4 minute read

Over the last decade, U.S. equities have consistently surpassed their global counterparts, prompting investors to ponder the necessity of international equities in their investment portfolios. This sentiment could not have been more apparent in 2023 when the oft-mentioned “Magnificent Seven” lead in the resurgence of equity returns. A closer look at major global equity indices also reveals a dominance of U.S. companies, constituting around 70% of the MSCI World Index and approximately 60% of the MSCI All-Country World Index (ACWI).

However, dismissing the rest of the world could mean overlooking compelling investment prospects. Numerous investment opportunities outside the U.S. offer the potential for robust returns and portfolio diversification.

For those heavily invested in North American assets, exposure to international markets can mitigate asset correlation and concentration risks. To illustrate the existence of opportunities beyond the U.S., the chart below delineates the breakdown between U.S. and non-U.S. companies among the top 100 performing stocks in the MSCI ACWI Index over the past decade.

This retrospective analysis of the last 10 years reveals a surprising fact: while U.S. equity indexes dominated returns, the majority of the top 100 performing stocks each year came from companies outside the U.S. On average, only 24 of the top 100 performers were American companies. As such, this chart builds a strong case for the advantages of diversifying equity holdings beyond the U.S.

Implications for portfolios

The past decade underscores the dominance of the American market and its significance in investment portfolios. While the U.S. will remain a core element of global equity investments, we believe there are attractively valued opportunities in international equities as well.

RBC GAM's Investment Strategist, Eric Savoie, recently highlighted that the current valuations of global stocks, including the U.S., are 4.8% below their equilibrium fair value. Excluding the U.S., the global valuation composite is 17.2% undervalued. This presents a compelling case for considering international equities in the years to come.

To be clear, we're not vigorously advocating for international equities as we still harbor concerns about the global economy. Nevertheless, we see considerable value in expanding exposure beyond the U.S. (or North America as a whole) as a prudent risk management strategy. Not only do many international stocks lead in annual performance, but geographic diversification may also decrease overall risk within investment portfolios.

Please speak to us to discover how broadening geographical exposure can contribute to a more stable and balanced investment journey.