Has the outperformance of US equities reached a tipping point?

US equities have enjoyed robust gains in recent years, but will the strength of the US dollar, lower commodity prices and cheaper valuations elsewhere mean that investors will find better value in in other international stock markets?

26 February 2015

Simon Webber

Simon Webber

Lead Portfolio Manager

As we enter the seventh year of the US bull market, we have likely reached a tipping point where international equities will begin to generate superior returns to US equities.

The link to the full analysis can be found at the bottom of this page, but in summary, there are a number of factors that make a powerful case for non-US equities.

1) Competitiveness

Firstly, the outperformance of US equities in recent years has in no small part been a reflection of a competitive and flexible US economy when compared to the more rigid labour laws of other countries, especially Europe.

However, this may all be about to change as a combination of wage restraint in Japan and Europe, and the recent strengthening of the US dollar, has had a dramatic effect on relative labour costs and served to improve the competitiveness of these two major regions.

How dollar strength is increasing labour costs in the US compared with Japan

Source: National Statistics, Morgan Stanley, Schroders. February 2015

We are already seeing the evidence of this change in competitiveness reflected in economies’ and corporates’ growth rates. Cost competitiveness is helping companies to grow market share (sometimes at the expense of US competitors) and exports are accelerating in both Europe and Japan.

Meanwhile, the stronger dollar is beginning to inflict some pain on corporate America and this is only set to worsen as a significant part of the currency appreciation has been very recent.

2) The commodities dividend

The second factor we believe will contribute to the performance of non-US equities is the commodities dividend.

While convention has it that the US consumer will be the biggest beneficiary of lower oil prices, most of the major investable regions outside of the US (including Japan, the eurozone, China and India) also stand to benefit as they are all large commodity importers.

In fact, UBS estimates that a $10 decline in oil prices will boost European GDP growth by 0.2%, compared to a gain of 0.1% of GDP growth in the US.

3) Valuations

Finally, international equity markets are far more attractively valued than their US counterparts, both in absolute terms and relative to history on a variety of measures. The opportunity then for further re-rating in international shares seems higher than for US equities at this point.

We believe that against this backdrop, equity market leadership is likely to shift away from the US. This is fertile ground for bottom-up stockpickers able to exploit a range of opportunities from the breadth of international or global markets.


  • Equities
  • Global
  • US

Important Information: The views and opinions contained herein are those of Schroders’ Investment team, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change.  UK: Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA, is authorised and regulated by the Financial Conduct Authority. For your security, communications may be taped or monitored. Further information about Schroders can be found at www.schroders.com US: Schroder Investment Management North America Inc. is an indirect wholly owned subsidiary of Schroders plc, a SEC registered investment adviser and is registered in Canada in the capacity of Portfolio Manager with the Securities Commission in Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Quebec and Saskatchewan providing asset management products and services to clients in Canada. 875 Third Avenue, New York, NY, 10022, (212) 641-3800. www.schroders.com/us