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Global Equities: Upon Closer Inspection...

U-Wen Kok, CFA 22-Mar-2024

magnifying glass and globe

As sweeping generalizations go, the global economy has proven to be far more resilient than many investors have expected, especially given the trifecta of geopolitical turmoil, elevated inflation, and the several-year tightening bias of the U.S Federal Reserve and many other global central banks.


However, painting with a broad brush has limitations when it comes to evaluating and allocating to so many regions and such a diverse array of businesses. Upon closer inspection, we see a wide disparity within global equities, with some nations (and companies) faring significantly better than others. The UK, Canada and China, for example, have underperformed our domestic markets over the past year or so. Meanwhile, other interesting
markets within the Eurozone—such as Denmark, Spain and Italy—even outpaced the U.S. in 2023. Our takeaway? We continue to see many intriguing investment opportunities across the globe.


Global Temp Check


Global Equities (as measured by the MSCI All Country World Index) advanced sharply during 2023 and finished up by more than 22% for the full year. The rally was largely fueled by expectations of easing monetary conditions and declining interest rates in 2024. It’s no surprise, then, that sectors poised to benefit from rate cuts, such as technology, real estate and industrials, have performed relatively well, while energy has lagged amid weaker oil and gas prices late last year and early 2024. More recently, however, inflation data has surprised to the upside and called into question how soon and how far interest rates may fall.


Though global growth prospects in the near term remain somewhat muted, it appears that the risk of global recession has decreased. This past January, the IMF revised its projection of 2024 growth upward from 2.4% to 3.1%, and if the prospect of lower interest rates comes to fruition later this year, it could provide a further tailwind for equities and growth. But for the moment, interest rates remain high, and that is likely to be a detriment to corporate earnings in many sectors. The ongoing wars in Ukraine and Gaza also have the potential to threaten economic stability beyond their regions.


Given this global growth backdrop, we see compelling opportunities outside of the U.S. for long-term investors. Importantly, we also view the risk-reward scenario for international equities as potentially favorable compared to the major domestic indexes. Non-U.S. equities—as measured by the MSCI All Country ex-US Index—continue to trade at a steep discount of over 30% compared to the S&P 500®, with the former trading below its 20-year average. Moreover, international equities also offer greater income potential, with dividend yields trading at a 1.8% spread above those of their U.S. counterparts. This risk-reward dynamic is one reason to get excited, and we think that equities outside of the U.S. should be part of any well-diversified portfolio.




Given the opportunity set, the next question begs:  How can an investor best invest in global equities. One tactic some investors may choose is buying everything—in other words, a broad, passive approach. But we think investing passively in the global landscape is inefficient at best and downright risky at worst. We don’t want to own every stock in every region at the same time.


Rather than an indiscriminate passive approach, we think that it is possible to identify probable winners (and avoid losers) among the global equities landscape through a combination of rigorous quantitative modeling and deep fundamental research. In our experience, companies with the greatest potential for price appreciation tend to share some common traits. For example, those generating attractive cash flow returns should be able to deliver higher-quality and consistent earnings, which the markets tend to reward. Further refining this universe by paying close attention to comparative valuations can help identify portfolio candidates with some measure of downside protection. Simply put, seeking quality at a reasonable valuation is a formula that we like, and it seems especially critical today.


Importantly, one of the tenets of our portfolio construction is to allocate broadly with benchmark-like allocations (though we aim to be slightly more concentrated than the benchmark, with enough holdings to capture the appropriate diversification benefits). The divergent nature of country-specific economic cycles is one reason we choose to do this. We have no desire to “guess” which region will be the next best performer. Rather, we embrace the broad diversification characteristics inherent to benchmarks, and we then aim to differentiate stock selection.


Ultimately, there’s no denying the uncertainties ahead. Is the global economy on track for a hard or soft landing? Will rates stay higher-for-longer, or will global central banks become more accommodative in 2024? How will the geopolitical turmoil and wars evolve (or resolve) this year? Has higher inflation truly been tamed? Given these and other worries, some U.S. investors tend to eschew international stocks and gravitate toward domestic strategies.


However, we remain undaunted, and we think the opportunities outweigh the risks with regard to investing globally. The diversification benefits, the value proposition, and the absolute return potential are intriguing, in our view. But stock selection and portfolio construction are key when it comes to global strategies, and by focusing on quality and minimizing other unwanted style and factor exposures, we think that we can position opportunistically for the longer term.