Equity
Jan 09, 2025|ByOlivia Treharne, CFABlackRock Fundamental Equities
Key takeaways
- Recent history has been extremely favorable to US equities, but there are several reasons we believe international quality stocks could be set to outperform.
- Home country bias is pervasive amongst US advisor portfolios, however an active, quality bias can help mitigate some common concerns about investing outside the U.S.
- The BlackRock International Dividend ETF, BIDD, can help investors diversify their portfolios with international exposure, managed by BlackRock’s Global Equity team.
Think back to New Years Day, 2008. George W Bush was entering his final year as President. The New York Giants were a few weeks away from winning the Super Bowl, ruining the New England Patriots perfect season, and Flo Rida’s hit song, “Low” was #1 on the Billboard Hot 100. Markets were highly volatile, with concerns around the subprime mortgage market already percolating. At the same time, international equities had outperformed U.S. equities for six consecutive calendar years.1 Conventional wisdom said international equities were poised to continue powering returns for portfolios. As we now know, that turned out to be incorrect, with U.S. equity markets outperforming international equities in 12 of the next 16 calendar years. (2008-2023)
Source: Morningstar as of 10/31/24. US performance represented by S&P 500 Index. Non-US performance represented by MSCI ACWI ex USA Index. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.
However, we believe today could be a positive inflection point for quality, international equities. We see several key reasons:
- There are attractive, high quality, unique business opportunities found outside the U.S
- The founder of modern portfolio theory, Harry Markowitz, famously said “Diversification is the only free lunch.” With record levels of concentration in U.S. equity markets, international equities could provide diversification to muted, future U.S. returns and increased volatility.
Today, Lead Portfolio Manager for BlackRock’s International Dividend franchise, Olivia Treharne, is particularly excited about three types of international equity opportunities.
- Companies with unique business models
- There are franchises listed internationally which have differentiated intellectual property - whether that be vintage brands, proprietary data or distinctive pharmaceutical products – which we believe will have the ability to dominate their end markets, resulting in undervalued cash growth. For example, companies with private databases focused on areas like healthcare and legal that have increased in value with the advancement of artificial intelligence.
- International companies which are similar quality to US peers but which trade at a substantial discount
- E.g., major integrated European oil & gas companies, which are refocusing on their core businesses. These companies are currently trading at substantial price/earnings discounts to their U.S. peers, despite having similar levels of free cash flow and operating at a similar level.
- Companies which have secular growth tailwinds not present in developed markets
- E.g., Some industries, such as banking, are mature in their growth in developed markets. However, in emerging markets, the story could be completely different. For example, 95% of U.S. adults have a bank account, compared to 49% in Mexico, leaving a longer runway for growth.2 As active managers, we can be selective and focus on banks with strong credit quality.
Source: Morningstar as of 11/30/2024. Looked at annual calendar year returns of the 50 highest returns stocks in the MSCI ACWI Index. Past performance is not indicative of future results.
Even amidst the US rally over the last several years, more than 70% of the best performing equities continue to be based outside the United States. Portfolios with limited international exposure are potentially missing out on these opportunities.
When looking at opportunities internationally, we prefer to invest in companies which are high quality, which can be reflected in financial metrics like free cash flow, low leverage, or a growing dividend, as well as qualitative metrics such as management team strength. These quality characteristics can be particularly helpful in uncertain market environments, such as today.
The second major reason we like international equities today is their ability to provide diversification. We are seeing concentration levels in U.S. equity indices greater than any point in the last 25 years,3 leaving some investors concerned about what that means for future returns and volatility. The last time U.S. equity markets saw the top 10 names comprise more than 25% was 2000, when market concentration peaked at 26.6%.4 The following years were unkind to U.S. equities, as can be seen in the table below.
Source: Morningstar. Returns for S&P 500 following prior peak in market concentration in March 2000. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.
In addition to the concentration in the top 10 names, U.S. equity indices have seen a large increase in technology stocks as a percentage of the index, reaching a 30+ year high.5 International equity indices look quite different, as they have not faced similar levels of concentration, and their sector composition has been more heavily tilted towards areas like financials and industrials, with materially less weight in technology. The different composition of international equities means a dedicated exposure could help diversify portfolios.
Source: Morningstar as of 10/31/24.
Source: Morningstar as of 10/31/24.
Active ETFs to consider
BlackRock Advisor Center data shows the average U.S. financial advisor is underweight non-U.S. stocks in their portfolios.6 However, there are compelling reasons to invest in international equities today. Investors interested in international exposure can consider the BlackRock International Dividend ETF, a strategy that seeks high quality, dividend paying companies with strong capital allocation at attractive valuations, with lower volatility than the broader international equity market.
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Olivia Treharne
Managing Director, Co-Head of the Global Equity Team
Olivia Treharne, Managing Director, is co-Portfolio Manager for several strategies on the Global Equity team and co-Head of the team. She covers the Financials sector and has been in the industry since 2010. She holds degrees from Cambridge and Oxford, and is a CFA charter holder.
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1 Returns for MSCI ACWI ex US index outperformed the S&P 500 every calendar year from 2002-2007.
2 MarketWatch, June 2024, Elijah Megginson, “Mexico’s unbanked population ‘now big enough to count’ for fintech companies”
3 Defined as % of the S&P 500 index in the top 10 names
4 Peaked in March 2000, S&P 500
5 UBS, Jonathan Golub, Tech defined as GICS Technology Sector; Interactive Media & Services, Interactive Home Entertainment, and Netflix from Movies & Entertainment within Communication Services; and Amazon.
6 BlackRock, Aladdin as of 7/31/24. Analysis based on 22,983 portfolios.
Important Information
Important Information
This information must be preceded or accompanied by a current prospectus. Investors should read and consider it carefully before investing.
Investing involves risk, including the possible loss of principal.
There is no guarantee that any fund will pay dividends. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets and in concentrations of single countries. Funds that concentrate investments in specific industries, sectors, markets or asset classes may underperform or be more volatile than other industries, sectors, markets or asset classes and the general securities market.
Actively managed funds do not seek to replicate the performance of a specified index, may have higher portfolio turnover, and may charge higher fees than index funds due to increased trading and research expenses.
Diversification and asset allocation may not protect against market risk or loss of principal.
This material represents an assessment of the market environment as of the date indicated; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.
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The information presented does not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy or investment decision.
This material contains general information only and does not take into account an individual's financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial professional before making an investment decision.
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