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Why We Are Neutral Between U.S. and Non-U.S. Stocks

Sébastien Page, CFA, Head of Global Multi-Asset

Executive Summary

Our Asset Allocation Committee is neutral between U.S. and non-U.S. stocks. U.S. stocks are supported by massive stimulus measures and are exposed to innovative sectors that have proven to be resilient in this environment. Meanwhile, non-U.S. stocks may have a smoother recovery from the pandemic and could potentially benefit from a weakening U.S. dollar.


In our Asset Allocation Committee, we like Emerging Market stocks relative to developed markets, but at the top level, we are neutral between U.S. and non-U.S. stocks. No one likes a two-handed economist, but I’m not an economist, so let me give my top two reasons to favor U.S. stocks, and my top two reasons to favor non-U.S. stocks.

In favor of U.S. stocks, there is a clear stimulus advantage. The year-over-year increase money growth (a proxy for stimulus measures) in the U.S. has been more than four times the increase in Europe, Japan, the UK, and China. US authorities just had more dry powder available than the rest of the world.

Second, U.S. stocks enjoy an important sector advantage. U.S. stocks are comprised of 27% technology companies, compared to 7.5% in Europe, for example. So the U.S. economy has been and could continue to be more dynamic, more innovative, or vibrant if you will. And U.S. stocks remain more resilient in a continued low interest rate environment.

Now perhaps I’ve convinced you to overweight U.S. stocks. But wait…

In favor of non-U.S. stocks, we likely have a smoother recovery from the pandemic. Markets typically look not for the resolution of economic shocks, but rather for the “stop-getting-worse moment.” With regards to the number of cases and the impact of the pandemic on economic activity, it appears the U.S. is lagging the rest of the world.

The second of my top two reasons in favor of non-U.S. stocks is a potentially weakening U.S. Dollar. The narrowing of the growth differential and interest rate differential that have favored the U.S., and the massive supply of liquidity I mentioned, could continue to push the U.S. Dollar lower. Equity investors sometimes underestimate the impact of currencies on their unhedged foreign equity exposures. This factor could play an important role in the months ahead.

Notice that I haven’t mentioned the valuation advantage for non-U.S. stocks as one of my top two reasons to like the asset class. It is a factor we look at, but it has poor historical performance as a tool for tactical asset allocation at the 6-18 month time horizon, and sector differences can weaken the signal significantly.

The bottom line? When it comes to U.S. vs. non-U.S. stocks, we believe diversification is the name of the game. As we tell our clients, don’t be a hero, stay invested, and stay diversified.

Morningstar Awards 2020©. Morningstar, Inc. All Rights Reserved. Awarded to T. Rowe Price for 2020 U.S. Morningstar Exemplary Stewardship and to Jerome Clark for 2020 U.S. Morningstar Outstanding Portfolio Manager, U.S.A.