This website uses cookies to collect usage information in order to offer a better browsing experience. By browsing this site or by clicking on the "ACCEPT COOKIES" button you accept our Cookie Policy.

International Stocks Post-Covid

By:

Head of U.S. iShares Megatrend and International ETFs

Three takeaways

  1. U.S. equities have been the strongest performing asset class for a long time, but that may be changing.
  2. It may be a good time to think internationally as global economic recovery is taking shape.
  3. iShares exchange traded funds (ETFs) can offer simple ways to access international equities.

Investors are leaning hard into U.S. equities just when they should be looking abroad.

A recent BlackRock analysis of over 20,000 financial professionals’ model portfolios found that the average advisor is significantly overweight U.S. stocks versus the MSCI All Country World Index (MSCI ACWI), a broad global equity benchmark.1

Source: BlackRock, in an annual BlackRock analysis of over 20,000 financial professionals’ model portfolios across the industry, we found that an average equity sleeve holds 70% U.S. equities as of June 2018, 75% of U.S. equities as of 9/30/20. The MSCI ACWI index holds 57% of U.S. equities as of 9/30/20. Weights are subject to change.

While this home-country preference shouldn’t be surprising, given that U.S. equities have been in the spotlight for most of the past decade, the unprecedented concentration in domestic stocks does ring alarm bells about the potential for extreme concentration since the U.S. equity market is increasingly top-heavy in large technology companies. For example, in 2020, Facebook, Apple, Amazon.com, Netflix, Google-parent Alphabet and Microsoft (commonly referred to as the FAANGM), drove 60% of the return of the S&P 500 index, while the other 494 companies drove 40% of the S&P 500 index return.2 Such concentration could present a large portfolio risk with U.S. equity indexes at historical highs and regulatory uncertainty looming.

Source: Bloomberg, as of 12/31/20, based on market cap weighted S&P 500 index. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

Looking beyond U.S. borders

International investing could offer a potential solution to this problem. Investors often look to international markets to expand diversification and access new growth potential. The U.S. vs. international relative stock outperformance tends to come in waves with one leading performance over the other. Currently, valuations are indicating a shift may be forthcoming as the valuation gap between domestic and international equities could be changing.3

A global recovery takes shape

As the global economy rebounds from the Covid-19 pandemic and vaccinations rollout, we expect many regions to see steady recovery over the next 12 months. We expect to see more normalized manufacturing activity, stronger consumer confidence, and rising trade volumes. This increased economic growth will likely lead to higher revenue and valuations from international companies, particularly in emerging markets.

A few supportive forces are at play:

1. Synchronized fiscal stimulus and more anticipated U.S. trade and foreign policy under the Biden administration are beneficial for global growth. The International Monetary Fund recently estimated that emerging markets will grow at 6.3% in 2021 compared to -2.4% in 2020. Emerging market countries in Asia, such as China and India, are leading the outlooks in 2021, especially India, which is expected to grow 11% this year.4

2. The ongoing trend of a weaker dollar amid easy monetary policy could serve as a potential driver for emerging market equities to outperform in the next few months.

3. While the U.S. remains a primary engine for the most cutting-edge research and innovation, many new business ideas and technological advancements are coming from international markets. For example, Europe owns the most advanced renewable energy technology, Asia saw the fastest growth in the business-to-consumer (B2C) space, enabled by technological solutions such as mobile payments and online retail5.

4. U.S. companies are capturing less of their sales growth from overseas markets. (Figure 3). The average international revenue growth of the companies within the S&P 500 has been decelerating in the past few years, as companies overseas started to take a larger share of the revenue pie. We expect this trend to continue into the next decade, powered by the strong economic growth and favorable demographic trends in developing countries.

Figure 3: U.S. companies are capturing less of international growth

U.S. companies are capturing less of international growth

*2020 data as of Jan 2020 to isolate the impact of Covid-19.
Source: Thomson Reuters DataStream, as of 12/31/20, based on the cap weighted average YoY foreign revenue growth of companies in the S&P 500 index.

In this fast-changing world, the belief that investors may gain the same global growth exposures through domestic companies that run business in foreign markets is no longer true. It is time to consider getting direct foreign revenue access via international ETFs.

ETFs offer simple access to international equities

The good news is that international investing is simpler than ever, thanks to more efficient investment options and more open overseas markets. iShares ETFs offer direct access to international economies at a low cost.

There are a few different ways to invest in international markets. For example, ETFs offer broad international market exposures through regional and country-specific markets, sustainable and factor-based products.

iShares has the industry’s largest suite of country ETFs in the U.S which offer the potential to target growth while also seeking portfolio diversification.6

Additionally, driven by growing recognition that sustainability considerations can be financially material, investors are seeking sustainability in their international exposures. Investors rebalancing into international equities might look to add international ESG ETFs that provide access to companies with favorable environmental, social and governance characteristics.

Lastly, factor strategies offer investors another way to efficiently access international markets. Recently, we’ve seen increased investor interest in quality factor exposures with more than $6 billion into U.S. listed ETFs with a quality focus in the past 12 months7. Quality factor ETF strategies seek to track above-average exposure to highly profitable companies with stable earnings and low indebtedness all while delivering diverse exposure.

Summing it up

The global economy is poised for recovery, giving investors reason to consider adding to international equities as part of their core portfolio strategy. A cost-effective and simple way to gain exposure to this asset class is by including international ETFs to help improve diversification.

© 2021 BlackRock, Inc. All rights reserved.

1 See BlackRock, in an annual BlackRock analysis of over 20,000 financial professionals’ model portfolios across the industry, we found that an average equity sleeve holds 70% U.S. equities as of June 2018, 75% of U.S. equities as of 9/30/20. The MSCI ACWI index holds 57% of U.S. equities as of 9/30/20. Weights are subject to change.

2 Bloomberg, as of 12/31/20, based on the S&P 500 index. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

3 Bloomberg, U.S. equity price to earnings multiple, the ratio of a company’s share price to the company’s earnings per share, was 32% higher than international, compared to a historical average of 20% as of 12/31/20, based on the S&P 500 index and the MSXI ACWI ex-US index.

4 IMF, as of Feb 1st, 2021.

5 PWC, McKinsey Global Institute, as of January 2020.

6 iShares has the industry’s largest country ETF suite in the U.S. with 61 funds. BlackRock as of 12/31/2020.

7 Markit, as of 2/20/2021.

Originally Posted on February 25, 2021 – International Stocks Post-Covid

Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses, which may be obtained by visiting the iShares Fund and BlackRock Fund prospectus pages. Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal.

International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/ developing markets or in concentrations of single countries.

There can be no assurance that performance will be enhanced or risk will be reduced for funds that seek to provide exposure to certain quantitative investment characteristics (“factors”). Exposure to such investment factors may detract from performance in some market environments, perhaps for extended periods. In such circumstances, a fund may seek to maintain exposure to the targeted investment factors and not adjust to target different factors, which could result in losses.

A fund’s environmental, social and governance (“ESG”) investment strategy limits the types and number of investment opportunities available to the fund and, as a result, the fund may underperform other funds that do not have an ESG focus. A fund’s ESG investment strategy may result in the fund investing in securities or industry sectors that underperform the market as a whole or underperform other funds screened for ESG standards. In addition, companies selected by the index provider may not exhibit positive or favorable ESG characteristics.

The information on funds not managed by BlackRock or securities not distributed by BlackRock is provided for illustration only, and should not be construed as an offer or solicitation from BlackRock to buy or sell any securities.

This material represents an assessment of the market environment as of the date indicated; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

The information presented does not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy or investment decision.

This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial professional before making an investment decision.

The information provided is not intended to be tax advice. Investors should be urged to consult their tax professionals or financial professionals for more information regarding their specific tax situations.

The Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).

The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Barclays, Bloomberg Finance L.P., BlackRock Index Services, LLC, Cohen & Steers Capital Management, Inc., European Public Real Estate Association (“EPRA® ”), FTSE International Limited (“FTSE”), ICE Data Services, LLC, India Index Services & Products Limited, JPMorgan Chase & Co., Japan Exchange Group, MSCI Inc., Markit Indices Limited, Morningstar, Inc., The NASDAQ OMX Group, Inc., National Association of Real Estate Investment Trusts (“NAREIT”), New York Stock Exchange, Inc., Russell or S&P Dow Jones Indices LLC. None of these companies make any representation regarding the advisability of investing in the Funds. With the exception of BlackRock Index Services, LLC, who is an affiliate, BlackRock Investments, LLC is not affiliated with the companies listed above.

Neither FTSE nor NAREIT makes any warranty regarding the FTSE NAREIT Equity REITS Index, FTSE NAREIT All Residential Capped Index or FTSE NAREIT All Mortgage Capped Index; all rights vest in NAREIT. Neither FTSE nor NAREIT makes any warranty regarding the FTSE EPRA/NAREIT Developed Real Estate ex-U.S. Index or FTSE EPRA/NAREIT Global REIT Index; all rights vest in FTSE, NAREIT and EPRA.“FTSE®” is a trademark of London Stock Exchange Group companies and is used by FTSE under license.

© 2021 BlackRock, Inc. All rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, BUILD ON BLACKROCK, ALADDIN, iSHARES, iBONDS, FACTORSELECT, iTHINKING, iSHARES CONNECT, FUND FRENZY, LIFEPATH, SO WHAT DO I DO WITH MY MONEY, INVESTING FOR A NEW WORLD, BUILT FOR THESE TIMES, the iShares Core Graphic, CoRI and the CoRI logo are trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

iCRMH0221U/S-1534443

Disclosure: iShares by BlackRock

The iShares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).

The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Markit Indices Limited, nor does this company make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with Markit Indices Limited.

©2021 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

Disclosure: Interactive Brokers

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from iShares by BlackRock and is being posted with permission from iShares by BlackRock. The views expressed in this material are solely those of the author and/or iShares by BlackRock and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

In accordance with EU regulation: The statements in this document shall not be considered as an objective or independent explanation of the matters. Please note that this document (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and (b) is not subject to any prohibition on dealing ahead of the dissemination or publication of investment research.

trading top