The volatility that began amid the August holiday rush in US and global stock markets has continued into September. After a 12% rise in the MSCI World Index in the first half of this year, we believe markets are likely to be flat until the end of 2024 – although they may experience a lot of volatility due to economic, political uncertainty and geopolitical.
The new realities that took shape earlier in the year – including higher interest rates for longer periods, increased geopolitical risk and megatrends that are rapidly transforming industries – continue to create a complex environment of emerging opportunities and risks in global markets.
Central banks have been more cautious and taken more than expected to cut interest rates, impacting fixed income. We see opportunities to expand equity exposures beyond the biggest US names, although US mega-caps, particularly names with exposure to technology, remain in a good spot.
US income growth, a key driver of the outperformance since the global financial crisis (GFC), is slowing. Continued uncertainty in geopolitics and economics can affect business and consumer confidence. This could continue to fuel volatility.
After strong returns in a highly concentrated number of large-cap US tech stocks, driven by AI expectations, we believe investors should diversify internationally into a wider set of companies and consider business models with high quality with attractive dividend policies.
Since the start of the walking cycle in March 2022, the MSCI EAFE value index delivered returns in line with the S&P 500 through the end of August, a fact that may surprise market watchers.
As rates have risen, incomes have expanded. From the GFC to the COVID-19 pandemic, the S&P 500 delivered 4.7% EPS growth, compared to 0.7% for the Stoxx 600. From the pandemic in March 2020 to the end of June 2024, the STOXX 600 achieved, delivering 7.6% . to the S&P 500 7.8% annually.
Dividend-paying companies with consistent returns on invested capital, strong cash flow generation and a track record of capital discipline can be particularly attractive in international markets. Over the past 10 years, dividend reinvestment has accounted for 70% of total returns for the MSCI EAFE Index, compared to 20% for the S&P 500 as of June 30, 2024. Dividends can also serve as a hedge against market pullbacks that could be sharper in international markets.
Japan is also proving to be an interesting market for investment. What has happened there in the last 12 to 24 months is surprising – pressure from government and peer companies is driving corporate governance and structural reforms that have made large parts of the market more investable. Increased focus on shareholder returns and mitigation of cross-shareholdings has significantly improved the quality of Japanese companies.
The lesson from all of this is that to increase investor returns and limit downside risks as markets expand, we believe investors need to diversify, domestically and abroad.
In this slowing and increased risk environment, we like stocks with resilient growth potential that have reliable high margins and well-structured balance sheets. Investors should not be limited by their home markets, but should look for companies from capital markets around the world that can power through cycles and continue to grow earnings.
This again shows the value of taking long-term views; being active, long-term investors; and stay invested instead of trying to time the market. We continue to pursue a long-term philosophy and high conviction in international equity returns, emphasizing access to global industry leaders, and believe that many ADRs of foreign-based companies available in the US equity markets are attractive.
Alexis Deladerrière is head of international developed markets equities for Goldman Sachs Asset Management.