With U.S. equity indexes generally dominating non-U.S. equity indexes over the past decade, it is no surprise that many investors are beginning to wonder whether they need to invest outside the U.S. at all. There are a number of pundits that have been making this argument. One of the rationales used is that U.S. companies have competitive advantages due to a more business friendly legal and regulatory structure. Additionally some argue that many U.S. companies have international operations, suggesting that U.S. investors already have international exposure. Another narrative relates to demographic disadvantages in the eurozone and Japan that result in lower economic growth potential versus the U.S.
While these are important considerations and it is true that U.S. markets have delivered better relative earnings growth since the 2008 downturn, we believe that longer term investors should maintain international exposure for two basic reasons.
- First, valuation. While U.S. companies and the U.S. economy may have growth advantages, it appears this is being discounted or taken into consideration in market values as the valuation gap between the S&P 500 Index and the MSCI All Country World Index has expanded throughout the last cycle. We must remember and respect that the stock market is constantly adjusting prices to discount future growth. At the start of this decade the valuation gap was very narrow, such that relative earnings played an important role in determining relative performance. At current relative valuation levels, higher earnings growth by U.S. companies is already implied, and yet bottom analyst projections have international index earnings outpacing U.S. stocks in 2021.
- Second, opportunity. By limiting ourselves to U.S. based companies, we wall off 43 percent of the global equity opportunity set, based on market capitalization (more if measured by the number of stocks). Despite the relative underperformance of international indexes over the last decade, there have been plenty of individual opportunities for wealth creation. As an example, we looked at the top 50 performing stocks in the MSCI World Index (developed countries only) and counted the number of U.S. based companies. As depicted below, typically more than half of the best performing stocks in the developed world have been companies domiciled outside the U.S. We then expanded the universe to include emerging markets with the MSCI All Country World Index. Not surprisingly the results are even starker with U.S. based companies representing an even smaller fraction of the top performers.
Source: Bloomberg, MSCI and S&P
MSCI World Index is a broad global equity index that represents large and mid-cap equity performance across all 23 developed markets countries. It covers approximately 85% of the free float-adjusted market capitalization in each country.
MSCI All Country World Index measures the equity market performance of developed and emerging markets.
S&P 500 Index is a group of 500 widely held stocks and is commonly regarded to be representative of the large capitalization stock universe.
The indexes mentioned are unmanaged statistical composites of stock market or bond market performance. Investing in an index is not possible. Unmanaged index returns do not reflect any fees, expenses or sales charges.
A Word About Risk
Equities are subject to market volatility and loss. Foreign and emerging markets securities and depositary receipts such as American Depositary Receipts, Global Depositary Receipts and European Depositary Receipts, carry the associated risks of economic and political instability, market liquidity, currency volatility and accounting standards that differ from those of U.S. markets and may offer less protection to investors. The risks associated with investing in foreign markets are magnified in emerging markets due to their smaller economies.
Performance data quoted represents past performance, which is no guarantee of future results. The investment return and principal value of an investment in the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than performance data given. For performance information current to the most recent month-end, visit TouchstoneInvestments.com/mutual-funds.
Please consider the investment objectives, risks, charges and expenses of the fund carefully before investing. The prospectus and the summary prospectus contain this and other information about the Fund. To obtain a prospectus or a summary prospectus, contact your financial professional or download and/or request one on the resources section or call Touchstone at 800-638-8194. Please read the prospectus and/or summary prospectus carefully before investing.
Not FDIC Insured | No Bank Guarantee | May Lose Value