Senior Portfolio Strategist Damien Comeaux discusses why he sees an opportunity for U.S. investors to potentially participate in the next stage of the global economic reopening by broadening their overseas exposure.

Key Takeaways

• International stocks tend to be underrepresented in U.S.-based portfolios relative to those regions’ share of global GDP and market capitalization.
• Given this home bias, we typically see underexposure to cyclical sectors and industries that we believe will continue to benefit from the global economic recovery.
• In our view, rebalancing into international equities could provide geographic and sector diversification within portfolios as well as more cyclical sensitivity to a global economic recovery.

Through the Portfolio Construction and Strategy team’s examination of allocations in our portfolio database, we’ve long noted that international stocks are underrepresented in U.S.-based portfolios relative to those regions’ share of global GDP and market capitalization. Consequently, U.S. investors are typically underexposed to what we would consider the different opportunities associated with international and emerging markets investing.

Source: Janus Henderson Portfolio Construction & Strategy Portal Database, as of 31 December 2021, and Morningstar, as of 31 December 2021.

Given this home-country bias – as well as the staggered reopening of the global economy post-pandemic and recent performance differentials – we believe it could be an opportunity for U.S. investors to reconsider their international allocation to potentially participate in the next stage of the global economic reopening.

Avoiding the Growth vs. Value Dance

The disjointed global reopening has caused a dispersion of returns between ex U.S. value and ex U.S. growth, just as it has within U.S. equities. Within our financial professional database of clients with international stock allocations, 80% of them tilt toward growth with no dedicated international value, and almost one-third of clients only allocate to international growth for their exposure abroad. Instead of focusing on a certain style factor, we believe it is prudent to broaden overseas exposure in a way that avoids the growth versus value dance.

Given the aforementioned home bias, we typically see advisor portfolios underexposed to cyclical sectors and industries that we believe will continue to benefit from the global economic recovery. As illustrated in the chart below, ex U.S. equities are overweight cyclical sectors relative to their U.S. counterpart. Additionally, the MSCI ACWI ex U.S. Index is trading at a 20-year high discount relative to the S&P 500^® Index, creating a potential opportunity for investors looking to diversify outside the growth-heavy U.S.

Ex U.S. Equity vs. U.S. Equity Sector Overweights/Underweights
Ex U.S. equities are weighted more heavily toward cyclical sectors and trade at a discount relative to U.S. equities

Source: Morningstar, Bloomberg, as of 31 December 2021.

As investors revisit their global equity allocations, rebalancing into international equities could fulfill a broad mandate, providing geographic and sector diversification within portfolios as well as more cyclical sensitivity to a global economic recovery.