The Global Shift: Why Non-U.S. Equities Are Taking Center Stage

The Global Shift: Why Non-U.S. Equities Are Taking Center Stage

Matt Seiter: Hello, everyone, and welcome to Thornburg webcast: The Global Shift: Why Non-U.S. Equities Are Taking Center Stage. My name is Matt Seiter, and I help lead the intermediary sales efforts here at Thornburg. And I’m really pleased to have with me Matt Burdett and Brian McMahon. Safe to say, the year is off to a very interesting start, between tariff noise, political tweets, and markets hanging on every fed policymaker’s words.

No doubt we’ve seen a lot of volatility. And with that volatility also comes a good bit of opportunity. And for the first time, non-U.S. markets are decoupling from U.S. markets in a way we haven’t seen in years. Creating a good bit of opportunity. And so excited to hear from Matt and Brian on some of their perspective by way of intro, to the left of me, we have Matt Burdette. Matt heads up the Thornburg Equity team. Joined us in 2010 and 11 and then returned to the firm after a brief stint with a competitor. And he serves as a portfolio manager on both our global multi-asset and overseas equity portfolios. And then Brian McMahon is to the left of him. Thornburg, chief investment strategy, began his career here in 1984. served as our firm’s president from 1997 to 2015, and CEO from 2008 to 2015. He’s also a portfolio manager on our global equity and global multi-asset portfolios. So, with that, Matt, could you maybe start by providing some observations on the structural differences between U.S. and non-U.S. equities that you’re seeing right now?

Matt Burdett: Yeah, sure. So, I think if you go back to, you know, the end of ‘09, when the great financial crisis was, was taking hold. Central banks went into quantitative easing. Right. And it was a huge suppression of interest rates. Okay. So, the US went to zero, and Europe and Japan actually went to negative policy rates.

So that’s important because of just the construct of the U.S. equity market, and I’m talking just at the index level. Very tech-heavy, very growth-heavy versus the ACWI ex-US being much more older economy. So, financials are a quarter of that benchmark. So, when interest rates are artificially suppressed, as they were for many years, you really impact the earnings power of the international markets versus the U.S. markets.

And I think the viewers can see a slide that highlights on the, on the left, you know, going back to the end of ‘09, to, to the end of April, where not only did you have this, you know, quantitative easing element influencing relative earnings growth between the two markets. You also had multiple expansion in the U.S.

So, if you go back to the end of ‘09, the S&P 500 was about 14 times, and so was the ACWI ex-US Index. You fast forward. The U.S. multiple expanded more than 50% to today. It’s about 22.5 times or so. And the ACWI ex-US Index is actually slightly below where it was. So, you had, you know, your second headwind, the first one being the relative earnings growth, the second one being multiple relative multiple compression for the international markets.

And then the third big one is just the dollar. Right. And I think the viewers can see on the right side, the dollar index appreciated about 30% over that time. So those are a lot of headwinds. You know, for the international markets to be able to overcome. And now that you have a normalization of policy rates, which came with the pandemic, what you see is that the relative earnings growth in the international markets, is actually comparable to the U.S. and the viewers can see, slide on the left, which compares the MSCI Europe, EPS growth indexed compared to the S&P 500, from the end of 2020. And what you see is that the growth is actually better in your in that European index. And it’s comparable in dollar terms. And then on the right, you see a similar index for Japan. So those are two major parts of the international market. I think a lot of people probably don’t appreciate that the normalization of interest rates actually mattered a lot more for international markets than it did for the U.S. market.

Matt Seiter: It makes sense. So, Brian, you’ve got a lens into international markets, with two different global mandates that you run. Give us a sense on what you’re seeing right now and where you’re seeing the best opportunities.

Brian McMahon: Well, the biggest difference between U.S. markets and non-U.S. markets, equity markets at the moment, is price. So, if the S&P 500 is at 22 times forward earnings, a lot of markets around the world are eight, nine, 10 multiple points cheaper than the U.S. market. So that’s the biggest difference. Now, the reasons for that. Structures of the markets, the sectoral structures of the markets, and population growth in the U.S. have outstripped really any other country.

And people cause business to happen. They drive to work. They go to work. Just to put a number on it. The population in the U.S. in the 2000 census was 282 million people. And here we are, not 25 full years later, and there’s 60 million more people. So, the population of France, in one generation, grown in the United States.

So, it’s important to keep that in mind. But it’s also important to keep in mind that the headquarters of a given company isn’t everything. So, Coca-Cola is headquartered in Atlanta, but broadly, 70% of their sales are outside the U.S. And there are companies that are headquartered outside the U.S. that have more sales inside the U.S. than certain U.S.-headquartered companies.

So, I think you can’t oversimplify these relative valuations. And the last thing that I’ll mention is, U.S. investors tend to be more optimistic than other investors. You look around the world in many markets; people are quite happy to have money in the bank. Maybe overconsumed real estate in China is a classic example of that, where they’re bottled up.

And U.S. investors haven’t been very interested in foreign markets, per se. So, for the people watching this webcast, they kind of think about, okay, what’s my client base? How are they allocated? Or any end investors, how am I allocated? And chances are they’re under-allocated to non-U.S. equity investments, and that’s been the way to be the last few years for sure.

Coming out of the global financial crisis, U.S. markets have outperformed. This year is different. And I would just remind people, the eight years between 2000 and 2008, non-U.S. equities outperformed U.S equities by more than 500 basis points per year, year after year. So, I think you just have to look at where’s the value? Where do I want to be? What’s not overcrowded? Think about you could go out to dinner at a restaurant, maybe you want to find that jewel that isn’t overcrowded, but still really good. And we’re kind of the same way.

Matt Seiter: So, I think if we go back to early April, the initial tariff headlines start to hit. I don’t know that the average investor would have expected foreign markets to outperform so much. Maybe talk through a little bit of your views on obviously it’s fluid, but current, current tariff negotiations. How do you see that playing out, and why you think it’s been less of an issue for overseas companies?

Brian McMahon: Well, we don’t know how that’s going to play out as far as the end state of the tariffs. I think it’s safe to assume that at the end of all this, tariffs will be higher than they were last year. And they’ll be structurally higher, at least for the duration of the Trump administration. So, either margins will shrink or things will cost more, and inflation will be higher, or both. So, those are all concerns that people have. And I think it’s important to realize, look at the stock market or the bond market, roughly a third of the U.S. Treasury market is held by non-U.S. investors, and a significant percentage of U.S. corporate debt is held by non-U.S. investors. And if I look at private non-U.S. investors, they’re the value of their U.S. financial investments has gone from 10 trillion to close to 30 trillion in the last 10 years.

So, some of them are looking at what’s going on here politically, and they’re saying, you know, maybe I’m going to bring some of that money back home. And that’s what we’re seeing in the initial months of 2025. They’re bringing some of that money back home, and it’s enough at the margin to move the dollar down. So, those are the big forces.

Matt Seiter: So, Matt, maybe just hit on some of those factors related to the U.S. dollar and certainly had an incredible run for a long time. It’s weakened and in kind of recent history. What are some of the factors at play that impact that currency relative to other parts of the world? And what that means for foreign investors?

Matt Burdett: Yeah, sure. So, I like to look at the Fed’s real trade-weighted dollar index, and the reason why is because it’s comprised of 26 currencies that we actually trade with. And the Fed will adjust those weights annually or sooner if trade dynamics change enough to merit changing the weights back. So, that level today is 118, right over the last 50 years, which is about 17% higher than the 50-year average. Right. And it’s about 7% away from the all-time high, which is back in the ‘80s when interest rates were very, very high. But it’s about 32% above the low over that time. So that kind of gives you some perspective on the level of the dollar right now. And you know, Brian mentioned the world reacting to the U.S. administration, and the U.S. administration has actually been fairly clear about wanting a weaker dollar. Right. And so, there’s a lot of forces there, you know, Brian mentioned foreign investors taking away some U.S. assets, and so foreign investors own about 30% of the US equity market. Right. So, it’s been a lot of money coming in over recent years, and potential to have some of that money come back out.

Right. And I think there’ll be many factors that, you know, drive that. But I think just kind of honing in on where we are at dollar level relative to history is, is pretty instructive. Really, you know, financial investors are going to go to where the value is ultimately right. There’s a lot of fast money types of strategies that go on. But, generally speaking, money’s going to go where the value is. And then, you know, the relative, at least in equities, the relative value of multiples, would hint that, you know, outside of the U.S. is a better value.

Matt Seiter: So, Brian, you talk a lot about, especially in the quest for dividend income, the appeal of other parts of the world from a yield perspective, and especially big foreign multinationals and the ability to pay and the willingness to pay income. How does a lot of this trade policy and tariff noise impact that ability and willingness to pay in your mind?

Brian McMahon: Well, there are good dividend payers here at home as well. So, it’s not the case that the only good dividends are outside the U.S., but there are plenty of good dividends outside the U.S. And, in fact, the propensity of boards to pay cash dividends is a bit higher outside the U.S, a significant bit higher. And it’s rational because tax treatment is better for dividends. So, a dollar paid in dividends is taxed twice for a U.S corporation to a U.S. taxpayer. And that’s not the case in most of the rest of the world. So, U.S. companies tend to focus more on stock buybacks than the distributions paid as stock buybacks significantly exceed the distributions paid in cash, as cash dividends in the U.S.

Now, as far as how tariffs impact that, we do try to avoid what we would perceive as victims of U.S. government tariffs. And there are plenty of service businesses, or companies that are trying to sell tradable goods into the United States at cheap prices that pay good dividends, and so that they’re insulated from the U.S tariff effects. And there are plenty of choices there. And what we’re seeing now as investors around the world start to look for those kinds of businesses, maybe more than they did in the past. So, I expect we’re in the very early innings of that, and that should continue.

Matt Seiter: So, maybe one final question. And this has come up, a number of different ways through the chat. But Matt, maybe just talk about sort of your thoughts on the U.S.-China trade relationship. Obviously been lots of headlines, lots of noise, perhaps the biggest market mover we’ve seen in recent weeks. What’s your thought on how that plays out and how you think about being an overseas investor, particularly related to China here?

Matt Burdett: Yeah, sure. I guess how it plays out is tough to know. You know, we have this, this 90-day period where, you know that the tariff rates went from very, very high levels to more manageable 30%, tariffs on Chinese goods, of which 20% is the fentanyl portion, and then a 10% tariff on U.S. goods.

So, it’s come down, look, I think it’s tough to know where it’s going to come out, but the economies are very, very intertwined. Right. And this has been the case for a long time. So, I think you’ve heard the U.S. talk about a decoupling of some sort. It’s probably going to be a lot harder than people really think, simply because the supply chains in China are so vast and have been there for so long that it’s just going to be hard to replace them. Right? You certainly couldn’t physically do it in a short period of time. But look, it’s likely to be volatile, you know, from here.

Matt Seiter: That’s helpful. Well, so out. Thank you, Matt and Brian.

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