Jack Bogle, founder of Vanguard, was famously averse to non-U.S. stocks, since most large U.S. companies get much of their revenue from doing business overseas. And indeed, over the past few decades, U.S. equities have trounced overseas stocks. But over the past year, non-U.S. stocks have performed a bit better than U.S. stocks, making the argument that investors should consider diversifying overseas, contends an article in Morningstar.
From 2013 to 2022, the Morningstar Global Markets ex-US Index trailed the Morningstar US Market Index in 8 out of the 10 years, but that pattern started to reverse last year, as U.S. stocks underwent a bear market brought on by the Fed’s hawkish tightening policy. While Morningstar’s global index lost about 15% in 2022, its U.S. counterpart fell 20%, and emerging-markets dropped 18%, though stocks in Latin America and the Middle East, weighted towards the robust energy sector, did better than others. But diversifying may be trickier than expected, because many overseas-stock benchmarks have been closely correlated to the U.S. market for the last 3 years, especially developed-markets in Europe and the U.K, which emerging-markets equities aren’t as closely tied to U.S. stocks. The correlations between a small cluster of European emerging-markets stocks greatly declined last year, thanks to steep losses in those countries after Russia invaded Ukraine early last year, with the Morningstar Emerging Markets Europe Index losing almost 2/3rds of its value in 2022. But those stocks are a small 1.3% sliver of the wider Morningstar Emerging Markets Index. If a recession happens in the U.S. or the dollar goes into a long-term decline, it’s possible that the correlations between U.S. and international markets could sink lower, as has happened in the past when the dollar declined, the article maintains.
Investors with diversified portfolios haven’t seen much reward for the last 10 years, but they have seen reduced volatility compared to those with a U.S.-only portfolio. While the 10-year standard deviation for the Morningstar US Market Index is 15.2%, it stands at 14.4% for the Morningstar Global Markets Index. And where the U.S. market is tilted more and more towards growth, that could be detrimental during periods like last year, when value-oriented sectors led the way. During those times, non-U.S. stocks may outperform. And given emerging markets’ lower correlation with U.S. equities than developed markets, investors might consider allocating some of their overseas stocks to less-developed markets across a broad range of geographic regions rather than focusing on just one specific region, Morningstar advises.