Last Updated: 03 October 2025
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Snapshot → The US still dominates global portfolios (65% of MSCI ACWI; ~25% of foreign investor holdings in Treasuries), but valuations are stretched (~22.6x forward P/E, a 20-year high). With USD–equity correlations shifting, a weaker dollar no longer guarantees US outperformance, raising the risk of FX drag. International markets now offer alpha via valuation discounts (scope for multiple expansion), structural reforms (Europe’s Draghi Report, Japan governance, India’s ratings upgrade), and EM carry (local debt yields ~6.3% vs. US Treasuries ~4.0%). The question for investors: can allocations abroad be reframed not just as diversification, but as a genuine source of returns?
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For more than a decade, US equity markets have been on a historic bull run, with the US dollar appreciating steadily for much of the past 35 years. For global investors, allocating outside the US has often been less about chasing higher returns and more about seeking diversification benefits. While US exceptionalism is likely to continue this decade, stretched valuations and the premium attached to US assets, alongside a softening dollar and evolving global conditions now create a case for investors to look internationally not just for diversification, but also for incremental returns and alpha generation.
Currently, the US is heavily overweight in most global portfolios. It makes up about 65% of the MSCI All Country World Index, with the next largest allocation being Europe ex-UK at only ~11%. Even among foreign investors, exposure to US equity markets is around 17%, while US Treasuries account for ~25% of allocations. Over the past decade, the US has outperformed the rest of the world by roughly 4x and for foreign investors, this outperformance was amplified by dollar appreciation, which added a positive FX carry
Source: Marketwatch, SPX (Blue) v/s MSCI ACWI ex-US IMI (Black)
But the correlation between the US dollar and US equities has been shifting. In recent years (post-pandemic), periods of dollar strength have not always coincided with equity outperformance, meaning investors face greater FX drag risk on US exposure. This isn’t the first time global capital flows have reorganized. A similar dynamic occured post–dotcom bubble era and into the pre-2008 cycle, when the US outperformed global peers despite dollar weakness.
Although global equities are not cheap, valuations still have room for multiples to expand, particularly outside the US. In contrast, US equity multiples are stretched and at a 20-year high (curently at ~24.5x forward P/E), limiting further upside. A weaker US dollar provides an additional tailwind to international outperformance.
By sector, the US is broadly expensive, with healthcare the only major sector still relatively undervalued. At the same time, earnings growth across international markets (ex-China) is converging toward US levels, reducing the growth premium investors historically paid for US exposure. Taken together, these factors strengthen the case for allocating more capital to international markets.
Over the past decade, Europe’s fiscal austerity contributed to structurally weaker growth relative to peers. That backdrop is now shifting. The Draghi Report (2023) has called for a step-change in public and private investment, particularly in the energy transition, digital infrastructure, and critical raw materials. Momentum is also building for greater use of EU-level financing tools, while recent constitutional changes in Germany (2025) enabling higher defense spending underscore the policy pivot. Together, these developments point to stronger productivity gains and potential re-rating opportunities in European infrastructure and industrial equities.
Japan has made significant progress on corporate governance. The reduction in listed subsidiaries signals a cleaner ownership structure, while the rise in independent directors, share buybacks, and activist engagement reflects a shift toward greater shareholder alignment. These reforms support higher returns on equity and renewed investor interest in Japanese equities.
India continues to stand out as a high-quality growth market. The recent sovereign ratings upgrade has reinforced investor confidence, and with ROE levels now competing with the US, valuations appear more justified. Resilient domestic demand, fiscal consolidation, and robust FX buffers position India as a core EM allocation.
Emerging markets more broadly are benefiting from a decline in policy uncertainty. Importantly, the US debt/GDP ratio (~120% and rising) highlights that fiscal sustainability is not solely an EM issue (vs ~70% for EMs). Meanwhile, US yields to worst (~4.5%) are converging toward EM sovereign levels (~6.4%), narrowing the spread advantage. Against this backdrop, EM local-currency debt looks attractive given high real yields, the prospect of central bank rate cuts, and meaningful carry benefits.
