positive earnings growth, estimates suggest the sharpest reversals will occur be in highly cyclical sectors such as energy, consumer discretionary, industrials and materials.

Figure 2 | Broadening Growth May Favor Cyclicals’ Earnings

Data as of 12/31/2020. Source: FactSet. 2021 forward is estimated. Forecasts are not a reliable indicator of future performance.

Potential Beneficiaries of Vaccine Rollout, Stimulus Support

Widespread distribution of an effective coronavirus vaccine, combined with ongoing fiscal and monetary stimulus should help accelerate economic recovery and global earnings growth. News of successful trials for several vaccines in November 2020 sent stocks sharply higher. Investor optimism that an end may be in sight began the rotation toward recovery-related stocks and fueled growth. Subsequent success in vaccine rollout could further support the broadening of growth to include previously pressured industries, such as travel and leisure, energy and automobiles.

Governments and central banks around the globe continue to deliver unprecedented amounts of fiscal and monetary stimulus to buoy their economies. As shown in Figure 3, the eurozone, U.K. and Japan committed a larger percentage of GDP toward stimulus than the U.S. through the end of 2020. (Source: Cornerstone Macro.)

Figure 3 | Global COVID-19 Policy Response as a Percent of GDP

Data as of 12/31/2020. Source: Cornerstone Macro.

The European Union's recovery plan includes multiple "green" environmental initiatives to support renewable energy and reduction in greenhouse gasses while simultaneously supporting economic growth. See Figure 4. Such initiatives and newly funded infrastructure projects should directly benefit companies involved in construction, renewable energy networks, electric vehicle production and components, and electrical grid improvement.

Figure 4 | Renewable Energy Forecast to Increase

Data from 12/31/2000 – 12/31/2020. Source: Bloomberg. 2021 forward is estimated. Forecasts are not a reliable indicator of future performance.

Emerging markets (EM) are also positioned to benefit from economic recovery. As countries put the worst of the health crisis behind them and economies reopen, we expect the region to experience strong earnings growth. Emerging markets are likely to benefit from increased global economic activity and stronger commodities prices as well as lessening geopolitical headwinds. A weakening U.S. dollar, buffeted by ongoing stimulus and Federal Reserve policies, should also support EM economies. EM banks stand to benefit from economic normalization and improved credit penetration driven by new consumer product offerings.

Select countries, including South Korea and China, were among the most effective at containing the virus. Developed markets, especially the U.S., participated in the recovery-led growth these two markets experienced. We note, however, that non-U.S. developed markets tend to have greater direct exposure to emerging markets than the U.S. For example, many European luxury goods companies are benefiting from increasing demand amid continued wealth creation and the desire for a higher standard of living among Asian consumers.

We believe Japan also represents multiple opportunities for non-U.S. investors. The new administration's continuing of previously instituted growth policies, combined with new initiatives, should support increased investment trends. Many Japanese firms are leaders in those areas we believe are poised to outperform. An example is factory automation. Accelerating global capital investment is being driven by exposure to information technology, improving automotive trends and improving growth in China.

Secular Trends Are in Earlier Stages of Growth in Non-U.S. Markets

Many secular trends maturing in the U.S. maintain a strong growth trajectory in non-U.S. markets. One example is e-commerce and online shopping. While growing in popularity, penetration in Europe and emerging markets remains well below rates in the U.S. and China. Additional examples include food and grocery delivery services, digital payment processors amid the transition to a cashless society, and healthy living trends such as athleisure wear, exercise gear and healthier food options. We expect adoption rates and industry consolidation in these areas to lead to higher earnings growth relative to similar U.S. services for some time.


Investors should consider reevaluating their allocations to non-U.S. equities. Because global markets don’t move in tandem—one region may be performing well while another is declining–diversification across different parts of the world has proven to be important over time. A U.S.-only portfolio might not offer exposure to many of the economic opportunities and ongoing secular trends to be found in non-U.S. markets. We believe an active management approach and disciplined, bottom-up investment process may help identify examples of companies exhibiting sustainable earnings acceleration that an investor in U.S. equities might otherwise overlook.

Is It Time to Consider Non-U.S. Equities?

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Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.

Diversification does not assure a profit nor does it protect against loss of principal.

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