As uncertainty rises, case for non-U.S. equities strengthens

Improved fundamentals abroad, still-attractive relative valuations and a pause in U.S. dollar strength are shifting the balance toward international equities, says Seth Weingram of Acadian Asset Management.

Speaking on the Soundbites podcast, he said diverging from global cap-weighted benchmarks — where the U.S. dominates — is not a casual decision. But “there are some things that have changed the balance to potentially favour non-U.S. equities.”

Weingram said non-U.S. markets have seen steady earnings improvements, with valuations only beginning to reflect that progress.

“The market has given some credit to those improved fundamentals in non-U.S. valuations — finally,” he said, “whereas tech-heavy U.S. valuations have been buffeted by sudden swings in investor sentiment.”

He added that non-U.S. markets are more heavily weighted toward financials, industrials and defence — sectors that have delivered stronger earnings growth.

A recent abatement in U.S. dollar strength has also supported the shift.

At the same time, elevated geopolitical and economic volatility is weakening conviction in sustained U.S. outperformance and reinforcing the role of diversification in global portfolios.

“I would advocate for really well-diversified overweights across both EAFE — so developed markets outside of North America — as well as emerging markets,” he said.

“We like countries where fundamentals have been ahead of market expectations so far, and that has justified valuations and fuelled positive sentiment. Those are countries like Taiwan and Korea.”

He said there is a temptation to think that where a company is domiciled doesn’t matter.

“There are mega-cap technology companies in Asia, in emerging Asia, and Taiwan and Korea, for example, that seem every bit a part of the developed market ecosystem as mega-cap technology companies that are based in California,” he said. “Nevertheless, geographical diversification is still important to a well-designed portfolio. There are markedly different industry exposures across geographies.”

Weingram said it is especially valuable in the small-cap segment.

“Not only are small-cap stocks less sensitive to global drivers of returns, but they also tend to be less efficiently priced and, as a result, are a key source of stock-picking opportunity,” he said.

He cautions investors against “glomming on to speculative froth.”

“It’s still quite evident in the market, and I think that dispassionate investors will be rewarded for taking the other side of what I still see as expensive growth stocks with highly uncertain fundamental prospects.”

Rather, he looks for what he calls “low-risk stocks” — those with low market betas.

“Evidence shows that over time, these stocks have returned performance in excess of their risk, and they provide some cushion against downside market exposure,” he said.

“I can summarize my takeaway for designing global portfolios at this point as diversify, diversify, diversify. Don’t give up on diversification. Don’t lose faith in it. It’s going to be your friend in the long term.”

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.