International Stocks Surge Past U.S.—Global Markets and Currency Moves Reshape Investor Opportunities
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In aggregate, American business has done wonderfully over time and will continue to do so. – Warren Buffett
International Stocks Outperforming
International stocks are beginning to surpass U.S. stocks, prompting investors to consider increasing their foreign investments. The MSCI ACWI, excluding the U.S., has returned 26.7% so far this year, compared to a 14.8% increase in the S&P 500. This metric encompasses both developed and emerging markets, while the MSCI EAFE represents developed markets and the MSCI EM pertains to emerging economies.
Long-Term Performance Insight
Despite past performance not guaranteeing future results, foreign stock investors have faced disappointment over the last several decades when compared to U.S. investors. For instance, the S&P 500’s total return over the past two decades has been 700.6%, far exceeding the 233.3% return from global international markets. A significant factor for U.S. stocks has been the impressive growth of the tech sector, which rose by 2,053.8% in the same timeframe.
Currencies and Their Impact
U.S. investors in international stocks also need to consider currency fluctuations. A weakening dollar boosts returns on foreign investments. In fact, currency shifts accounted for 9.3 of the 11.9 percentage points of the MSCI ACWI Ex-U.S.’s outperformance over the S&P 500 this year. However, historical patterns suggest that this currency boost may not be replicated, as foreign exchange effects have generally reduced returns on international investments over the past twenty years.
Diversification and Investor Attitudes
Many experts argue that a “home country bias” leads U.S. investors to hold an insufficient number of international stocks. Academics advocate for a market capitalization-weighted standard, which suggests that U.S. stocks should make up around 49% of a stock portfolio. Ignoring foreign currency risks, this perspective overlooks the strong advantages the U.S. has, including a robust legal system and a diverse market across various sectors, which many foreign markets lack.
Examining Sector Bets
Allocating investments to international indexes can be seen as a bet against technology. The S&P 500 has a 35% tech representation, while international markets sit at 14%. A further analysis of leading U.S. tech firms elevates this exposure to 46% when including major names like Amazon and Alphabet.
Framework for International Investing
While the U.S. dominates global markets, there are exceptional companies abroad worth considering. Investors should focus on global opportunities rather than adhering to a fixed percentage in international stocks. Warren Buffett’s investment in Japanese trading companies exemplifies this approach, showcasing how specific global opportunities should be pursued while paying attention to foreign currency risks.
Disclosure: Glenview Trust holds Berkshire Hathaway and other stocks mentioned within its recommended investment strategies. I am a long-time shareholder of Berkshire Hathaway and worked for Salomon Brothers when Warren Buffett became Chairman and CEO. Glenview Trust does not provide tax advice, so please consult your tax advisor.
