A continued shift towards a “tripolar” world and recent outperformance of non-US stocks make diversification even more compelling now than after the global financial crisis (GFC), say Anil Rao and Rohit Gupta of MSCI Research.
A rare double-digit performance gap favouring non-US equities over their US counterparts opened up in early 2025, accompanied by a shift in fund flows away from the US and into Europe, Asia and emerging markets (EM), note Rao and Gupta.
At the same time, the US’s net international investment position, historically propelled by strong foreign appetite for US stocks and bonds, may be showing signs of reversing, they add in a new research blog post, and this could potentially prolong the weakness in the US dollar and other US assets.
“While US equities are still a sizeable 63% share of the global universe, a shift in market leadership may be underway, driven by downward revisions in US growth expectations amid tariff concerns,” write Rao and Gupta.
Non-US stocks outperformed
Non-US stocks outperformed US stocks by 10% year to date through April 25, marking the seventh-largest such gap over the last 50 years.
See also: US-China trade truce: Reprieve or realignment?
As a result, non-US stocks’ weight in the MSCI All Country World Investable Market Index (IMI) sharply reversed the declining path they had followed since 2008. Non-US stocks’ capitalisation weight reached a historic low among the index’s 8,390 constituents at the end of 2024, when they had once composed 70% of the global equity universe.
“Souring fundamentals and the shock to consumer confidence — even after the 90-day tariff pause — point to continued downside risk for US equities,” say Rao and Gupta.
See also: Beyond the trade truce: Why Chinese stocks deserve a nuanced approach
US equity dominance could shift
While the US equity market has meaningfully outperformed its global peers for much of the post-GFC era, historical data suggest these cycles can — and do — shift, say the research analysts.
“Over the last five decades, leadership in the home-bias premium (the relative return of a country over the broad market, excluding that country) has rotated multiple times,” they note. “Japan’s meteoric rise in the 1970s and 1980s (when the US faced stagflation) gave way to Europe’s strength in the 1990s to late 2000s, followed by the resource-driven surge in Australia and Canada throughout the 2000s to early 2010s. More recently, the US assumed the lead following the GFC.”
Home bias is global. MSCI’s analysis of approximately US$10 trillion in exchange-traded fund (ETF) holdings across “several major domiciles” found that investors consistently overweight their domestic equity positions relative to a neutral global benchmark.
In the US, where wealth advisors and individual investors are the primary users of ETFs, there is about a 15% overweight to domestic stocks. Other markets, particularly Japan, India and China, display even stronger home biases, according to the analysts.
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“While familiarity, regulatory constraints and tax considerations can sometimes justify a home bias — especially for investors who need to match local currency liabilities — it can also stem from behavioral preferences,” they note. “Consistent with our and others’ research, home bias is often the single largest tilt in equity portfolios.”
Yet, US mega-caps were more profitable, though still pricier, than other markets; US mega-caps remain the most expensive segment of the global equity universe, even after April’s abrupt market disruption, says MSCI.
“We found that several European countries boast stronger real earnings growth at comparatively lower valuations than in the past, and India’s elevated multiples appear more mid-range in the context of its stronger growth outlook,” add the analysts.
A tripolar world
MSCI notes a shift into “more-distinct regional camps” since 2010, implying that global diversification benefits may be stronger now than on the heels of the GFC.
“For example, Canada’s trade ties had been drawing it closer to the US as well as to Europe. China has become more distinctly EM than other emerging economies, in part because it represents such a large share of the EM market today,” say the analysts. “Meanwhile, Japan, Australia and Saudi Arabia still straddle all three regions, reflecting their connections to both developed and emerging markets.”
Is now the time to leave home bias behind? It may appear so, especially for US-based investors, write Rao and Gupta.
“Taken together, the US market’s recent struggles, the persistence of home bias among asset allocators and individual investors, and the renewed opportunities outside the US, could signal avenues for investors looking to reassess geographic exposures,” they add.
Charts: MSCI
Photo: Bloomberg
