Mike McCune, Boston Partners Portfolio Analyst, discusses in Boston Partners latest Entry Points video.
International Equities: The Opportunities and Benefits
Considering the unrestrained growth of domestic technology- and internet-related names between 2014 and 2021, the deceleration in the U.S. equity markets in 2022 should come as no surprise. Among the small subset of the world’s largest tech names, for instance, it’s a lot easier to grow market caps for companies going from $1 billion to $2 billion. But growth becomes exponentially more difficult when valuations exceed $1 trillion.
International equities have been overshadowed by U.S. stocks in recent memory. At the same time, the current concentration in tech is now creating a compelling entry point for investors who recognize the diversification benefits of allocating to both domestic and international equities over a long-term time horizon.
Catalysts in Play:
The concentration of tech in the U.S. has already influenced global portfolios. As of June 30, 2022, the weight of technology and technology-related stocks in the MSCI World Index exceeded 28%, up from approximately 10% in 2006.
Meanwhile, developed market exposures within the same index don’t even represent a third of the total weighting. The MSCI EAFE stocks have shrunk to under 30% from over 45% during the same time period. Passive investors are thus underweight to several acute catalysts still taking form:
Global Supply/Demand Imbalance | The pandemic, coupled with the war in Ukraine exacerbated the global supply/demand imbalances that were already affecting global commodity prices. Allocations to active international strategies can hedge investors concerned about volatility related to these imbalances.
Metals and Mining Hotbed | The universe of international stocks also offers more opportunities to invest in metals and mining companies or machinery and equipment manufacturers who sell into these verticals. In fact, there were 4x as many companies in these segments across the MSCI World (ex-USA) index than there in the MSCI USA index as of September. This underscores the breadth of the opportunity set available to active international strategies.
Currency Tailwind | Investors in the U.S. also benefit as the Federal Reserve tightens monetary policy. Of course, this reinforces the strength of the U.S. dollar, but more importantly it supports free cash flow yields among European operators exporting into global markets.
Active Strategy: Boston Partners has been investing in global and international equities since 2004 and offers a number of different approaches to access these geographies. Today, an “all-cap” approach can offer flexibility for disciplined managers to expand their investment universe and scan up and down the market-cap spectrum to construct a dynamic portfolio of undervalued names most likely to outperform against the current backdrop.
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Statistics and other information taken from the following sources:
The MSCI USA Index is designed to measure the performance of the large and mid cap segments of the US market. With 627 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the US. These indexes are unmanaged and investors cannot invest directly in these indexes.
The MSCI World ex USA Index captures large and mid cap representation across 22 of 23 Developed Markets (DM) countries*– excluding the United States. With 890 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. These indexes are unmanaged and investors cannot invest directly in these indexes.
US Federal Reserve: The Federal Reserve System is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of financial panics led to the desire for central control of the monetary system in order to alleviate financial crises.
Market Cap is the market price of an entire company.
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