Votes, valuations and non-U.S. equities

Bottom line up top

One world, billions of decisions. It’s already been a busy election year outside the U.S., and there’s much more politicking and persuasion on the way — including, of course, within the U.S. By the end of 2024, when all ballots are cast and counted across hemispheres, continents and countries, more than four billion people, representing close to half the world’s population and 57% of global GDP, will have participated in national elections during the year (Figure 1). The implications for investors are critical, as roughly 70% of global equity market capitalization will be influenced by the economic, trade, regulatory, governance and sociopolitical changes these electoral outcomes may bring over the next several years.

No to the status quo? Most recently, we saw a decided rightward shift in the European Union Parliamentary elections, marking a blow to ruling centrist parties in some key EU member states. In response, French President Emmanuel Macron called for a snap national election at the end of June, with a 7 July runoff to determine the next prime minister. Dissatisfaction with a sluggish European economy has intensified, giving France’s nationalist-populist parties an opportunity to reach for more power.

Similar threats to longtime incumbent leadership have materialized in places as diverse as India, Mexico and South Africa. Those elections, while in the rearview mirror, will help shape the political road ahead. And elections set for 4 July in the United Kingdom are widely expected to mark an end to 14 years of Conservative Party rule, with consequences for developed markets in the second half of 2024. Beyond elections, geopolitical risks, such as the newly inked defense pact between Russia and North Korea, are worth watching.

While politics and geopolitics can always lead to heightened uncertainty, in the current market environment we see compelling reasons to consider investment opportunities in select non-U.S. equity markets.

Portfolio considerations

Many diversified equity allocations are weighted more toward the U.S., an emphasis we have favored over the past few years. Recently, however, we have become more comfortable with reducing our U.S. overweight and shifting into non-U.S. equity opportunities in both developed and emerging markets (EM). Factors supporting such a move include relative valuations based on forward price-to-earnings (P/E) ratios – a useful tool for identifying value. Currently, P/Es for non-U.S. equities look more attractive (less expensive) than those for their U.S. counterparts, which remain well above their long-term average (Figure 2). Of course, valuations can vary widely by individual markets and aren’t the only criteria to consider when deciding where to allocate.

In terms of specific geographies, Japan (the world’s second-largest developed market, behind only the U.S.) has benefited from a return to normalized monetary policy with the end of the Bank of Japan’s yield curve control program, success in managing inflation and notable earnings improvement. In fact, corporate profits reached an all-time high in the first quarter of 2024, growing 15.1% year-over-year. And while the yen has fallen sharply versus the U.S. dollar and euro, this bolsters Japanese exports and tourism revenue. Equity gains in Japan this year have been led by large companies, driven by better corporate governance, higher returns on equity and fund flows from the recently launched NISA, a tax-advantaged savings account. While investor focus has favored large caps, small and mid caps appear attractively valued, given price-to-book ratios below 1x and large cash holdings.

Among EM equities, India has a forward P/E of 20.6x (about 10% higher than its 10-year average), which looks somewhat expensive. But several other factors enhance its appeal as a long-term investment destination, including favorable demographics, with a young population that many other large countries do not have. Additionally, the Indian economy’s position at the lower end of the consumption curve ($2,400 per capita income) represents a huge opportunity, as discretionary consumption should continue to grow alongside GDP, which has expanded at an annual rate of nearly 6% over the past decade. Lastly, with the world’s largest population and a massive labor force, India should be poised to benefit from a further de-emphasis of China in the global supply chain.

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