In recent weeks, The Wall Street Journal and The Financial Times published articles addressing the wide valuation and performance disparity between U.S. stocks and their foreign counterparts. Although they were published within days of each other, the articles reached opposing conclusions. While we find some agreement with both points of view, TSW takes a very different stance toward the perennial question “why own international stocks?”

On Thanksgiving Day, The Wall Street Journal published an attention-grabber titled “A Quarter of Your Retirement Fund Just Isn’t Keeping Up”¹ by Ben Eisen that began “U.S. stocks have been euphoric lately—and they’ve left international stocks in the dust.” Eisen went on to document the outperformance of the S&P 500® Index over the past 15 years and suggested that many investors allocate far too many of their assets to “something that keeps falling behind.” He cited both an individual investor and a professional advisor who have thrown in the towel on international stocks completely, noting that large U.S. companies like McDonald’s and Microsoft “have significant foreign sales.” He added that investors have been pulling funds from international ETFs and mutual funds, offering the explanation that “the pain-to-benefit ratio isn’t worth it.”

A few days later Ruchir Sharma, chair of Rockefeller International, kept the shock factor high with his article, “The Mother of All Bubbles”² published in The Financial Times. Sharma noted that the relative prices of U.S. stocks are “the highest since data began over a century ago and relative valuations are at a peak since data began half a century ago.” Warning that “a booming U.S. market is sucking money out of the others,” Sharma stated his opinion bluntly: “the U.S. is over-owned, overvalued and overhyped to a degree never seen before.”

TSW has no quarrel with The Wall Street Journal’s observation about the outperformance of U.S. stocks.  That is just a fact. It is equally true that U.S. stocks are historically expensive relative to non-U.S. stocks. Both authors are right, but that’s where our agreement stops. TSW believes that the overwhelming reason to own international stocks in a well-rounded portfolio is that the world is dotted with great companies, many of which trade at attractive prices. This combination sets up the possibility of superior long-term returns. Like many of the best U.S. companies, these companies frequently have presence across global markets, including the U.S., and may dominate a particular market niche. Because of this, their country of domicile or the location of their stock listing is of little relevance to the investment case.

The Journal tiptoes around this point by noting that “one case for owning foreign stocks is that the rest of the world might do well when the U.S. is doing poorly.” TSW believes this isn’t very likely in today’s hyper-connected global economy. A set of circumstances leading the world’s largest economy to do poorly would likely have serious repercussions for other economies and investor sentiment alike. Except for brief dislocations, global stock market returns are highly correlated, as illustrated by the chart below. Both historical data and daily observation suggest that stocks mostly move together. These high correlations contradict the argument that U.S. stock returns will be persistently superior.

But wait a minute.

If global stocks really do march in unison, doesn’t this support the argument that one need only hold U.S. stocks to enjoy all the benefit? The answer is a resounding “no”. Constraining a portfolio to a single country excludes many attractive investment opportunities. Why would an investor consciously rule out great companies just because of geography, especially if those stocks are offered at appealing prices? Home country bias may be inevitable, but it isn’t an investment strategy.

TSW also struggles with The Financial Times’ valuation point. We’ve seen the graphs. The price premium for U.S. stocks certainly looks extreme. But the U.S. market does enjoy some indisputable advantages: sophisticated financial markets, an entrepreneurial/risk-oriented culture, and a business-friendly legal structure (to name a few). Some premium is justifiable, although we can’t say what the right level is. By themselves, valuation measures, especially dogpile aggregations like “the price-to-earnings ratio of the S&P 500® Index versus international stocks”, are a lousy timing tool. The current U.S. premium could persist or go even higher. There are far too many unknowns to make a precise call. Likewise, the idea of reversion to a historical mean relationship between constantly changing and compositionally different stock indexes is a weak basis for investment decisions.

So why own international stocks? In our view, the answer is simple; there are great opportunities to earn attractive returns in companies based all around the world, and there’s no good reason for investors to shun those opportunities simply because of geography. Foreign stocks do present complexities such as  politics and currency movements which can make them feel more risky and less certain, but this is where professionals like TSW have a role to play. TSW has invested in global stocks for more than three decades, and TSW believes the opportunities we see today are as good as ever.

The popular press will always try to make grand pronouncements about this or that. BusinessWeek magazine’s August 1979 cover story, “The Death of Equities”, might be the most famous example, but such declarations amount to little more than clickbait. The recent offerings from The Wall Street Journal and The Financial Times are no different. Read them for entertainment if you wish, but in our view, the best call is to stick with an allocation to both U.S. and international equities and ignore the facile arguments for lurching back and forth based on recent performance or dubious valuation comparisons.