Non-U.S. Large Cap Equities

• The combination of rising stock prices and lower earnings for U.S. equities (S&P 500) has resulted in a significant valuation premiums relative to non-U.S. equities.
• International stocks (MSCI ACWI ex US) are trading at a 37% discount to U.S. equities on P/E FY1 Est. The current discount is 42% greater than the 10-year average discount of 21%.
• Additionally, non-U.S. stocks have significantly lower levels of long-term debt to equity and double the yield of U.S. stocks, which could provide a buffer should the market experience future downside volatility.
• While non-U.S. equities have lower estimated 3-5 year EPS growth estimates, the asset class appears very attractive on price per unit of growth measure (PEG Ratio).

Source: FactSet Research Systems. Performance data shown represents past performance and is no guarantee of future results.

• The U.S. equity market has become increasingly concentrated, particularly over the last five years.
• The top five companies in the S&P 500 now represent 23% of the Index.
• Conversely, the MSCI EAFE Index is less concentrated than it was 20 years ago. The top five companies in the MSCI EAFE Index represent just 9%.
• The top five companies in the S&P 500 now represent 23% of the Index.

Value: Industrials, Financials, Materials, Consumer Staples, Utilities, Real Estate, Energy

Growth: Consumer Discretionary, Health Care, Communication Services, Information Technology

Source: FactSet Research Systems.

• Between 2001-2010, the U.S. dollar weakened and provided a tailwind for international equities, boosting EAFE returns by +40% (MSCI EAFE USD vs. MSCI EAFE Local).
• Between 2011-2022 the strength of the U.S. dollar served as a headwind for international equities, accounting for -54% of cumulative performance for EAFE during the period (MSCI EAFE USD vs. MSCI EAFE Local).
• As we move closer to potential shift in Fed policy, dollar weakening may prove a tailwind for international equities looking ahead.

Source: Ycharts. Performance data shown represents past performance and is no guarantee of future results.

• While U.S. equities have outperformed over more recent periods, the majority of the MSCI ACWI’s best-performing companies in the world over the past decade were domiciled in non-U.S. markets.
• On average, 79% of the top 50 calendar year performers within the MSCI ACWI Index were located outside of the U.S.

Source: FactSet Research Systems. Performance data shown represents past performance and is no guarantee of future results.

• At a sector level, certain sectors like financials and communication services have structurally underperformed over time.
• The chart above shows the rolling 10-year excess return of EAFE sectors vs EAFE overall, dating back to the common inception period of 1994.
• Specific to financials, this also has represented the largest average sector exposure within the benchmark over the last decade, averaging a 20%+ weight.
• There are likely several reasons for this chronic underperformance, but one likely component is Europe’s tendency to maintain too many state-supported banks (and telecos within communication services) relative to their geographic footprint. As an example, there are 4-5 mega banks in the U.S., and each major country in Europe tends to have 3-5 of their own mega banks, resulting in an overly fragmented landscape that has struggled to earn attractive returns on capital over time.

Source: FactSet Research Systems, Morningstar. Performance data shown represents past performance and is no guarantee of future results.

Important Information

The views expressed herein may not be reflective of current opinions, are subject to change without prior notice, and should not be considered investment advice or a recommendation to purchase or sell a particular security.

The Standard & Poor’s 500 Index (S&P 500) is an unmanaged index generally representative of the U.S stock market. The MSCI All Country World Ex. US (ND) Index is a free float-adjusted market capitalization weighted index that is designed to measure equity market performance in the global developed and emerging markets, excluding the U.S. The MSCI EAFE (ND) Index is an unmanaged index generally representative of major overseas stock markets. The ICE US Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. The MSCI All Country World Index (ACWI) is a stock index designed to track broad global equity-market performance. These unmanaged indices do not reflect fees and expenses and are not available for direct investment.

In relation to any data attributed to Morningstar, please note the following: © Morningstar 2024. All rights reserved. Use of this content requires expert knowledge. It is to be used by specialist institutions only. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied, adapted or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information, except where such damages or losses cannot be limited or excluded by law in your jurisdiction. Past financial performance is no guarantee of future results.

Investing entails risks and there can be no assurance that any investment will achieve profits or avoid incurring losses.

Stock markets are volatile and equity values can decline significantly in response to adverse issuer, political, regulatory, market and economic conditions. Investing in international and emerging markets poses special risks, including potentially greater price volatility due to social, political and economic factors, as well as currency exchange rate fluctuations. These risks are more severe for securities of issuers in emerging market regions.

P/E FY1 or Price to Earnings ratio, current year. Current prices divided by estimated future earnings over the next 12 months. 

PEG Ratio or Price/Earnings to Growth is calculated by dividing a stock’s price-to-earnings (P/E) ratio by the growth rate of its earnings over a specified time period.

Dividend yield is a percentage that represents the dividend-only return of a stock investment. It is calculated by dividing the annual dividend per share by the stock's price per share.

EPS or Earnings Per Share is an indicator of a company's profitability.

Federal Funds Rate refers to the target interest rate range set by the Federal Open Market Committee (FOMC).

Copyright © 2024 Harbor Capital Advisors, Inc. All rights reserved.

3413612