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Tom Naratil, UBS Americas president, makes the case for ex-US equities



tom naratil ubsReuters / Arnd Wiegmann

  • Tom Naratil, UBS’s president of the Americas and co-president
    of the firm’s US wealth management division, says recent stock
    market volatility should have investors reconsidering their
    geographic allocations.
  • He makes the case for stocks outside the US, and urges
    investors to consider making their holdings more globally

The sudden bout of weakness in the US stock market should serve
as a wakeup call for investors who had started to see their
domestic market as the only place to be.

For most of this year, US stocks forged ahead while markets in
the rest of the world struggled. Yet, with the US market recently
succumbing to the worries plaguing other markets around the
world, now is a great time to rebalance US portfolios to ensure
that international stocks and other assets have a proper
allocation. Given that the US has already had such a strong run,
a globally diversified investment approach is likely to produce
even better results over the longer term.

To be clear, despite October’s sell-off, individual US investors
are still upbeat about the prospects for stocks. According to
a UBS Investor
Watch Pulse survey conducted after the midterm elections on
November 9-14, just 14% of US high net worth investors believe
it’s time to get out of the market, compared with 22%
pre-election. Furthermore, US business owners who responded to
the survey also grew even more positive on the robust 12-month
economic outlook, with 73% expressing optimism compared with 67%

However, our advice to American clients is to translate that
enthusiasm into global equities, rather than sticking solely to
the US.

Over the five years to November 23, US stocks gained 60.1% as
measured by the Russell 1000 index, compared to just 8.0% for
emerging market stocks and 9.4% for developed market equities
excluding the US as measured by MSCI. Although 2017 saw
international equities outperform US peers, 2018 has so far seen
a return of this trend. 

As a result, many US investors have come to feel that there is no
place like home, and have been inclined to shy away from
international exposure. However, we still believe that investing
globally is one of the best long-term strategies for a number of

First, it is unlikely that any market can outperform all the
time. US stocks drastically lagged emerging and non-US developed
markets from 2002 to 2007, with MSCI Emerging Markets gaining
353% and MSCI EAFE (developed non-US) returning 129%, versus just
43% for the S&P 500. 

Since 1999, the US has only topped the ranks of countries’ equity
markets once, while emerging markets have come out in the lead in
nine years. The growing maturity of some emerging markets may
also increase their potential. For example, Warren Buffett, who
has long been cautious about India’s stock market, this summer
invested in the country’s maturing fintech sector for the first

Second, the conditions that produced the recent US outperformance
show signs of fading. The earnings boost from the 2017 US tax
cuts, which has propelled stock returns this year, will likely
ebb over the coming year. Additionally, profit margins for US
companies are close to their historic highs, whereas they are
still depressed in both emerging and other developed markets.
Valuations in the technology sector, which has been responsible
for much of the US outperformance, are also no longer as
appealing as they were a few years ago. 

Third, other regions look to offer more compelling long-term
value. As of November 23, as a multiple of future earnings
estimates, the US stock market was valued in line with its
30-year average. In contrast, emerging markets, whose economies
are growing faster than the US, were trading at an 18% discount
to their three decade average, while non-US developed market
stocks are at a 23% discount. Furthermore, because the US
economic and earnings cycles are more advanced than other
regions, other markets are likely to outperform in the coming

Our chief investment office’s market models now assume non-US
equities will produce annual returns between 1-2 percentage
points more than US stocks over coming years. Over the next
market cycle, excluding international equities could result in a
drag of greater than 1 percentage point on portfolio returns—a
hefty cost in an environment where forward-looking returns have
become precious.

Today, an understanding of economic conditions and trends in all
markets is essential to optimizing any sophisticated investor’s
decision-making process. According to financial theory,
allocating too much of an equity portfolio to a single country
increases risk – through higher volatility and more painful
losses – without leading to better returns. A globally
diversified approach should lead to a better risk-adjusted rate
of return and likely a more comfortable investor experience.

Harry Markowitz, the father of Modern Portfolio Theory, once
called diversification “the only true free lunch in investing.”
In today’s environment, investors who look for opportunity and
value both at home and abroad are the likely to be the ones to
sustain and grow their portfolios in the long run.

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