After years of U.S. stock market gains, investment experts see more value abroad. One recommendation: 15% to 20% in foreign markets. By Reshma Kapadia

The U.S. has been a rewarding investment destination for 15 years, trouncing overseas markets and making it tough for investors to leave. They kept their money at home even amid warning signs like rising stock valuations, overcrowding in parts of the market, and a soaring national debt.

That's beginning to change. Some investment pros are targeting markets outside the U.S. as the Trump administration's economic, trade, and geopolitical priorities scramble long-held alliances and assumptions about U.S. assets.

"People are trying to move to less-risky investments, which means less U.S. today," says Afsaneh Mashayekhi Beschloss, founder of investment firm RockCreek Group and Carlyle Group board member, after a trip to meet investors overseas. She says global investors are diversifying into markets outside of China, such as Europe, India, Canada, and Australia.

Moving away from a successful strategy isn't easy. U.S. stocks have performed so well in recent years that a generation of investors had little reason to look elsewhere. The S&P 500 delivered a total return 3.5 times as big as that of the MSCI All Countries World x-U.S.A. index -- 625% to 173%, respectively -- over the past 15 years. Powering some of that performance were the shale and artificial-intelligence revolutions that created rewarding opportunities for investors. The U.S. economy bounced back bigger and faster from the pandemic, buffeted by trillions of dollars in stimulus. That contrasted with a more-constrained Europe that was cleaning up from an earlier debt crisis, and a Chinese economy hobbled by a massive property bust.

That left investors heavily skewed toward U.S. assets. U.S. stocks make up almost two-thirds of the global market cap of the MSCI All Countries World index. U.S. residents' portfolios have 12% in foreign stocks, down from 16% in 2018, according to macroeconomic research and consulting firm Exante Data, based in New York.

Differing valuations led strategists like Antti Ilmanen, global co-head of the portfolio solutions group at AQR Capital Management, to advocate looking abroad over the past couple of years. The cyclically adjusted price-to-earnings ratio for U.S. stocks hit double that of foreign companies at the end of 2024, up from parity around the 2007-08 global financial crisis.

Racing Ahead

The MSCI All-Country World ex U.S. index has logged a total return of 14% compared with just 1.5% for the S&P 500 this year. Net inflows into emerging markets and global and European stock and bond funds have totaled $139 billion, according to EPFR Global. Investors haven't poured this much money into European funds since 2015.

Strategists aren't recommending dumping U.S. assets or suggesting the dollar has lost its reserve currency status. But they do see a rebalancing that could play out over months and years, rather than weeks, as long-term, big money players -- including central banks and sovereign-wealth funds -- readjust portfolios for what Bridgewater Co-Chief Investment Officer Karen Karniol-Tambour describes as a once-in-a-generation economic shift.

Underpinning this shift is a move away from the U.S.-led international order of the past 80 years and globalization of the past couple of decades that pulled billions out of poverty, kept prices in the U.S. low, and supercharged profitability of U.S. companies even as it contributed to a hollowing out of the country's manufacturing sector. Robust trade between countries, especially the U.S. and China, also kept a lid on geopolitical volatility, since nations intertwined economically are less likely to engage in military conflict.

Whether or not the Trump administration strikes trade deals or changes some of its other policies, corporate executives and foreign officials don't expect to go back to how things were. Companies are staffing command centers to adjust their businesses to a shifting global order, and policymakers are prioritizing spending to become more self-sufficient in an increasingly fractious geopolitical environment.

Bond managers also see a change in the market as U.S. bond yields surge past 5% and the dollar weakens. "Part of American exceptionalism was driven by massive budget deficits," says Jack McIntyre, a fund manager on Brandywine Global's fixed income strategy. "We may show some fiscal responsibility. That slows growth versus the rest of the world, which has more financial levers to pull right now."

Europe -- led by Germany -- is in the midst of a U-turn on the financial austerity that has defined it over the past decade, committing to spend $1.08 trillion on defense and infrastructure as the U.S. signals it could back away from its security commitment to Europe. China is also showing more willingness to spend to support its still-sputtering economy. Investors hope it will step up those efforts once the full impact of the trade war and Trump policies become clearer.

Even if President Donald Trump is able to get his tax cuts and credits through, TS Lombard analysts estimate it will amount to no new net fiscal stimulus. China and Europe are increasing spending at a time when their markets are cheaper and earnings forecasts are lower, making it easier to outpace expectations in those markets.

"Now is a good time to shake yourself and say, do you really believe the future paradigm looks like the one in the past?" Karniol-Tambour said on a panel at the Milken Global Conference in May. "It doesn't matter where exactly any one policy lands but [rather] the mind-set shift of other countries who look and say, 'The U.S. wants to be self-sufficient; maybe we should be self-sufficient.' "

That shift will play out in other markets, most notably currencies. A recent Fed study showed that when Chinese banks lend to emerging markets, they are increasingly doing so in their own currency rather than the dollar. Increasingly, what global asset manager Baillie Gifford classifies as "middle earth" countries -- those trying to not pick sides in the U.S.-China rivalry and are home to five billion people -- are increasingly trading with each other in a currency other than the U.S. dollar.

Asset Shift

Just how much to put into international assets comes down to risk appetite. Strategists suggest roughly 15% to 20% in a mix of international stocks and bonds. Some suggest leaving at least a bit of that unhedged to provide foreign currency exposure.

As the dollar loses some of its allure, investors are gravitating toward gold. Even with the SPDR Gold Shares exchange-traded fund up 26% this year, strategists still favor a gold allocation as a hedge.

The recent spike in U.S. Treasury bonds beyond 5% illustrates that investors are demanding more protection to lend to the U.S., amid the Trump administration's efforts to shepherd its tax-and-spending bill through Congress and concerns about what it will do to the country's already high deficit.

Those concerns could intensify as the U.S. needs to refinance more than $9 trillion of U.S. Treasuries in the next 12 months. Foreign investors own 30% of marketable outstanding debt, down from 50% a decade ago. That 30% is now equally split between foreign officials and private accounts, the latter of which tend to be less sticky, according to J.P. Morgan head of global research Joyce Chang. The administration's "transactional tactics raise doubts about U.S. dependability," with the pressure on the dollar unlikely to reverse in the near term -- even though the dollar's dominance isn't going to fade fast, considering there are few alternatives, Chang says. She expects the dollar to continue to weaken. Brandywine's McIntyre also sees further dollar weakness and instead favors the euro and the Australian dollar, in part because both currencies have fiscal levers at their disposal.

For a one-stop shop to diversify, Russel Kinnel, senior principal of ratings at Morningstar, highlights the Dodge & Cox International Stock fund, which gives investors access to good stockpickers with a value-bent on the cheap for an active fund. He also highlights Fidelity Overseas, run by Vincent Montemaggiore, whom Kinnel describes as one of the better, next-gen stockpickers Fidelity has produced. In terms of bonds, Kinnel likes the Dodge & Cox Global Bond fund for its strong track record; and the BlackRock Strategic Global Bond fund, run by veteran Rick Rieder, which brings to bear the resources of the world's largest asset manager.

Europe is a favored destination, with 54% of investors J.P. Morgan recently surveyed signaling they were looking at increasing allocations to Europe over the next 12 months. Germany's fiscal spending plans, as well as the potential for capital market reforms and deregulation, bode well for that market. Two cheap ways to get access: the Vanguard FTSE Europe and iShares Core MSCI Europe ETFs. Matt Burdett, head of equities and manager of the Thornburg International Equity fund, is finding opportunity amid the policy flux in companies like AstraZeneca, which was recently hit by the Trump administration's drug-pricing plans. The stock trades at a price/earnings multiple in relation to the market at 0.78, compared with an average of above 1.

"Over the past 20 years, policy-related [volatility] usually presents a good opportunity. What drives these stocks is the innovation that comes out of the research," Burdett says. He says AstraZeneca has improved the productivity of its research and development over the past decade and is reaping the returns with cancer drugs such as Calquence, which is taking market share from AbbVie's Imbruvica.

Also attractive are utility companies in Europe. Spain's Endesa stands to benefit from increased investment in infrastructure, especially as Spain's recent blackout underscored the need for more grid investment, Burdett says. The stock trades at under seven times 2026 enterprise value to earnings before interest, taxes, depreciation, and amortization, or Ebitda. That's cheaper than European peers trading at around 8.3 and U.S. utilities typically fetching 10 to 11 times Ebitda, Burdett says. The stock's 4.74% dividend yield offers some extra ballast during uncertain times.

Others are finding opportunities in places that may be less vulnerable -- or even benefit from -- the reordering of trade created by U.S.-China tensions, such as Brazil and India. While Brazil's economic outlook isn't stellar, Paulina McPadden, a manager of Baillie Gifford's International Concentrated Growth Strategy, owns e-commerce company MercadoLibre, which has managed to succeed despite Brazil's difficult economic backdrop.

Local Champs

MercadoLibre represents the "local champions" that may gain more prominence in a world moving toward regionalization rather than globalization that was synonymous with multinational companies. A decade ago, investors feared Amazon.com would eat MercadoLibre's lunch on its home turf, but the company invested aggressively in logistics and emerged the dominant player. Now, the e-commerce giant is moving into adjacent opportunities like financial services that pave the way for stronger growth.

India's domestically oriented economy shields it somewhat from the trade war, and its positioning as a China alternative puts it in a prized strategic position. Apple has moved its iPhone manufacturing to India from China -- drawing criticism from Trump -- but India continues to court investment from others trying to diversify away from China. As China's economy suffered and Beijing's crackdown on technology companies and geopolitics rattled investors, many shifted to India, pushing up valuations.

The iShares MSCI India ETF is down 10% from its highs in September, drawing some renewed interest in investors who still favor Indian stocks, especially those geared toward consumers, long term. Alison Shimada, head of Allspring Global's Total Emerging Markets Equity team, is eyeing wealth managers like Nippon Life India Asset Management, which is well placed as more Indians begin investing and become more sophisticated in the tools they use.

With concerns mounting about the deterioration in developed economies' fiscal situations, Kimball Brooker, co-head of the First Eagle Global Value team, is sticking with companies that aren't dependent on capital markets, like Japan's MS&AD Insurance Group Holdings. The insurer has benefited from a consolidating industry and has been selling its equity investments in other companies, freeing up capital and using it to buy back stock and pay extra dividends.

Unlike past bouts of volatility due to market and business cycles, the current uncertainty comes with the prospect of sudden shifts. Morningstar's Kinnel advises investors to diversify across geographies and asset classes, so that a range of defenses can protect portfolios.

Write to Reshma Kapadia at reshma.kapadia@barrons.com

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May 30, 2025 21:30 ET (01:30 GMT)

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