Head of Equities Matt Burdett explains why diversification matters in Investment Week
For global equity managers, the past 15 years have called into question one of investing’s core beliefs: the importance of diversification.
Since the financial crisis, owning the S&P 500 alone has been enough to power strong returns. Back in 2009, both the S&P 500 and global ex-US equities traded on about 14 times earnings. But since then, US multiples have expanded to more than 22 times, while global ex-US markets have barely moved.
While the stronger earnings growth delivered by US stocks in recent years has justified a premium, today’s corporate landscape tells a different story. In dollar terms, the earnings gap between the US and Europe has now closed, and Japan has actually outperformed American corporates.
In addition, while the US has been the bastion of stability for decades, recent policy shifts have called into question whether it should carry a higher risk premium than in the past.
Currency has also been a critical factor, as the dollar appreciated 40% from 2009 to the peak of US exceptionalism last year – a huge headwind for non-US stock markets, as a stronger dollar diminishes returns for US investors in global equities.
However, this dollar dominance may be set to reverse, as the current US administration has openly signalled its intent for a weaker currency. The Federal Reserve’s trade-weighted real dollar index is near 130, well above its 50-year average of 100, suggesting downward pressure is likely into 2026.
Compelling valuations
With the Magnificent Seven now larger than the combined markets of several major economies, the narrow leadership of US equities looks increasingly unsustainable, and many investor portfolios are under-diversified.
While we do not believe US valuations are poised to collapse or investors in US equities are being senseless, from a relative value perspective, there are high-quality global companies with good outlooks that are more compellingly priced than US peers.
Here, Europe is particularly appealing. While it may have a track record of disappointing investors, the fundamentals are shifting. Even with this year’s positive performance, European stocks continue to display good value.
Encouragingly, many of the structural advantages observed during research trips this year to Europe – such as the region’s growing self-sufficiency – remain firmly in place and are translating into revenue and earnings growth for companies.
Old economy opportunities
Within Europe, specific sectors now offer particularly attractive opportunities. As the cost of capital normalises, European banks have posted some of the most significant positive earnings revisions among developed markets, with the sector posting earnings not seen for 15 years.
Despite this, many European banks continue to trade at deep discounts to US peers. BNP Paribas, in particular, stands out for its strong fundamentals and steady upward revisions.
Spanish utilities are another area of interest. Spain’s rapid expansion in solar power generation has created substantial intraday price volatility, underscoring structural weaknesses in the grid and a growing need for reinvestment.
Despite modest sector returns, power generation remains a monopoly business. Following the high-profile Iberian blackout in April, the case for upgrading infrastructure is all the more pressing. Spanish utilities trade at an attractive valuation gap, at roughly 14 times earnings versus more than 20 times for US peers.
More broadly, as industrial demand for energy rises, particularly in aerospace and defence, utilities and related firms are well-positioned to benefit.
AI innovation broadening
The stunning success of the US technology sector in recent years has meant the top 20 stocks in the S&P 500 now make up 50% of the index. This is the most concentrated the market has ever been, which adds to the case for looking outside the US.
While the US continues to lead in AI innovation, we anticipate growth expanding beyond the tech giants on the US West Coast. For example, China’s AI ecosystem continues to expand on similar drivers to those fuelling US growth. Alibaba’s recent 10% stock surge following increased capex plans underscores this momentum.
In Europe, ASML and SAP remain leading AI enablers, while telecom infrastructure companies that own critical towers and data centres – such as the French group Orange – trade at attractive valuations below six times enterprise value to EBITDA.
For much of the past decade, investors could afford to overlook diversification. But with global earnings catching up and valuations tilting in favour of non-US markets, the opportunity set away from the world’s largest market looks increasingly compelling.
This article first appeared in Investment Week.
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