The S&P 500 has been beating the rest of the world for years, but diversifying geographically may now be \u201can inexpensive hedge\u201d against a potential correction in U.S stocks, according to Morgan Stanley Wealth Management.<\/p>\n
The S&P 500 \u201cThe S&P 500\u2019s extraordinary outperformance of non-U.S. stocks over the past 15 years has convinced many investors that the U.S. is the only game in town,\u201d Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, said in a note Monday.\u00a0<\/p>\n \u201cTo be clear, we believe in the potential of capex-driven, AI-enabled innovation<\/a> and what we have termed the next American productivity renaissance,\u201d she said. \u201cBut valuations of non-U.S. equities versus the S&P 500 are at a 20-year low, and dividend yield differentials are also extreme.\u201d\u00a0<\/p>\n Shalett said investors should consider \u201crebalancing extreme overweights\u201d to U.S. equities with some exposure to Japan, Europe and emerging markets including Brazil, Mexico and India.\u00a0<\/p>\n \u201cWe see reason for optimism outside the U.S., given fiscal reform, stimulus and monetary accommodation that could catalyze profits in Europe, Japan and select EM countries,\u201d she said.<\/p>\n Read:<\/strong> India is winning over investors as Chinese stocks struggle, these charts show<\/a><\/p>\n \u201cWith China in geopolitical isolation from the West, Japan\u2019s leadership in Asia is being renewed,\u201d according to her note. Although \u201cChina is particularly challenging for investors,\u201d other emerging-market countries have growth catalysts including \u201cstructural drivers related to deglobalization of supply chains, constructive fiscal policies and stabilizing politics,\u201d she said.\u00a0<\/p>\n Read: <\/strong>U.S. stock valuations stick out in \u2018tremendous way\u2019 as S&P 500 beats rest of world<\/a><\/p>\n U.S. stocks have much higher valuations compared to international equities, according to Shalett.<\/p>\n While the S&P 500\u2019s forward price-to-earnings ratio is over 20.4, the equivalent for the MSCI ACWI ex U.S. is around 13.5, her note shows.\u00a0 <\/p>\n \u201cThat discount of nearly 35%, a 20-year low, is a two-standard-deviation event,\u201d she wrote. \u00a0Also, \u201cdividend yields for non-US equities are running above 3% \u2014 more than double that of the U.S. benchmark,\u201d said Shalett.<\/p>\n <\/p>\n Stocks in the U.S. represent more than 63% of the MSCI All Country World Index, \u201cthe country\u2019s largest premium to its relative GDP weight in the history of the benchmark,\u201d according to the Shalett. Yet the U.S. has a smaller share of global gross domestic product at 24%, she noted.\u00a0<\/p>\n While the U.S. may be heading for a \u201cbright\u201d economic future,\u201d diversifying geographically may make sense as valuations of its stock market \u201csuggest significant optimism is baked in\u201d when considering monetary policy, according to her note.<\/p>\n \u201cOver the next two years, U.S. growth and interest rates are likely to converge with global peers, just as relative valuations are extreme,\u201d said Shalett.\u00a0<\/p>\n Meanwhile, the Federal Reserve has been holding its benchmark interest rate steady at 5.25% to 5.5% in an effort to bring inflation down toward its 2% target. Many investors anticipate the Fed will begin cutting rates this year, as U.S. inflation has dropped significantly from its 2022 high.\u00a0<\/p>\n Read:<\/strong> Should stock-market investors care more about Nvidia or the Fed? Inflation data will provide a test.<\/a><\/p>\n The Morgan Stanley note also cited \u201cthe swelling U.S. deficit,\u201d with Shalett expressing concern over U.S. politics and debt.<\/p>\n U.S. \u201cpolitical and debt sustainability problems may not seem urgent to many, but even modest foreign rebalancing back to home markets could foster volatility that U.S. investors may now hedge affordably,\u201d she said.<\/p>\n Looking at different regions of the world, the iShares Europe ETF As for exchange-traded funds targeting stocks in individual countries, shares of the iShares MSCI Japan ETF Among ETFs focused on emerging markets, shares of the iShares MSCI India ETF The U.S. stock market was trading mostly lower Monday afternoon, with the Dow Jones Industrial Average
\n SPX<\/a>,<\/span>
\n a gauge of U.S. large-cap stocks, has climbed 6.4% this year based on Monday afternoon trading levels, surpassing the rest of the world\u2019s gains year to date, FactSet data show. Shares of the iShares MSCI ACWI ex U.S. ETF
\n ACWX<\/a>,<\/span>
\n which invests in international stocks while excluding the U.S., are lagging with just a 1.7% rise so far this year.<\/p>\n\n <\/div>
\n MORGAN STANLEY WEALTH MANAGEMENT NOTE DATED FEB. 26, 2024
\n <\/span>
\n <\/figcaption><\/figure>\n<\/p><\/div>\n\u2018Hedge affordably\u2019<\/h2>\n
\n IEV<\/a>
\n has gained 1.8% so far this year based on afternoon trading levels on Monday.\u00a0<\/p>\n
\n EWJ<\/a>
\n have jumped 7.6% so far this year as of Monday afternoon.\u00a0<\/p>\n
\n INDA<\/a>
\n have climbed 5.6% year to date, while the iShares MSCI China ETF
\n MCHI<\/a>
\n have slid 2.8% over the same period, according to FactSet data, at last check. Shares of the iShares MSCI Brazil ETF
\n EWZ<\/a>
\n are down 4.6% so far in 2024 based on Monday afternoon trading, while the iShares MSCI Mexico ETF
\n EWW<\/a>
\n has fallen 2.4% this year.<\/p>\n
\n DJIA<\/a>
\n off 0.1% while the S&P 500 shed 0.2% and the technology-heavy Nasdaq Composite
\n COMP<\/a>
\n rose 0.1%, according to FactSet data, at last check. The S&P 500 was slipping after closing Friday at a record high<\/a>.<\/p>\n<\/p><\/div>\n<\/div>\n