It May Be Time to Consider Non-U.S. Equities
Key Insights
- We believe that stretched relative valuations and potential U.S. dollar weakness have created attractive diversification opportunities in non‑U.S. equities.
- Investors seeking to maintain their current exposure to technology may want to consider tilting their non‑U.S. equity allocations toward the emerging markets.
U.S. stocks have outperformed non‑U.S. equities over the past 12 years, stretching relative valuations. Compared with both developed and emerging markets (EMs), valuation premiums1 on U.S. stocks currently are twice as high as their 20‑year averages.
There are numerous reasons for this divergence, but we would highlight two in particular: U.S. dollar strength and the dominance of technology in U.S. equity benchmarks.
Historically, periods of sustained U.S. dollar strength have coincided with U.S. equity outperformance. So it is notable that the dollar recently has weakened significantly. The Intercontinental Exchange (ICE) U.S. Dollar Index fell almost 10% over the six months ended August 31, 2020.
A Picture Emerges in Non‑U.S. Stocks
U.S. dollar weakness and higher technology exposure could favor EM equities
Past performance is not a reliable indicator of future performance.
January 31, 1991, through September 21, 2020 (left chart). As of September 21, 2020 (right chart).
Sources: Russell, MSCI, and ICE (See Additional Disclosures). T. Rowe Price calculations using data from FactSet Research Systems Inc. All rights reserved.
We believe dollar weakness could continue, as interest rate differentials and economic growth expectations between the U.S. and the rest of the world both have narrowed. Technology dominance is a different story, however. The drivers of technology outperformance have been strengthened by the global pandemic, and we believe they are unlikely to fade soon.
As of September 21, 2020, technology, interactive media, and internet retail combined accounted for less than 10% of the Morgan Stanley Capital International Europe, Australasia, and the Far East Index (MSCI EAFE). The MSCI Emerging Markets Index, however, had higher technology exposure than the MSCI USA Index.
We believe investors may be able to take advantage of potential dollar weakness while maintaining exposure to technology by potentially tilting their non‑U.S. equity allocations toward emerging markets.
1 A valuation premium is the higher price that an investor is willing to pay for a given stock or group of stocks relative to other stocks with comparable fundamentals such as earnings or sales.
Additional Disclosures
London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group 2020. FTSE Russell is a trading name of certain of the LSE Group companies. “Russell®” is a trade mark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication. The LSE Group is not responsible for the formatting or configuration of this material or for any inaccuracy in T. Rowe Price Associates’ presentation thereof.
MSCI and its affiliates and third party sources and providers (collectively, “MSCI”) makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. Historical MSCI data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.
ICE Data Indices, LLC (“ICE DATA”), is used with permission. ICE DATA, ITS AFFILIATES AND THEIR RESPECTIVE THIRD‑PARTY SUPPLIERS DISCLAIM ANY AND ALL WARRANTIES AND REPRESENTATIONS, EXPRESS AND/OR IMPLIED, INCLUDING ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, INCLUDING THE INDICES, INDEX DATA AND ANY DATA INCLUDED IN, RELATED TO, OR DERIVED THEREFROM. NEITHER ICE DATA, ITS AFFILIATES NOR THEIR RESPECTIVE THIRD‑PARTY SUPPLIERS SHALL BE SUBJECT TO ANY DAMAGES OR LIABILITY WITH RESPECT TO THE ADEQUACY, ACCURACY, TIMELINESS OR COMPLETENESS OF THE INDICES OR THE INDEX DATA OR ANY COMPONENT THEREOF, AND THE INDICES AND INDEX DATA AND ALL COMPONENTS THEREOF ARE PROVIDED ON AN “AS IS” BASIS AND YOUR USE IS AT YOUR OWN RISK. ICE DATA, ITS AFFILIATES AND THEIR RESPECTIVE THIRD‑PARTY SUPPLIERS DO NOT SPONSOR, ENDORSE, OR RECOMMEND T. ROWE PRICE OR ANY OF ITS PRODUCTS OR SERVICES.
Important Information
This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.
The views contained herein are those of the authors as of September 2020 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.
This information is not intended to reflect a current or past recommendation concerning investments, investment strategies, or account types, advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Please consider your own circumstances before making an investment decision.
Information and opinions presented, including any forward-looking statements, have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. Actual outcomes may differ from any forward-looking statements made.
Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. Diversification cannot assure a profit or protect against loss in a declining market. International investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as specific country, regional, and economic developments. These risks are generally greater for investments in emerging markets. Investing in technology stocks entails specific risks, including the potential for wide variations in performance and usually wide price swings, up and down. Technology companies can be affected by, among other things, intense competition, government regulation, earnings disappointments, dependency on patent protection and rapid obsolescence of products and services due to technological innovations or changing consumer preferences. All charts and tables are shown for illustrative purposes only.
T. Rowe Price Investment Services, Inc.
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