International equities have much to offer that can outperform Wall Street say Capital Group PMs
Investing in the ‘secret sauce’ that empowers big tech to thrive may not get investing taste buds tingling, but it could provide some much-needed spice to a bland portfolio.
US-based big tech grabs headlines and excites investors, but in a fast-changing world it’s worth remembering that other options may produce better returns.
In fact, international equities – led by Europe - should step out from the shadows of US peers given their recent strong performance.
Portfolio managers from Capital Group believe that the case for international equities has been strengthened by top-down and bottom-up economics converging.
They point to the weakening US dollar against certain international currencies, Europe’s better-than-expected response to the energy crisis (albeit helped by a mild winter), and China’s re-opening.
With international equities frequently undervalued, there could be some upside ahead.
Where to look?
Semiconductors may not be a sexy investment in the way that some FAANG stocks are, but their place in the increasingly-digital world is paramount.
These materials – often known as microchips - are vital to advanced technology in communications, transportation, healthcare, clean energy, and much more. The Semiconductor Industry Association calls them the “brains of modern electronics.”
For Capital Group PMs Gerald Du Manoir, Sung Lee, and Chris Thomsen, semiconductors is an industry “that appears poised for years of growth” and which is dominated by non-US firms.
With artificial intelligence set to surge, semiconductors will be in greater demand, driving up stock prices for their manufacturers.
Online entertainment is another growth industry, and the PMs acknowledge that while traditional gambling and gaming may bring to mind Las Vegas, in the online world European firms are winning.
While the region’s innovators benefited from early legalisation of online casinos and are now leveraging that in the US, Europe is also providing leading innovation in areas such as music streaming, grocery shopping, and the clean energy transition.
However, the PMs are clear that Europe is not the only region with growth potential.
Japanese tech firms, for example, are evolving and innovating, such as Olympus, known as camera brand, but now “the world’s leading supplier of endoscopes used in medical procedures.”
Healthcare is frequently cited among institutional investors as a focus area, and international firms are among the leading players in developing new pharmaceuticals and other innovations.
Consumer power
Capital Group’s experts also point to the resilience of consumers for strong international equity performance.
Again in Europe, the support given to people during the pandemic has supported consumer goods businesses.
While the post-pandemic years are also helping the aviation industry, there is also secular growth potential here as middle classes expand in developing countries, fuelling demand for air travel.
Finally, the Capital Group portfolio managers highlight the fundamentals of the financial services industry in Europe and Asia.
Firms in these regions are less exposed to interest rate risks than US peers and have generally strong capital positions.
More broadly, the PMs are seeing European and Japanese firms making greater commitments to dividends.
“International equities spanning many industries across the growth and value spectrum provide a diversified opportunity set with valuations that appear reasonable by many measures,” their report concludes.
