While the US market remains an important source of alpha opportunities, there is an increasing appreciation among investors for the need to diversify return streams by seeking opportunities elsewhere.
US equities are not the only game in town
Buoyed by optimism of the long-run earnings potential of generative artificial intelligence (AI), US stocks have recorded significant gains over the past year, with the S&P 500 benchmark notching multiple all-time highs year-to-date. While the US market remains an important source of alpha, there is an increasing appreciation among investors for the need to diversify return streams by seeking opportunities elsewhere. And why not, as there is a plethora of opportunities outside of the US market.
As illustrated below, a meaningful share of the top 50 performers of the MSCI World Index over the last 22 years is listed internationally. On average, between 2002 and 2023, approximately 29 of the top 50 performing stocks were found outside of the US.
While investors should not chase past returns, it is notable that internationally listed stocks outnumbered top performing US stocks in 12 of the last 22 years. The balance of top performers is not static and has swung between US-listed stocks and international equities over the years. Nevertheless, the data broadly underscores the breadth of opportunities that exists across regions and sectors for active managers that are able to tap into a wider opportunity set.
Look further afield to manage risks
Seeking quality opportunities with little regional bias can help buffer against market or region-specific risks. Going global also helps expand the opportunity set, widening the range of companies that active managers can select, whether across regions, sectors or currencies. This can help lower correlations across individual holdings, harnessing the benefits of diversification and potentially reducing the volatility of the overall portfolio.
Structural trends are seldom local
It is important to note that not all structural themes can be accessed through one geographical market alone. For example, while AI adoption remains a key theme for investors, attention has narrowly focused on a handful of mega-cap names in the US, belying an opportunity set that is far wider and more global in nature.
Indeed, generative AI has widespread implications and could impact the broader technology supply chain, beyond just a few companies in the US. From AI enablers upstream such as high performance semi-conductor manufacturers, to a growing list of AI adopters downstream such as software engineering, high-tech manufacturing and health care, the opportunity set is expansive, varied and ever evolving.
While certain AI-related companies in the US have become household names, there are plenty of lesser known companies in markets such as Taiwan, South Korea and Europe that play niche yet significant roles in key nodes of the tech supply chain and are therefore key beneficiaries of the growing demand for AI-related products. Yet these are still early days of generative AI adoption, and we could observe a shake-up in global market leadership as the technology evolves and proliferates.
The fact is, one could risk being underexposed to such transformational change by adhering to a relatively narrow focus, be it sector-wise or regionally. Staying active and looking at opportunities with a broader lens are important.
The outlook remains constructive, but stay selective
Looking ahead, consensus earnings forecasts paint a relatively constructive picture for global stocks. Earnings growth is expected to accelerate from a dismal 2023 across many regional markets. We have also seen signs of market performance broadening out from a narrow group of stocks to a wider range of companies, sectors and regions.
In addition, while US equity market valuation looks somewhat extended versus its past 15-year history, other regional markets appear more fairly valued, with price-to-earnings multiples hovering close to their long-term averages. More importantly, a wider dispersion of intra sector valuations presents a constructive backdrop for bottom-up stock selection.
Active management counts for long-term returns
Nevertheless, selectivity and active management matter amid a more challenging macro environment, marked by slowing growth, higher cost of capital, and elevated geopolitical risks.
In addition, the world is a big place with a wide range of markets in different stages of economic and financial development. Varied political systems, policy regimes and business cultures may present unique risks that investors will have to navigate when seeking out global opportunities.
Accordingly, access to a well-resourced global research platform with on-the ground presence, and a rigorous and repeatable investment process is important to help separate the wheat from the chaff and differentiate the potential winners and losers from key structural trends. Moreover, staying flexible can help allocate capital to high conviction ideas wherever they may be on a risk-adjusted basis.
Substance over style: seeking long-term growth from an “all weather” portfolio
To that end, the JPMorgan Global Select Equity Fund has achieved competitive and consistent performance in different market environments by harnessing a disciplined, bottom-up, research-driven approach that has been in place for over three decades. Differentiated insights driven by a well-resourced equities research platform has helped the strategy unearth high quality opportunities with relatively attractive valuations regardless which investing style is in vogue. Over the years, this tried-and-tested approach has helped the portfolio achieve consistent performance in both growth-led and value-led market environments.
At J.P. Morgan Asset Management, our dedication to global research is the cornerstone of our approach to equity investing. Managing over US$900 billion in equity assets1, our solutions span multiple investment styles and geographies, and are underpinned by the deep resources and rigorous research of a global platform.