For over a year, financial commentators have frequently discussed the concentration of U.S. equities in just seven names, but rarely the extreme concentration of global equities in the U.S. never has the U.S. share of global equities been this large at 64% (Exhibit 1). Recent trends suggest that upward trend has run its course – and the rest of the world is starting to catch up. Over the past two years, performance in international equity markets has been strong, especially in Europe, Japan and EM excluding China. The contribution to returns has been healthy, with equal heavy lifting being done by multiple expansion, earnings growth and dividends. The one sore spot, especially this year, has been the currency drag. In 2024, pockets of strong performance have continued, with Chinese equities joining the rebound. Beyond the regional view, single stock performance has been particularly strong, with 74% of the 50 best-performing companies being listed overseas (Exhibit 2).
Going forward, multiple expansion can still provide some support, especially compared to the U.S. (with double the normal discount to the U.S. at 34%). Importantly, on a sector-by-sector basis, the discount for quality companies listed overseas versus in the U.S. persists. This abnormally large discount is no longer warranted for international developed markets given substantial macro- and microeconomic changes, such as the return of inflation and positive rates, end of fiscal austerity and addition of buybacks to the already healthy dividend yields these companies have traditionally paid. In Europe, the turn in economic sentiment and manufacturing activity should support earnings and performance ahead. In Japan, corporate governance reform momentum should generate additional multiple expansion – a once-in-a-generation re-rating opportunity for investors. The Value style will likely continue to lead returns in Europe and Japan, as they often do during environments when Treasury yields hover between 3% and 5%. Lastly, the worst of the currency drag (especially in Japan) should be behind us – but is unlikely to turn into a substantial boost to U.S. dollar-based returns just yet.
In emerging markets, unsurprisingly China has been leading, due to depressed valuations, sentiment and positioning going into the year. The better economic momentum in parts of the economy, combined with more fiscal policy easing, should continue to result in a tactical rebound for a bit longer driven by multiple expansion. However, for Chinese equities to break out of their multi-year range, investors need to be significantly more confident in a domestic demand recovery – which seems unlikely this year, given limited demand-side stimulus and rising geopolitical tensions going into the U.S. election. As a result, we expect other EM markets to take back the baton as the year progresses, especially other EM Asian markets. For Korea and Taiwan, the turn in the electronics cycle, coupled with the AI-generated boost in semiconductors, should continue to generate strong earnings growth and market returns. In addition, Indian equities should regain their footing once the uncertainty about the election passes and as the tactical rebound in China loses steam, given strong earnings growth fueled by robust economic momentum.
Investors have already started to notice the improved performance overseas, with international equity exposure in global equity portfolios at a 12-month high*. However, this comes from a very low starting point. As always with international, there is a lot more opportunity than meets the eye, and with valuation spreads near record highs, active managers have a chance to uncover it.
