International (Non-US) versus US Equities (The "Arguments")

[vv19]

All future outcomes are uncertain.

Some future outcomes are more certain than others. The more certainty, the less risk. The less certainty, the more risk.

I agree with this - which is why I keep saying that all we can do is project probability of a certain outcome happening and place out bets accordingly. That’s all investing is.

[Circle the Wagons]

Nothing wrong with insurance, even if you can't know the price ahead of time.

It's unlikely to be expensive to the level of changing outcome, and it could end up being very cheap indeed.

It has been extremely expensive, and it's not insurance. Insurance pools risk and is a commitment to compensate. Ex-US is nothing like insurance.

We are not being literal here.

I stand by the view that it is unlikely to change outcomes negatively (e.g., for a retiree) at typical allocation levels, and especially so looking forward from here.

[zonto]

It has been extremely expensive, and it's not insurance. Insurance pools risk and is a commitment to compensate. Ex-US is nothing like insurance.

We are not being literal here.

I stand by the view that it is unlikely to change outcomes negatively (e.g., for a retiree) at typical allocation levels, and especially so looking forward from here.

That view may be misguided. See this post: viewtopic.php?p=5155949#p5155949



And this thread: Diversification Can Improve Retirement Outcomes (SWR) [Very Long Post]

[Circle the Wagons]

We are not being literal here.

I stand by the view that it is unlikely to change outcomes negatively (e.g., for a retiree) at typical allocation levels, and especially so looking forward from here.

That view may be misguided. See this post: viewtopic.php?p=5155949#p5155949



And this thread: Diversification Can Improve Retirement Outcomes (SWR) [Very Long Post]

I think you may have misinterpreted my posts, which were pro- international diversification.

[Beensabu]

Every single of those debates can be had in a context that has nothing to do with US vs ex-US.

You can discuss those entirely in the context of just US, for example.

Sure. How does that make the US vs exUS debate not about risk?

[watchnerd]

Every single of those debates can be had in a context that has nothing to do with US vs ex-US.

You can discuss those entirely in the context of just US, for example.

Sure. How does that make the US vs exUS debate not about risk?

The boundary conditions of the US vs ex-US debate should ideally be discussing within the universe of investable stocks as the risk discussion framing.

Getting into topics like, "Will I run out of money?" are portfolio management risk discussion topics that are outside the universe of just investable stocks.

[Beensabu]

Some future outcomes are more certain than others. The more certainty, the less risk. The less certainty, the more risk.

I agree with this - which is why I keep saying that all we can do is project probability of a certain outcome happening and place out bets accordingly. That’s all investing is.

I don't know that I'd call it placing a bet so much as determining how much risk you are willing to accept for how much potential return.

The higher the potential return, the greater the risk, because the range of uncertainty extends in both directions (positive and negative), and the actual return could fall anywhere in that entire range.

You can't control what the return will be, but you can narrow the range of potential outcomes to where the return will be acceptable no matter where in the range it ends up falling.

[Beensabu]

Sure. How does that make the US vs exUS debate not about risk?

The boundary conditions of the US vs ex-US debate should ideally be discussing within the universe of investable stocks as the risk discussion framing.

Getting into topics like, "Will I run out of money?" are portfolio management risk discussion topics that are outside the universe of just investable stocks.

The US vs exUS debate is a portfolio management risk discussion topic.

[watchnerd]

The boundary conditions of the US vs ex-US debate should ideally be discussing within the universe of investable stocks as the risk discussion framing.

Getting into topics like, "Will I run out of money?" are portfolio management risk discussion topics that are outside the universe of just investable stocks.

The US vs exUS debate is a portfolio management risk discussion topic.

In the context of stocks.

Not in the context of portfolio size or stock/bond split.

[CraigTester]

Fyi -- I rec'd a PM question today about my personal decision to the question of the thread...

In the spirit of full disclosure, below was my response:

• As for your question, I did share somewhere along the way in the thread that I have adopted a Global Market Cap AA for all the reasons cited in the Arguments list in the OP.
  
  (After defaulting to 100% US for decades)
  
  If you ultimately believe that markets are efficient, IMHO, Global Market Cap should serve you well for the stock portion of your portfolio... But it may take a while for all those reinvested Int'l dividends at today's historically low valuations to pay off...
  
  Having said that, there are a lot of people who have landed on different answers, so I encourage you to read through all the Arguments in the OP and see if you can find the AA that you can stick with forever... (which is ultimately the most important step)
  
  Best of luck to you,
  
  Craig Tester

[greedygus]

Goldman Sachs ISG Outlook 2025 is out this week. This was the group that seems more on the "would rather make more money" side of the phrase used in this thread, as they've been consistently recommending staying overweight to US equities over the last decade, and they fully judge their prior suggestions' performance each year, talking about what they got right & wrong.

https://privatewealth.goldmansachs.com/ ... utlook.pdf

Plenty of takes & charts in here to add discussion fuel for this thread again this time.

Here's some stuff from page 20. Their version of overweight US is now almost exactly at 80/20 recommendation:

[...]

Strategic Allocation: Minor Adjustments

Investors have clearly discounted US preeminence, as measured by the outperformance of US equities (see Exhibit 23) and the US dollar since the GFC. The US dollar has appreciated 52% since its trough in April 2008.

2024 was another strong year, with US equities outperforming non-US developed and emerging market equities (see Exhibit 24). The US dollar continued its upward climb and appreciated 7%.

Given our view of US preeminence and the outperformance of US equities, many clients— especially those in the US—are asking why they should allocate any public market assets to non-US developed and emerging market equities.

Let’s begin with a review of ISG’s current allocation in a moderate-risk taxable portfolio for US-based investors. While we have 72 model portfolios for different risk profiles, tax statuses, and geographic and currency preferences, and while we recommend portfolios be customized for every client, we use the moderate-risk model portfolio as an appropriate representation.

Our maximum overweight to US assets relative to the MSCI ACWI was 23 percentage points in 2009 (see Exhibit 25). As US equities outperformed non-US equities, the overweight narrowed to seven percentage points by year-end 2024. Including
this overweight, US equities account for 74% of the public equity allocation in the current model portfolio.

We do not believe it is appropriate to increase the overweight to match our high point of 23 percentage points, nor do we plan to eliminate non-US equities altogether. However, we are making some adjustments to our strategic asset allocation.

We are reducing the exposure to public non-US equities, in both developed and emerging markets, and reallocating those investments to private assets, which are predominantly composed of US assets. This reallocation implicitly increases the US equity overweight from seven to 12 percentage points.

This allocation improves the risk/return profile of the portfolio as measured by the Sharpe ratio, and it marginally improves the expected return. Given our view that there is more alpha potential in private assets, the potential for adding value through manager selection has also increased.

The impact on a moderate-risk taxable portfolio is shown in Exhibit 26. This reallocation will become effective at the end of the first quarter of 2025.

Now, some may ask why we don’t eliminate all non-US equities, given that US companies are the best managed in the world (see Exhibit 27) and have significant sales outside the US. As our colleague David Kostin, US equity strategist in Global Investment Research, reports in the 2024 Portfolio Passport, international sales account for 28% of S&P 500 revenues, with Asia-Pacific accounting for 8% (of which China represents only 2%); Europe, Middle East and Africa making up 11%; and the rest coming from Canada, Latin America and other regions.18

Our response is fivefold:

First, appropriate diversification is one of the five pillars of our investment philosophy. Some have referred to diversification as one of the few free lunches in portfolio management. (Another is compounding.) An appropriately diversified portfolio provides clients with a better risk/return profile. Given that the correlation between US and non-US developed market equities since the GFC is just 0.88, and the correlation between US and emerging market equities is 0.75, both asset classes provide some nominal diversification benefits. The uncertainty band around the expected return of a portfolio is decreased.

Second, while we are duly humble when putting forth our annual economic and financial market outlook, we are certain that US equities and the dollar will not repeat the outperformance of 2024—or that of the past nearly 16 years—over the next five years. As we show later in Exhibit 66, when reviewing our one- and five-year expected returns, US and non-US developed market equities are likely to have nearly identical returns, and we expect the dollar to modestly depreciate over the next five years from its currently high valuations. Some non-US exposure will provide diversification without requiring investors to forgo incremental returns.

Third, inevitably we will have periods of US underperformance sometime in the future. As shown in Exhibit 28, while the US has outperformed over the long run, there have been several multiyear periods when non-US developed market equities (for which there is much longer history than for emerging markets) outperformed US equities, including between January 2002 and June 2008. Non-US developed market equities outperformed US equities by 89 percentage points cumulatively, or nine percentage points annualized, during that period.

Another example of US equity underperformance is the period between October 2001 and August 2008, when Indian equities outperformed US equities by 470 percentage points cumulatively, or 26 percentage points annualized. India accounts for only 2% of the MSCI ACWI, compared to 24% for non-US developed market equities. Nevertheless, it provides an example of periods when US equities have lagged another market by a significant amount.

Fourth, there are numerous world-class companies with significant market share globally that are outside the US. Most are concentrated in health care, consumer discretionary, consumer staples, energy and materials. Below, we provide one high-name-recognition example from each of these sectors so clients can better understand why we do not think it is appropriate to categorically and indefinitely eliminate such companies from their portfolios. These companies were selected from a list of the top 10 in each sector based on average net income over the past three years. ISG does not make any individual stock recommendations.

Examples:
• Novo Nordisk of Denmark, the maker of weight-loss drugs Ozempic and Wegovy
• LVMH of France, the owner of brands such as Louis Vuitton, Dior, Bulgari, Tiffany and Dom Perignon
• Nestlé of Switzerland, with cereal brands like Cheerios, chocolate brands such as KitKat and Baci, water brands such as Perrier, ice cream brands such as Haagen-Dazs, and pet care brands such as Purina
• Shell, an energy exploration and production company headquartered in London, with more gas stations in the US than Exxon Mobil
• BHP Group of Australia, the largest metals and mining company in the world

Finally, US equities are expensive relative to most non-US equities, as we discuss in more detail next. While we believe the valuation differential is justified, we also do not think an increased allocation to public US equities is warranted at this time. Recently, an amusing Financial Times article referred to US equities in the context of “Tina”— “there is no alternative” but US equities.19 Much of the good news has been priced in.

We now turn to US and non-US equity valuations.


Staying Invested in US Equities Versus Non-US Equities

Our non-US clients are asking us a different question than our US clients—the exact opposite. They want to know why, given the relative cheapness of non-US equities, isn’t ISG shifting away from US equities to non-US equities—even if only on a tactical basis?

Non-US equities are indeed cheaper than US equities.

We aggregate six different valuation metrics to make long-term historical comparisons. NonUS developed market equities are trading at a near historic discount of 54% to US equities (see Exhibit 29). Among non-US developed market equities, the UK is the cheapest major equity market, at a 62% discount. Emerging market equities are trading at a near historic discount of 61% (see Exhibit 30). Among emerging market equities, China is the cheapest major equity market, at a 63% discount.

This cheapness is broad-based across nearly all the major equity markets. The one exception is India, whose equities trade at a 6% discount to US equities based on this combined metric.

The question we address below is whether these extreme discounts reflect a tactical investment opportunity. First, we show that these discounts do not accurately reflect the cheapness in each country or region. Second, we explain why we believe that these discounts are justified based on each country’s or region’s economic prospects.

[...]

[Nathan Drake]

Goldman Sachs ISG Outlook 2025 is out this week. This was the group that seems more on the "would rather make more money" side of the phrase used in this thread, as they've been consistently recommending staying overweight to US equities over the last decade, and they fully judge their prior suggestions' performance each year, talking about what they got right & wrong.

https://privatewealth.goldmansachs.com/ ... utlook.pdf

Plenty of takes & charts in here to add discussion fuel for this thread again this time.

Here's some stuff from page 20. Their version of overweight US is now almost exactly at 80/20 recommendation:

[...]

Strategic Allocation: Minor Adjustments

Investors have clearly discounted US preeminence, as measured by the outperformance of US equities (see Exhibit 23) and the US dollar since the GFC. The US dollar has appreciated 52% since its trough in April 2008.

2024 was another strong year, with US equities outperforming non-US developed and emerging market equities (see Exhibit 24). The US dollar continued its upward climb and appreciated 7%.

Given our view of US preeminence and the outperformance of US equities, many clients— especially those in the US—are asking why they should allocate any public market assets to non-US developed and emerging market equities.

Let’s begin with a review of ISG’s current allocation in a moderate-risk taxable portfolio for US-based investors. While we have 72 model portfolios for different risk profiles, tax statuses, and geographic and currency preferences, and while we recommend portfolios be customized for every client, we use the moderate-risk model portfolio as an appropriate representation.

Our maximum overweight to US assets relative to the MSCI ACWI was 23 percentage points in 2009 (see Exhibit 25). As US equities outperformed non-US equities, the overweight narrowed to seven percentage points by year-end 2024. Including
this overweight, US equities account for 74% of the public equity allocation in the current model portfolio.

We do not believe it is appropriate to increase the overweight to match our high point of 23 percentage points, nor do we plan to eliminate non-US equities altogether. However, we are making some adjustments to our strategic asset allocation.

We are reducing the exposure to public non-US equities, in both developed and emerging markets, and reallocating those investments to private assets, which are predominantly composed of US assets. This reallocation implicitly increases the US equity overweight from seven to 12 percentage points.

This allocation improves the risk/return profile of the portfolio as measured by the Sharpe ratio, and it marginally improves the expected return. Given our view that there is more alpha potential in private assets, the potential for adding value through manager selection has also increased.

The impact on a moderate-risk taxable portfolio is shown in Exhibit 26. This reallocation will become effective at the end of the first quarter of 2025.

Now, some may ask why we don’t eliminate all non-US equities, given that US companies are the best managed in the world (see Exhibit 27) and have significant sales outside the US. As our colleague David Kostin, US equity strategist in Global Investment Research, reports in the 2024 Portfolio Passport, international sales account for 28% of S&P 500 revenues, with Asia-Pacific accounting for 8% (of which China represents only 2%); Europe, Middle East and Africa making up 11%; and the rest coming from Canada, Latin America and other regions.18

Our response is fivefold:

First, appropriate diversification is one of the five pillars of our investment philosophy. Some have referred to diversification as one of the few free lunches in portfolio management. (Another is compounding.) An appropriately diversified portfolio provides clients with a better risk/return profile. Given that the correlation between US and non-US developed market equities since the GFC is just 0.88, and the correlation between US and emerging market equities is 0.75, both asset classes provide some nominal diversification benefits. The uncertainty band around the expected return of a portfolio is decreased.

Second, while we are duly humble when putting forth our annual economic and financial market outlook, we are certain that US equities and the dollar will not repeat the outperformance of 2024—or that of the past nearly 16 years—over the next five years. As we show later in Exhibit 66, when reviewing our one- and five-year expected returns, US and non-US developed market equities are likely to have nearly identical returns, and we expect the dollar to modestly depreciate over the next five years from its currently high valuations. Some non-US exposure will provide diversification without requiring investors to forgo incremental returns.

Third, inevitably we will have periods of US underperformance sometime in the future. As shown in Exhibit 28, while the US has outperformed over the long run, there have been several multiyear periods when non-US developed market equities (for which there is much longer history than for emerging markets) outperformed US equities, including between January 2002 and June 2008. Non-US developed market equities outperformed US equities by 89 percentage points cumulatively, or nine percentage points annualized, during that period.

Another example of US equity underperformance is the period between October 2001 and August 2008, when Indian equities outperformed US equities by 470 percentage points cumulatively, or 26 percentage points annualized. India accounts for only 2% of the MSCI ACWI, compared to 24% for non-US developed market equities. Nevertheless, it provides an example of periods when US equities have lagged another market by a significant amount.

Fourth, there are numerous world-class companies with significant market share globally that are outside the US. Most are concentrated in health care, consumer discretionary, consumer staples, energy and materials. Below, we provide one high-name-recognition example from each of these sectors so clients can better understand why we do not think it is appropriate to categorically and indefinitely eliminate such companies from their portfolios. These companies were selected from a list of the top 10 in each sector based on average net income over the past three years. ISG does not make any individual stock recommendations.

Examples:
• Novo Nordisk of Denmark, the maker of weight-loss drugs Ozempic and Wegovy
• LVMH of France, the owner of brands such as Louis Vuitton, Dior, Bulgari, Tiffany and Dom Perignon
• Nestlé of Switzerland, with cereal brands like Cheerios, chocolate brands such as KitKat and Baci, water brands such as Perrier, ice cream brands such as Haagen-Dazs, and pet care brands such as Purina
• Shell, an energy exploration and production company headquartered in London, with more gas stations in the US than Exxon Mobil
• BHP Group of Australia, the largest metals and mining company in the world

Finally, US equities are expensive relative to most non-US equities, as we discuss in more detail next. While we believe the valuation differential is justified, we also do not think an increased allocation to public US equities is warranted at this time. Recently, an amusing Financial Times article referred to US equities in the context of “Tina”— “there is no alternative” but US equities.19 Much of the good news has been priced in.

We now turn to US and non-US equity valuations.


Staying Invested in US Equities Versus Non-US Equities

Our non-US clients are asking us a different question than our US clients—the exact opposite. They want to know why, given the relative cheapness of non-US equities, isn’t ISG shifting away from US equities to non-US equities—even if only on a tactical basis?

Non-US equities are indeed cheaper than US equities.

We aggregate six different valuation metrics to make long-term historical comparisons. NonUS developed market equities are trading at a near historic discount of 54% to US equities (see Exhibit 29). Among non-US developed market equities, the UK is the cheapest major equity market, at a 62% discount. Emerging market equities are trading at a near historic discount of 61% (see Exhibit 30). Among emerging market equities, China is the cheapest major equity market, at a 63% discount.

This cheapness is broad-based across nearly all the major equity markets. The one exception is India, whose equities trade at a 6% discount to US equities based on this combined metric.

The question we address below is whether these extreme discounts reflect a tactical investment opportunity. First, we show that these discounts do not accurately reflect the cheapness in each country or region. Second, we explain why we believe that these discounts are justified based on each country’s or region’s economic prospects.

[...]

I don’t see much substance in this piece. Looks like pure performance chasing

[comeinvest]

That is a remarkable point of view.

What's remarkable about it?

I thought I relayed commonly known facts that are hard to argue against. But I guess I was wrong (about the arguing, at least). I still stand by what I wrote, but who cares.

[Beensabu]

The US vs exUS debate is a portfolio management risk discussion topic.

In the context of stocks.

Not in the context of portfolio size or stock/bond split.

Not necessarily.

For instance, the size of your allocation (or lack thereof) to exUS stocks could inform your allocation to TIPS.

Or conversely, a large fixed income allocation (especially one that includes a hefty chunk of TIPS) could inform your allocation to exUS stocks.

I don't see the point in compartmentalization vs a holistic approach to risk management. Not everyone has a LMP + risk portfolio. Most people just have a risk portfolio, so they need to think about the risk of their portfolio as a whole.

[unwitting_gulag]

[...]
... while we are duly humble when putting forth our annual economic and financial market outlook, we are certain that US equities and the dollar will not repeat the outperformance of 2024—or that of the past nearly 16 years—over the next five years. As we show later in Exhibit 66, when reviewing our one- and five-year expected returns, US and non-US developed market equities are likely to have nearly identical returns, and we expect the dollar to modestly depreciate over the next five years from its currently high valuations. Some non-US exposure will provide diversification without requiring investors to forgo incremental returns.
[...]

They're "duly humble", but they're also "certain". Nice to be certain, isn't it? What might they say in January 2026, if by then, the US Dollar comes to be worth say 1.2 Euros, and the US stock market outperforms ex-US by 25% (because say the US declines by 10%, but ex-US declines by 28%)?

[rushrocker]

I went back and skimmed about 5 of those Goldman Sachs ISG Outlook publications, especially to look at their "tactical tilt" section.

Wouldn't you know it, just about nothing they've recommended has worked out as they predicted.

Stay the course!

[watchnerd]

Is GS saying they're reducing ex-US to increase exposure to US private equity?

We are reducing the exposure to public non-US equities, in both developed and emerging markets, and reallocating those investments to private assets, which are predominantly composed of US assets. This reallocation implicitly increases the US equity overweight from seven to 12 percentage points.

Note bolded.

[CraigTester]

Is GS saying they're reducing ex-US to increase exposure to US private equity?

We are reducing the exposure to public non-US equities, in both developed and emerging markets, and reallocating those investments to private assets, which are predominantly composed of US assets. This reallocation implicitly increases the US equity overweight from seven to 12 percentage points.

Note bolded.

Good catch. I wonder if those “private” assets come with juicy fees for Goldman…?

PS if we care what the experts think, here is a chart from the OP.

[*]A range of experts forecast Int'l outperformance, who am I to argue?
https://preview.redd.it/why-you-should- ... 809ad484e4

[Circle the Wagons]

Goldman Sachs ISG Outlook 2025 is out this week. This was the group that seems more on the "would rather make more money" side of the phrase used in this thread, as they've been consistently recommending staying overweight to US equities over the last decade, and they fully judge their prior suggestions' performance each year, talking about what they got right & wrong.

https://privatewealth.goldmansachs.com/ ... utlook.pdf

Plenty of takes & charts in here to add discussion fuel for this thread again this time.

Here's some stuff from page 20. Their version of overweight US is now almost exactly at 80/20 recommendation:

[...]

Strategic Allocation: Minor Adjustments

Investors have clearly discounted US preeminence, as measured by the outperformance of US equities (see Exhibit 23) and the US dollar since the GFC. The US dollar has appreciated 52% since its trough in April 2008.

2024 was another strong year, with US equities outperforming non-US developed and emerging market equities (see Exhibit 24). The US dollar continued its upward climb and appreciated 7%.

Given our view of US preeminence and the outperformance of US equities, many clients— especially those in the US—are asking why they should allocate any public market assets to non-US developed and emerging market equities.

Let’s begin with a review of ISG’s current allocation in a moderate-risk taxable portfolio for US-based investors. While we have 72 model portfolios for different risk profiles, tax statuses, and geographic and currency preferences, and while we recommend portfolios be customized for every client, we use the moderate-risk model portfolio as an appropriate representation.

Our maximum overweight to US assets relative to the MSCI ACWI was 23 percentage points in 2009 (see Exhibit 25). As US equities outperformed non-US equities, the overweight narrowed to seven percentage points by year-end 2024. Including
this overweight, US equities account for 74% of the public equity allocation in the current model portfolio.

We do not believe it is appropriate to increase the overweight to match our high point of 23 percentage points, nor do we plan to eliminate non-US equities altogether. However, we are making some adjustments to our strategic asset allocation.

We are reducing the exposure to public non-US equities, in both developed and emerging markets, and reallocating those investments to private assets, which are predominantly composed of US assets. This reallocation implicitly increases the US equity overweight from seven to 12 percentage points.

This allocation improves the risk/return profile of the portfolio as measured by the Sharpe ratio, and it marginally improves the expected return. Given our view that there is more alpha potential in private assets, the potential for adding value through manager selection has also increased.

The impact on a moderate-risk taxable portfolio is shown in Exhibit 26. This reallocation will become effective at the end of the first quarter of 2025.

Now, some may ask why we don’t eliminate all non-US equities, given that US companies are the best managed in the world (see Exhibit 27) and have significant sales outside the US. As our colleague David Kostin, US equity strategist in Global Investment Research, reports in the 2024 Portfolio Passport, international sales account for 28% of S&P 500 revenues, with Asia-Pacific accounting for 8% (of which China represents only 2%); Europe, Middle East and Africa making up 11%; and the rest coming from Canada, Latin America and other regions.18

Our response is fivefold:

First, appropriate diversification is one of the five pillars of our investment philosophy. Some have referred to diversification as one of the few free lunches in portfolio management. (Another is compounding.) An appropriately diversified portfolio provides clients with a better risk/return profile. Given that the correlation between US and non-US developed market equities since the GFC is just 0.88, and the correlation between US and emerging market equities is 0.75, both asset classes provide some nominal diversification benefits. The uncertainty band around the expected return of a portfolio is decreased.

Second, while we are duly humble when putting forth our annual economic and financial market outlook, we are certain that US equities and the dollar will not repeat the outperformance of 2024—or that of the past nearly 16 years—over the next five years. As we show later in Exhibit 66, when reviewing our one- and five-year expected returns, US and non-US developed market equities are likely to have nearly identical returns, and we expect the dollar to modestly depreciate over the next five years from its currently high valuations. Some non-US exposure will provide diversification without requiring investors to forgo incremental returns.

Third, inevitably we will have periods of US underperformance sometime in the future. As shown in Exhibit 28, while the US has outperformed over the long run, there have been several multiyear periods when non-US developed market equities (for which there is much longer history than for emerging markets) outperformed US equities, including between January 2002 and June 2008. Non-US developed market equities outperformed US equities by 89 percentage points cumulatively, or nine percentage points annualized, during that period.

Another example of US equity underperformance is the period between October 2001 and August 2008, when Indian equities outperformed US equities by 470 percentage points cumulatively, or 26 percentage points annualized. India accounts for only 2% of the MSCI ACWI, compared to 24% for non-US developed market equities. Nevertheless, it provides an example of periods when US equities have lagged another market by a significant amount.

Fourth, there are numerous world-class companies with significant market share globally that are outside the US. Most are concentrated in health care, consumer discretionary, consumer staples, energy and materials. Below, we provide one high-name-recognition example from each of these sectors so clients can better understand why we do not think it is appropriate to categorically and indefinitely eliminate such companies from their portfolios. These companies were selected from a list of the top 10 in each sector based on average net income over the past three years. ISG does not make any individual stock recommendations.

Examples:
• Novo Nordisk of Denmark, the maker of weight-loss drugs Ozempic and Wegovy
• LVMH of France, the owner of brands such as Louis Vuitton, Dior, Bulgari, Tiffany and Dom Perignon
• Nestlé of Switzerland, with cereal brands like Cheerios, chocolate brands such as KitKat and Baci, water brands such as Perrier, ice cream brands such as Haagen-Dazs, and pet care brands such as Purina
• Shell, an energy exploration and production company headquartered in London, with more gas stations in the US than Exxon Mobil
• BHP Group of Australia, the largest metals and mining company in the world

Finally, US equities are expensive relative to most non-US equities, as we discuss in more detail next. While we believe the valuation differential is justified, we also do not think an increased allocation to public US equities is warranted at this time. Recently, an amusing Financial Times article referred to US equities in the context of “Tina”— “there is no alternative” but US equities.19 Much of the good news has been priced in.

We now turn to US and non-US equity valuations.


Staying Invested in US Equities Versus Non-US Equities

Our non-US clients are asking us a different question than our US clients—the exact opposite. They want to know why, given the relative cheapness of non-US equities, isn’t ISG shifting away from US equities to non-US equities—even if only on a tactical basis?

Non-US equities are indeed cheaper than US equities.

We aggregate six different valuation metrics to make long-term historical comparisons. NonUS developed market equities are trading at a near historic discount of 54% to US equities (see Exhibit 29). Among non-US developed market equities, the UK is the cheapest major equity market, at a 62% discount. Emerging market equities are trading at a near historic discount of 61% (see Exhibit 30). Among emerging market equities, China is the cheapest major equity market, at a 63% discount.

This cheapness is broad-based across nearly all the major equity markets. The one exception is India, whose equities trade at a 6% discount to US equities based on this combined metric.

The question we address below is whether these extreme discounts reflect a tactical investment opportunity. First, we show that these discounts do not accurately reflect the cheapness in each country or region. Second, we explain why we believe that these discounts are justified based on each country’s or region’s economic prospects.

[...]

GS has been on the right side of US outperformance for quite a while now, where others (like Vanguard) haven't. They even put USA pump up pics on the cover for some years running now.

So they're taking a bit of a victory lap. Credit where due.

Maybe it'll ultimately blow up in their face.

[Circle the Wagons]

Is GS saying they're reducing ex-US to increase exposure to US private equity?

We are reducing the exposure to public non-US equities, in both developed and emerging markets, and reallocating those investments to private assets, which are predominantly composed of US assets. This reallocation implicitly increases the US equity overweight from seven to 12 percentage points.

Note bolded.

Probably private debt and other alts too. They're a sizable and growing portion of the investable universe.

Unfortunately much less investable and more opaque for the average individual investor.

[CraigTester]

Is GS saying they're reducing ex-US to increase exposure to US private equity?




Note bolded.

Probably private debt and other alts too. They're a sizable and growing portion of the investable universe.

Unfortunately much less investable and more opaque for the average individual investor.

In a former life I ran a public company initially funded by private equity....

Got a Birds Eye view....

Returns can be spectacular... but also quite dismal... but big fees are paid either way...

Not really judging, just saying its a different set of rules than buying-n-holding VTI or VEA....

Full disclosure, I didn't read the Goldman article, but if they're basing their US versus Ex-US track-record on a system that includes private equity, that feels a bit like they moved the goal posts versus how Vanguard, et al in the above post seems to be framing the competition...

But let me know if I'm missing something from not having read (or tracked) Goldman's advice over the years...

[unwitting_gulag]

Full disclosure, I didn't read the Goldman article, but if they're basing their US versus Ex-US track-record on a system that includes private equity, that feels a bit like they moved the goal posts versus how Vanguard, et al in the above post seems to be framing the competition...

There are many dimensions to this debate.... many mutually orthogonal axes, if you like. The main axis is US vs. ex-US. Another is large-cap vs. medium and small. Yet another is somehow investing in privately held companies, vs. publicly traded ones... that is, buying a stake in Bobby's Laundromat down the road here. Yet another is private equity in the proper sense, which I take to mean, putting-up cash to sustain new and burgeoning (one hopes) businesses before they start generating profits. Yet another is real estate.

The common element is, what's an "investible" asset, and what is not. Until maybe 40 years ago, it would have been hard, would it not, for American investors to access ex-US stocks, let alone ex-US indices. Right? That might have some bearing on historical returns (or it might not?). Similarly, I'd love to diversify by buying 5% of the best restaurant in town, and 10% of the corner gas station. But there's no means to do that... at least, none of which I'm aware.

Markets have to be addressable. I envy my local acquaintances whose houses have blossomed in value. I'm a renter. How can I get in on the housing-appreciation action, without actually buying a house? Bit of a problem. Thus also with GS. Unless we're willing to pay exorbitant fees, we can't access some of the markets or diversification-vehicles that they hawk. A US-based investor might go to ex-US stocks (or rather, funds), not because he or she particularly believes in ex-US, or really even cares much about it, but simply because the other members of the investment universe are unavailable.... The other axes of the investment-debate are inaccessible.

[Nathan Drake]

Goldman Sachs ISG Outlook 2025 is out this week. This was the group that seems more on the "would rather make more money" side of the phrase used in this thread, as they've been consistently recommending staying overweight to US equities over the last decade, and they fully judge their prior suggestions' performance each year, talking about what they got right & wrong.

https://privatewealth.goldmansachs.com/ ... utlook.pdf

Plenty of takes & charts in here to add discussion fuel for this thread again this time.

Here's some stuff from page 20. Their version of overweight US is now almost exactly at 80/20 recommendation:

GS has been on the right side of US outperformance for quite a while now, where others (like Vanguard) haven't. They even put USA pump up pics on the cover for some years running now.

So they're taking a bit of a victory lap. Credit where due.

Maybe it'll ultimately blow up in their face.

I don't see how they are right, when in 2009 their model had a much more significant amount of exUS exposure, and then they've been gradually whittling that down to 20% recently.

That's nothing but performance chasing. No credit deserved.

They also want to sell you an alternative asset class with less diversification and collect higher fees.

[Valuethinker]

Full disclosure, I didn't read the Goldman article, but if they're basing their US versus Ex-US track-record on a system that includes private equity, that feels a bit like they moved the goal posts versus how Vanguard, et al in the above post seems to be framing the competition...

The common element is, what's an "investible" asset, and what is not. Until maybe 40 years ago, it would have been hard, would it not, for American investors to access ex-US stocks, let alone ex-US indices. Right? That might have some bearing on historical returns (or it might not?). Similarly, I'd love to diversify by buying 5% of the best restaurant in town, and 10% of the corner gas station. But there's no means to do that... at least, none of which I'm aware.

There was Bernie Cornfeld, Robert Vesco and the IOS scandal. International Mutual Fund which disappeared in a cloud of fraud.

However there was also John Templeton and Templeton Growth Fund.

It wasn't so much that you could not access international stocks, at least from the early 1970s, however:

- the tax situation may not have been great (not sure?)
- the costs of the actively managed funds were quite large -- typically front end loads of 5-10% plus active fees of 1.5-2.5% pa

[Nathan Drake]

Full disclosure, I didn't read the Goldman article, but if they're basing their US versus Ex-US track-record on a system that includes private equity, that feels a bit like they moved the goal posts versus how Vanguard, et al in the above post seems to be framing the competition...

There are many dimensions to this debate.... many mutually orthogonal axes, if you like. The main axis is US vs. ex-US. Another is large-cap vs. medium and small. Yet another is somehow investing in privately held companies, vs. publicly traded ones... that is, buying a stake in Bobby's Laundromat down the road here. Yet another is private equity in the proper sense, which I take to mean, putting-up cash to sustain new and burgeoning (one hopes) businesses before they start generating profits. Yet another is real estate.

The common element is, what's an "investible" asset, and what is not. Until maybe 40 years ago, it would have been hard, would it not, for American investors to access ex-US stocks, let alone ex-US indices. Right? That might have some bearing on historical returns (or it might not?). Similarly, I'd love to diversify by buying 5% of the best restaurant in town, and 10% of the corner gas station. But there's no means to do that... at least, none of which I'm aware.

Markets have to be addressable. I envy my local acquaintances whose houses have blossomed in value. I'm a renter. How can I get in on the housing-appreciation action, without actually buying a house? Bit of a problem. Thus also with GS. Unless we're willing to pay exorbitant fees, we can't access some of the markets or diversification-vehicles that they hawk. A US-based investor might go to ex-US stocks (or rather, funds), not because he or she particularly believes in ex-US, or really even cares much about it, but simply because the other members of the investment universe are unavailable.... The other axes of the investment-debate are inaccessible.

Why would a renter want local housing appreciation action? Housing is highly correlated with local markets. There are REIT funds that accomplish this. You don't need private equity, which is just a form of volatility laundering. It does not provide the diversification exUS does, either. Regional markets in public and private equity move in the same direction if you remove the laundering component.

Private Equity is looking for more people to sell to in this environment. There's a big push to reach a broader investor space beyond their accredited investor class. There's a reason for that, and Private Equity has never been more richly valued than it is today.

[Circle the Wagons]

GS has been on the right side of US outperformance for quite a while now, where others (like Vanguard) haven't. They even put USA pump up pics on the cover for some years running now.

So they're taking a bit of a victory lap. Credit where due.

Maybe it'll ultimately blow up in their face.

I don't see how they are right, when in 2009 their model had a much more significant amount of exUS exposure, and then they've been gradually whittling that down to 20% recently.

That's nothing but performance chasing. No credit deserved.

They also want to sell you an alternative asset class with less diversification and collect higher fees.

Of course, you have to consider that the MCW of ex-US has declined markedly over the time period. They had +23 ppt extra exposure toward US in 2009, and they're down to +7 now. Or +12 if you include the US private market exposure.

They state their rationales for continued US over-exposure. It's not particularly deep content, and nothing new vs. this robust thread. You're free to disagree with it all.

Regarding private equity, all of these things can be true at the same time:

- PE represents a sizable and growing share of the "investable" (for some) market
- illiquidity, high fees and opaqueness make it challenging, especially for the average individual investor
- institutional investors still seem to seek significant exposure to it
- the US vs. ex-US public markets valuation differential (and maybe other self-serving motivations) has not pushed GS toward ex-US, but rather toward US private markets

[vv19]

Goldman Sachs ISG Outlook 2025 is out this week. This was the group that seems more on the "would rather make more money" side of the phrase used in this thread, as they've been consistently recommending staying overweight to US equities over the last decade, and they fully judge their prior suggestions' performance each year, talking about what they got right & wrong.

https://privatewealth.goldmansachs.com/ ... utlook.pdf

Plenty of takes & charts in here to add discussion fuel for this thread again this time.

Here's some stuff from page 20. Their version of overweight US is now almost exactly at 80/20 recommendation:

GS has been on the right side of US outperformance for quite a while now, where others (like Vanguard) haven't. They even put USA pump up pics on the cover for some years running now.

So they're taking a bit of a victory lap. Credit where due.

Maybe it'll ultimately blow up in their face.

Fair play to them. They are in the business of making money. Who would have thought, huh?

[CraigTester]

- the US vs. ex-US public markets valuation differential (and maybe other self-serving motivations) has not pushed GS toward ex-US, but rather toward US private markets

I guess it's also fair to say that these valuation differentials have not pushed Goldman toward adding more US pubic company exposure, but rather toward US private markets (e.g. "2 and 20" fees = Yummy )

As VV19 observes above, maybe the only real takeaway from the Goldman article is that Goldman is good at making money for Goldman....

Nothing wrong with that per se, but just healthy to understand as we try to glean any insights from their marketing docs ....

[unwitting_gulag]

Why would a renter want local housing appreciation action? Housing is highly correlated with local markets. There are REIT funds that accomplish this.

One example is a wealthy but itinerant person, with no fixed address, and also no householder skill. It would be foolish to buy a house outright, but still desirable to benefit from home equity appreciation. A REIT won't do that. REITs are almost entirely rental-income plays. REITs don't buy literal portions of owner-occupied single family housing.

Attempting to return to our topic, recall that in the dot.com bust, we had simultaneously:

1. Sharp drop in US large-cap tech
2. Smaller (but still large) drop in US large-cap anything
3. US small-caps did better, but still not great
4. ex-US did relatively better
5. US residential real estate was fantastic, at least in the marquee markets (not the small-town Midwest).

A person agnostic about US vs. ex-US. but interested in diversifying from the S&P 500, might wonder if US residential real estate makes sense. We hear that it also did well in the 1970s - another harrowing time for US stocks (but better for ex-US... notice a pattern?). Joe and Jane Doe already own their own house, and a handsome house at that. That's their diversifier. No need for any exotic dabbling. Rufus has 3 or 4 times more net worth than the Doe family, but owns no real estate. Rufus is left wondering about his options.

[CraigTester]

A person agnostic about US vs. ex-US. but interested in diversifying from the S&P 500, might wonder if US residential real estate makes sense. We hear that it also did well in the 1970s - another harrowing time for US stocks (but better for ex-US... notice a pattern?). Joe and Jane Doe already own their own house, and a handsome house at that. That's their diversifier. No need for any exotic dabbling. Rufus has 3 or 4 times more net worth than the Doe family, but owns no real estate. Rufus is left wondering about his options.

Except for "recently", US home prices basically tracked inflation..

https://www.multpl.com/case-shiller-hom ... n-adjusted

[Nathan Drake]

Why would a renter want local housing appreciation action? Housing is highly correlated with local markets. There are REIT funds that accomplish this.

One example is a wealthy but itinerant person, with no fixed address, and also no householder skill. It would be foolish to buy a house outright, but still desirable to benefit from home equity appreciation. A REIT won't do that. REITs are almost entirely rental-income plays. REITs don't buy literal portions of owner-occupied single family housing.

Attempting to return to our topic, recall that in the dot.com bust, we had simultaneously:

1. Sharp drop in US large-cap tech
2. Smaller (but still large) drop in US large-cap anything
3. US small-caps did better, but still not great
4. ex-US did relatively better
5. US residential real estate was fantastic, at least in the marquee markets (not the small-town Midwest).

A person agnostic about US vs. ex-US. but interested in diversifying from the S&P 500, might wonder if US residential real estate makes sense. We hear that it also did well in the 1970s - another harrowing time for US stocks (but better for ex-US... notice a pattern?). Joe and Jane Doe already own their own house, and a handsome house at that. That's their diversifier. No need for any exotic dabbling. Rufus has 3 or 4 times more net worth than the Doe family, but owns no real estate. Rufus is left wondering about his options.

Where is your proof that housing did better than exUS stocks in the 60s through 80s than exUS stocks on appreciation alone?

Housing, I recall, had been devastated by high mortgage rates. I’m dubious of this claim.

[Nathan Drake]

A person agnostic about US vs. ex-US. but interested in diversifying from the S&P 500, might wonder if US residential real estate makes sense. We hear that it also did well in the 1970s - another harrowing time for US stocks (but better for ex-US... notice a pattern?). Joe and Jane Doe already own their own house, and a handsome house at that. That's their diversifier. No need for any exotic dabbling. Rufus has 3 or 4 times more net worth than the Doe family, but owns no real estate. Rufus is left wondering about his options.

Except for "recently", US home prices basically tracked inflation..

https://www.multpl.com/case-shiller-hom ... n-adjusted

Thanks, housing went nowhere just like US stocks. His claim false, exUS stocks had a real return

[unwitting_gulag]

Except for "recently", US home prices basically tracked inflation..

https://www.multpl.com/case-shiller-hom ... n-adjusted

Thanks, housing went nowhere just like US stocks. His claim false, exUS stocks had a real return

US housing did badly from 2000 to 2007? What was that quote, about being entitled to our own opinions, but not our own facts?

And as for recency, once again, we have the whole 21st century so far. Here in Los Angeles, residential single family housing had cumulative performance comparable to the S&P 500... between 2000 and 2025. A quick google search finds for example this: https://www.gatsbyinvestment.com/educat ... os-angeles. Looking at the chart, the reported median price was around $220K in the year 2000, and $800K by the end of 2022 (it's higher now)... went up by a factor of 3.6. Between 2000 and the end of 2022, did the S&P 500 go up by a factor of 3.6 (dividends reinvested)? Maybe instead of hand-wringing over Nvidia, Apple or the "asset" that shall not be named (begins with a "B"), the smart money should have gobbled up bungalows in LA? But we digress.

Where some of us are getting frustrated - from both sides - is this recency dogma. Hey, it's only recent, so why weave some epic narrative? US out-performance recency... 17 years. My tawdry little sidebar example of housing... 25 years. My buddy's kids are in college this year... they were born, by this measure, only "recently". The very first stock market started in Amsterdam, around 400 years ago, which compared to recorded history of some 4000-5000 years, is only recent... which itself, compared to the presence of anatomically-modern humans on earth, is only... recent.

I have been investing for a bit over 30 years. During my entire investing lifetime, US has handsomely outperformed ex-US, and yet, that is still... recent. Whatever our position on the topic of this thread, we need to have a long, hard look at the meaning of "recent".

[Circle the Wagons]

- the US vs. ex-US public markets valuation differential (and maybe other self-serving motivations) has not pushed GS toward ex-US, but rather toward US private markets

I guess it's also fair to say that these valuation differentials have not pushed Goldman toward adding more US pubic company exposure, but rather toward US private markets (e.g. "2 and 20" fees = Yummy )

As VV19 observes above, maybe the only real takeaway from the Goldman article is that Goldman is good at making money for Goldman....

Nothing wrong with that per se, but just healthy to understand as we try to glean any insights from their marketing docs ....

A healthy dose of skepticism is always prudent. No one would debate that Wall Street is always out to make a buck.

I would not let cynicism cut short thoughtful discussion, though. It remains true that a large and growing chunk of the economy is in private hands. And not just Joe's Laundromat. Scaled businesses. The trend continues to be funded by supposedly "smart" institutional money.

[Chocolatebar]

A person agnostic about US vs. ex-US. but interested in diversifying from the S&P 500, might wonder if US residential real estate makes sense. We hear that it also did well in the 1970s - another harrowing time for US stocks (but better for ex-US... notice a pattern?). Joe and Jane Doe already own their own house, and a handsome house at that. That's their diversifier. No need for any exotic dabbling. Rufus has 3 or 4 times more net worth than the Doe family, but owns no real estate. Rufus is left wondering about his options.

Except for "recently", US home prices basically tracked inflation..

https://www.multpl.com/case-shiller-hom ... n-adjusted

I'm a bit confused by this, as I was under the impression that real estate is a strong hedge against inflation. Is that not the case? I'm also curious why the chart ends at 2017.

[vv19]

A person agnostic about US vs. ex-US. but interested in diversifying from the S&P 500, might wonder if US residential real estate makes sense. We hear that it also did well in the 1970s - another harrowing time for US stocks (but better for ex-US... notice a pattern?). Joe and Jane Doe already own their own house, and a handsome house at that. That's their diversifier. No need for any exotic dabbling. Rufus has 3 or 4 times more net worth than the Doe family, but owns no real estate. Rufus is left wondering about his options.

Except for "recently", US home prices basically tracked inflation..

https://www.multpl.com/case-shiller-hom ... n-adjusted

That is only for a 3-4 years period.
Real estate is a great hedge against inflation doesn’t mean the yearly price growth of your house goes more than inflation - that’s not how most people see it. It is a great hedge against inflation because it is your biggest fixed cost and is fixed for 30 years.

[CraigTester]

I have been investing for a bit over 30 years. During my entire investing lifetime, US has handsomely outperformed ex-US, and yet, that is still... recent. Whatever our position on the topic of this thread, we need to have a long, hard look at the meaning of "recent".

You have a knack for putting your finger on the underlying issue.....

From the OP:

• "Since 1990, the vast majority of the US’s outperformance versus the MSCI EAFE Index (currency hedged) of a whopping +4.6% per year, was due to changes in valuations. In other words, the US victory over EAFE for the last three decades—for most investors’ entire professional careers—came overwhelmingly from the US market simply getting more expensive than EAFE."

https://www.aqr.com/Insights/Research/J ... hese-Years

Whatever forces are behind this trend, may also be fueling the inflection point in housing... Transitioning from a hundred year trend of just breaking-even with inflation, to whatever it is we're observing now...

[CraigTester]

Except for "recently", US home prices basically tracked inflation..

https://www.multpl.com/case-shiller-hom ... n-adjusted

I'm a bit confused by this, as I was under the impression that real estate is a strong hedge against inflation. Is that not the case? I'm also curious why the chart ends at 2017.

If you want to see the inflation adjusted house price chart continue through current dates, click on the below link,....and navigate to the housing data in "Fig 3-1"...

Let me know if you get stuck...

https://shillerdata.com/

[unwitting_gulag]

• "Since 1990, the vast majority of the US’s outperformance versus the MSCI EAFE Index (currency hedged) of a whopping +4.6% per year, was due to changes in valuations. In other words, the US victory over EAFE for the last three decades—for most investors’ entire professional careers—came overwhelmingly from the US market simply getting more expensive than EAFE."

https://www.aqr.com/Insights/Research/J ... hese-Years

Whatever forces are behind this trend, may also be fueling the inflection point in housing... Transitioning from a hundred year trend of just breaking-even with inflation, to whatever it is we're observing now...

That's currency-hedged, yes? Unhedged, the results are even more lopsided.

To your point, we have confluences of outcomes:

1. US vs. ex-US had their respective moments, see-saw, yin-yang etc., over most of the available history. But over the past 30 years, the US just took off. Yes, we had the 2000-2007 blip. But the bigger story is 30+ years of US outperformance.

2. Real estate has mostly just tracked inflation, since the days of Vitruvius, or maybe even Imhotep. Long periods of slight under- or out-performance relative to core inflation, mostly evened out. That all broke starting around the year 2000. Today we're beyond the then-peak of real estate irrational exuberance in 2006.

3. Small-caps have historically outperformed. Yes, we have the "tell tale chart" showing long runs of stagnation followed by sharp ascendancy. But in the 21st century we've had unusually long periods of stagnation, or words.

What happened? What broke? Around the time that many of us were starting our careers or completing our education, or starting to invest... sometime towards the end of the 20th century, we have the narrative, of residential housing and large cap (mostly but not entirely tech) US stocks running away with the prize. Buy a big house, get a big mortgage, put your spare coins into QQQ or at least the S&P. Don't venture abroad, except as a tourist. Don't rent. Avoid factors.

Every year, wise people pronounce, that longstanding trends are long in the tooth, stale, stretched, unsustainable. The future is coming, and we best prepare! But every future much resembles the past. Who needs headlights, when the rear-view mirror is more accurate?

[Billy C]

Well, how about one of those portfolio visualizer dot com calculations? Would anyone care to please run that? Let's start 30 years ago: January 1995.

1. Portfolio #1: 100% S&P 500.
2. Portfolio #2: 40% S&P 500, 20% US small-cap, 40% ex-US index.

To keep it simple, lump-sum $100K in each, in January 1995, and do nothing thereafter.

I haven’t logged on for a few weeks and noticed that nobody responded to your request.

Here are the results you asked for:

[Billy C]

Goldman Sachs ISG Outlook 2025 is out this week. This was the group that seems more on the "would rather make more money" side of the phrase used in this thread, as they've been consistently recommending staying overweight to US equities over the last decade, and they fully judge their prior suggestions' performance each year, talking about what they got right & wrong.

https://privatewealth.goldmansachs.com/ ... utlook.pdf

Plenty of takes & charts in here to add discussion fuel for this thread again this time.

Thank you for posting this greedygus. Even though I ignore predictions, I very much like the data and charts that Sharmin Mossavar-Rahmani and her team at Goldman Sachs provide.

I particularly like the chart that compares U.S. vs. non-U.S. equity returns, which now spans 100 years. A perfect century of data. The U.S. account balance ends the period approximately an order of magnitude greater. And of course it would be significantly more than this in the real world once costs/taxes are accounted for. This chart is a continuation of a trend that began in 1849. There have been 116 rolling 60-year periods since then, and as far as I can tell the U.S. has won all of them. If anyone has data that proves otherwise, I’d like to see it.

[Nathan Drake]

Goldman Sachs ISG Outlook 2025 is out this week. This was the group that seems more on the "would rather make more money" side of the phrase used in this thread, as they've been consistently recommending staying overweight to US equities over the last decade, and they fully judge their prior suggestions' performance each year, talking about what they got right & wrong.

https://privatewealth.goldmansachs.com/ ... utlook.pdf

Plenty of takes & charts in here to add discussion fuel for this thread again this time.

Thank you for posting this greedygus. Even though I ignore predictions, I very much like the data and charts that Sharmin Mossavar-Rahmani and her team at Goldman Sachs provide.

I particularly like the chart that compares U.S. vs. non-U.S. equity returns, which now spans 100 years. A perfect century of data. The U.S. account balance ends the period approximately an order of magnitude greater. And of course it would be significantly more than this in the real world once costs/taxes are accounted for. This chart is a continuation of a trend that began in 1849. There have been 116 rolling 60-year periods since then, and as far as I can tell the U.S. has won all of them. If anyone has data that proves otherwise, I’d like to see it.

Indeed.

This is a great chart to highlight just how tenuous the "US exceptionalism" argument is.

• You saw a large period of US outperformance from 1945-1949 (WW2)

• A period of oscillating flat performance from 1950-1973

• A period of great US underperformance from 1974-1989

• A clawback of getting back to neutral period for US between 1990-2013

• And, of course, the latest period showing US outperformance from 2014-Present

The only "premium" is basically a very brief period post WW2 and the recent period. Even this premium can be given back with enough time.

If you cut the chart off at year 1989 and then flip the axis, it looks exactly as this chart does but in reverse - it looks like massive exUS outperformance (all mostly the result of the prior nearly 3 decades). Do you ask yourself in 1989 - why do I own US stocks at all? Do I get rid of US stocks? Of course these would have been mistakes, and yet they are the exact same mistakes people are making in this thread when they argue for 100% US equity.

You'd be like unwitting_gulag playing mental gymnastics in his mind about how exUS outperformance has gone on for a very long time (nearly 3 decades) and that past is therefore much more likely to be prologue. Except, it eventually wasn't.

[vv19]

I find it quite incredible that people like to go back 40-50-100 years to argue what is being debated here. A better exercise is to open to your eyes to the present and see which country has almost a monopoly of technological innovation, an economy that is an envy of the world, companies that have a rock solid balance sheet with expanding margins y/y and more cash than most nation states.

People are still stuck in the conventional “value” debate rather than obvious macro trends. But, sure, at least the ex US equities are “cheap”.

[Nathan Drake]

I find it quite incredible that people like to go back 40-50-100 years to argue what is being debated here. A better exercise is to open to your eyes to the present and see which country has almost a monopoly of technological innovation, an economy that is an envy of the world, companies that have a rock solid balance sheet with expanding margins y/y and more cash than most nation states.

People are still stuck in the conventional “value” debate rather than obvious macro trends. But, sure, at least the ex US equities are “cheap”.

Because the past shows cyclicality. That cyclicality isn't predictable from a timing perspective, but it's a distinct feature of markets. That's a primary reason for diversification.

And to say the US has a monopoly on innovation just isn't true. Innovation doesn't just happen on Social Media apps and Search engines. Some of the most important technological innovation is occurring in industries the US is completely absent in. It's also true that innovation isn't a requirement of investor growth. The two are not correlated, just like GDP isn't.

[unwitting_gulag]

Well, how about one of those portfolio visualizer dot com calculations? Would anyone care to please run that? Let's start 30 years ago: January 1995.

1. Portfolio #1: 100% S&P 500.
2. Portfolio #2: 40% S&P 500, 20% US small-cap, 40% ex-US index.

To keep it simple, lump-sum $100K in each, in January 1995, and do nothing thereafter.

I haven’t logged on for a few weeks and noticed that nobody responded to your request.

Here are the results you asked for:

Thank you for posting this! The results are even worse (for diworsifying outside of the S&P 500) than I surmised. It's better to know, than to not-know; but knowing, and realizing how much better one's life would have been in the alternative (that is, all Essen Pea, all of the time)... is going to take some maturity and stoicism, to endure. Best of luck to all.

[Nathan Drake]

I haven’t logged on for a few weeks and noticed that nobody responded to your request.

Here are the results you asked for:

Thank you for posting this! The results are even worse (for diworsifying outside of the S&P 500) than I surmised. It's better to know, than to not-know; but knowing, and realizing how much better one's life would have been in the alternative (that is, all Essen Pea, all of the time)... is going to take some maturity and stoicism, to endure. Best of luck to all.

Now do it from 1965-1995 and the results flip. So not sure what this experiment tells us other than cherry picking start/end dates can give you different results and that valuations matter.

A 8.5% CAGR for the second portfolio isn't eating dog food.

[Billy C]

Here is another chart from the Goldman Sachs report that I find very useful. It compares EPS growth in local currency. This approach allows for a more accurate comparison of earnings growth within each region or country without the distortion caused by currency exchange rate changes. It focuses on the intrinsic growth of earnings within the local economic context.

Earnings Per Share Growth: In aggregate, US companies have outearned their counterparts in developed and emerging economies.

Since 1992, earnings growth in the U.S. has outpaced earnings in non-U.S. developed economies by an annual average of 2.4 percentage points; the growth rate was faster about 60% of the time. We expect U.S. EPS growth rates to continue outpacing those of non-U.S. developed economies by about two percentage points over the next five years.

Similarly, earnings growth in the U.S. has outpaced earnings in emerging market economies by an annual average of five percentage points; the growth rate was faster about 60% of the time in this comparison as well. We expect U.S. EPS growth rates to be in line with those of emerging market countries over the next five years.

The earnings growth rate in the U.S. has picked up momentum since the GFC. U.S. earnings are up 143% relative to their peak levels before the GFC. Earnings in non-U.S. developed markets are up 25%, and in emerging markets they are up 33%, both lagging the U.S. by more than 100 percentage points over avout 17 years (see Exhibit 34)!

U.S. companies have had stronger business fundamentals for decades, explaining their higher valuations and dominant market performance.

[Nathan Drake]

Here is another chart from the Goldman Sachs report that I find very useful. It compares EPS growth in local currency. This approach allows for a more accurate comparison of earnings growth within each region or country without the distortion caused by currency exchange rate changes. It focuses on the intrinsic growth of earnings within the local economic context.

Earnings Per Share Growth: In aggregate, US companies have outearned their counterparts in developed and emerging economies.

Since 1992, earnings growth in the U.S. has outpaced earnings in non-U.S. developed economies by an annual average of 2.4 percentage points; the growth rate was faster about 60% of the time. We expect U.S. EPS growth rates to continue outpacing those of non-U.S. developed economies by about two percentage points over the next five years.

Similarly, earnings growth in the U.S. has outpaced earnings in emerging market economies by an annual average of five percentage points; the growth rate was faster about 60% of the time in this comparison as well. We expect U.S. EPS growth rates to be in line with those of emerging market countries over the next five years.

The earnings growth rate in the U.S. has picked up momentum since the GFC. U.S. earnings are up 143% relative to their peak levels before the GFC. Earnings in non-U.S. developed markets are up 25%, and in emerging markets they are up 33%, both lagging the U.S. by more than 100 percentage points over avout 17 years (see Exhibit 34)!

U.S. companies have had stronger business fundamentals for decades, explaining their higher valuations and dominant market performance.

Yes, this was already highlighted in decomposing the returns for US vs. exUS.

US has higher EPS growth (likely partially attributable to buyback preference over dividends). exUS has a much higher dividend yield. In some cases, 3X the dividends of US stocks.

The net result is, backing out currency and valuation changes, the fundamental performance of US vs. exUS has been roughly the same over this period of US exceptionalism.

[CraigTester]

Is it possible that US Valuations have been increasing 3X Int'l for 30 years because the world beyond this thread doesn't have Nathan Drake to provide alternative perspectives on all the incomplete/misleading/incorrect information that we see perpetually getting circulated around....?

[vv19]

Here is another chart from the Goldman Sachs report that I find very useful. It compares EPS growth in local currency. This approach allows for a more accurate comparison of earnings growth within each region or country without the distortion caused by currency exchange rate changes. It focuses on the intrinsic growth of earnings within the local economic context.

Earnings Per Share Growth: In aggregate, US companies have outearned their counterparts in developed and emerging economies.

Since 1992, earnings growth in the U.S. has outpaced earnings in non-U.S. developed economies by an annual average of 2.4 percentage points; the growth rate was faster about 60% of the time. We expect U.S. EPS growth rates to continue outpacing those of non-U.S. developed economies by about two percentage points over the next five years.

Similarly, earnings growth in the U.S. has outpaced earnings in emerging market economies by an annual average of five percentage points; the growth rate was faster about 60% of the time in this comparison as well. We expect U.S. EPS growth rates to be in line with those of emerging market countries over the next five years.

The earnings growth rate in the U.S. has picked up momentum since the GFC. U.S. earnings are up 143% relative to their peak levels before the GFC. Earnings in non-U.S. developed markets are up 25%, and in emerging markets they are up 33%, both lagging the U.S. by more than 100 percentage points over avout 17 years (see Exhibit 34)!

U.S. companies have had stronger business fundamentals for decades, explaining their higher valuations and dominant market performance.

So higher EPS growth (because of fundamentally sound companies growing with expanding margins) resulted in better returns for the US investors. No wonder investors are willing to pay premium for these behemoths.

Gee, who would have thought that?