Achieving Balance in a Global Equities Portfolio
The US stock market has been an extraordinary success story over the past decade. A booming technology sector has driven a phenomenal rally, with US companies at the heart of global innovation. For investors, an index tracker on the US market has served them well and there has been little incentive to look elsewhere.
However, the remarkable performance has left some anomalies. While the US has continued to show significant economic prowess, its free float market capitalization meaningfully exceeds its share of global GDP—at 62% versus 32%.1 It holds an even higher share of the MSCI World index, at 72%.2 This should give investors pause for thought.
The US is unquestionably a fertile source of innovation, but it does not have a monopoly on it. There are multiple growth opportunities elsewhere, from semiconductors in Taiwan, to obesity treatments in Denmark, to fast-growing emerging economies. There is a risk that investors miss these kinds of opportunities by focusing too much on the US. Diversifying3 into these markets could help investors harness a broader spread of opportunities.
There are other diversification3 considerations. The MSCI USA Index is heavily dominated by information technology, with almost one-third of its allocation in this sector.4 There are also companies such as Amazon and Tesla, which are considered consumer discretionary companies, but are heavily linked to the technology cycle.
Technology remains a vital global sector, and continues to disrupt existing markets, such as the auto sector. However, high exposure to a single sector carries risks. Introducing exposure to an index such as the MSCI World ex USA Index alongside US exposure can help achieve a more diversified3 sectoral breakdown.
In the MSCI World ex USA Index, financials are the largest sector, followed by industrials. Information technology represents only 8.93% of this index, showing a smaller contribution from technology in non-US markets.1
Performance considerations
The MSCI USA Index has vastly outperformed5 its non-US counterpart over the long run, reflecting the sustained dominance of the US equity market and its high-growth technology companies. The performance of the MSCI World ex USA Index has been lower, but the index is more diverse,3 with a greater contribution from areas such as health care and financials.
Looking at both indexes side by side today, the MSCI World ex USA Index has lower aggregate valuations and a higher dividend yield when compared to the MSCI USA Index.6 This gives it some appeal for investors who want to diversify3 their sources of return beyond the capital gains-driven US market. Incorporating the MSCI World ex USA index into a portfolio can create greater balance across capital appreciation and income.
That said, investors cannot ignore the remarkable economic strength and outsized market capitalization of the United States. While valuations look high relative to their history, the market opportunity for the mega-cap technology companies is vast. In particular, they are exposed to the artificial intelligence trend, which promises to be as important a technological development as the internet.
Separating US and non-US exposure allows investors greater flexibility to adapt to changing market conditions. A large weighting in the high-growth US will be right for many investors, but there will be others who may need to balance it with a lower-volatility or higher-income approach. Using ETFs as building blocks for a portfolio gives investors the ability to find the right option to suit their needs.
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1 Source: MSCI, Amundi, as of 30/08/2024. Past performance is not a reliable indicator of future performance.
2 https://www.msci.com/documents/10199/178e6643-6ae6-47b9-82be-e1fc565ededb
3 Diversification does not guarantee a profit or protect against a loss.
4 https://www.msci.com/documents/10199/255599/msci-usa-index-gross.pdf
5 Past performance is not a guarantee or indication of future results.[1] Source: Bloomberg, Amundi. Past performance is not a reliable indicator of future performance. Best consensus estimates as of 05/09/2024.
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