International Equities
International equities have led the way in gains this year, although many U.S. investors may have missed these higher returns. Home country bias may be costing investors: The average advisor allocates 77.5% of their equity portfolio to the U.S., up from 70% in 2018.25 Heightened international returns have followed a supportive mix of fiscal and monetary spending abroad, a weaker dollar, and the possibility of interest rate reductions in the U.S. International equities can help build a well-diversified portfolio, particularly as they show potential for continued support from potential dollar weakness.
Investors have started to correct for this underweight and turning to international, with non-U.S. equity exposures comprising 29% of total equity ETF flow YTD vs. 12% last year.26 Across recent webinars we hosted, clients indicated that they are four times more likely to add exposure to European or developed international equities than to reduce it.27 This builds on the trend observed of strong appetite for non-U.S. exposure. We believe there are three reasons why.
1 – Declining dollar has historically lifted international returns
We believe we are toward the beginning of a weaker dollar cycle, which has tended to boost international returns – potentially indicating a structural relationship change that requires investors to consider evolving portfolio construction. The dollar has long benefitted from a cycle of robust U.S. growth and investment. But we think the structural bull market may be challenged amid current trade policy, a reorientation of global growth and demand for alternative reserve currencies.
Historical evidence underpins our view that FX moves in sustained, longer-term cycles: since the end of Bretton Woods in 1971, we’ve observed six completed dollar cycles, with an average duration of about eight years (Figure 11). If we are at the beginning of a longer-term dollar cycle, we see reason to reconfigure portfolios. Unhedged international equities may stand to benefit the most from ongoing currency weakness.
Figure 11. We’re still early in the FX cycle
