US versus non-US equities: Exploring a lesser-known distinction
June 21, 2017
Unless otherwise noted, companies mentioned by name in this material are not currently held in any investment strategy managed by the author.
Most deliberations about why investors should diversify globally start and end with the same topic: geography. Investors are implored to keep a global mindset because emerging markets are growing, or because Europe is recovering, or perhaps because Japanese Prime Minister Shinzo Abe has a new plan to turn around Japan’s economy. Another common reason is that US valuations are stretched, while non-US multiples are relatively low. Investors are also often reminded of the diversification benefits that can occur if stock market prices across various geographies are not highly correlated with one another.
All of these arguments have merit. To those arguments, we'd like to add one more view, by framing the analysis as one that distinguishes between two groups: US-based companies and non-US companies. By doing so, we put this fact into stark relief: More and more of the world’s most competitive firms are headquartered, and have their shares listed, outside the United States. Indeed, we observe that there are fewer dominant US firms in a number of important sectors, and in some sectors there are essentially no US-based firms at all (see chart below).
Data: MSCI, via FactSet, for industries represented within the MSCI All Country World Index. As of May 2017. Red vertical line denotes the overall US weight, as percentage of total global market capitalization.
A closer look at a shrinking US presence
The automobile manufacturing industry offers a good example of dwindling US dominance in the global market. As reported by FactSet (citing data within the MSCI All Country World Index) as of mid-May 2017, US-domiciled companies represent only 13% of the aggregate value of the top 50 manufacturers in the industry worldwide. One could argue that one of the top-two US firms, Tesla, is really more of a technology company than an automobile manufacturer. German names represent nearly 1.5 times the US weight, while Japanese companies represent 2.5 times the US weight.1
Many investors have witnessed the gradual decline in global market share held in some industries such as automobiles. Yet several US industries are already nearly or totally dominated by non-US players. One that might come as a surprise is — of all things — cement, in which there is no major US competitor. (In the chart above, cement is included in the construction materials industry.) Although companies such as Vulcan Materials and Martin Marietta Materials are of significant scale, their businesses are centered on so-called aggregates (materials like gravel, crushed rock, and sand) instead of cement. The big global players are LafargeHolcim (formed by the merger of Swiss and French companies), HeidelbergCement (headquartered in Germany), CRH (based in Ireland), and Cemex (based in Mexico). These non-US names account for a significant percentage of total US cement production. In doing so, they set up an ironic possibility: One of the greatest beneficiaries of the building of a border wall on the US southern frontier would likely be Mexico’s own Cemex.
As we look across other systemically important sectors, the same picture is painted repeatedly. Some examples that we think are particularly telling:
- The metals and mining industries have seen a virtual disappearance of major US players. Two Australian firms (BHP Billiton and Rio Tinto2) hold dominant market share, along with a collection of companies rooted in places like South Africa.
- Tires have come to be sold and produced mainly by non-US firms such as Michelin, which also sells under legacy US brands like BF Goodrich and Uniroyal. There are also Japan’s Bridgestone (also sold as Firestone) and Sumitomo Rubber3 (Dunlop and Falken). The US-based Goodyear now has well below 15% of the US replacement tire market, and not much more of the market for tires on new cars.
- Companies that manufacture televisions constitute another group that is now under complete dominance by non-US companies. Long gone are the glory days of US stalwarts like RCA and Zenith in an industry now ruled by Korea’s Samsung4 and LG, together with Japan’s Sony.
- Household appliances have also come under non-US dominance. Sweden’s Electrolux, as well as European, Japanese, and Korean players have long challenged (and gained market share on) America’s long-standing beacon of household machinery, Whirlpool. General Electric, another US firm that was once prolific in this space, recently sold its appliance division to China’s Haier Electronics Group. As a result, non-US firms now dominate some two-thirds of the US appliance market.
- Another sector to become dominated by non-US firms is that of semiconductor memory chips. According to DRAMeXchange, Samsung (appearing yet again), SK Hynix, and Micron Technology had world market shares of 48%, 27%, and 19%, respectively, in the fourth quarter of 2016.
- Maritime shipping to and from the US, other than shipping between two US ports, which is protected by law, is also a non-US affair. With the exception of one tiny Hawaii-based firm, the container ships that transport Asian and European exports to US shores are either European (Danish Maersk Line is a prominent example), Korean, Japanese, or Chinese. And the shipbuilders that make those ships? They left the land of the clipper ships long ago as well: Five of the top 10 shipbuilders in the world are Korean; the others are Japanese and Chinese.
Going where the opportunities are
The bottom line is that in quite a number of industries, US firms are indeed a small and declining part of the narrative. For investors seeking exposure to these industries, it increasingly makes sense to consider investment opportunities in industry-leading companies that exhibit sustainable competitive advantages, many of which are headquartered outside the US.
With these realities in mind, we believe investment opportunities beyond US borders can no longer be ignored.
Non-US equities further supported by macro factors
In addition to the waning influence of US firms at the industry level, there are some more-fundamental economic factors that make non-US equities particularly attractive in today’s market environment. Consider what is transpiring in Europe, for instance. Across the region, political risks appear to be lessening, economic growth is picking up, and earnings are trending positively. What’s more, inflation projections seem to be corroborating this positive outlook.
Europe: Signs of an earnings recovery …
Data: MSCI, via Ned Davis Research (ndr.com). Based on earnings within the MSCI Europe ex UK Index. As of June 2017.
… together with an expected inflation uptick
Data: International Monetary Fund and UBS
Ultimately, macroeconomic trends, together with industry-level leadership outside the US, put forth a strong case for maintaining non-US exposure as part of an adequately diversified investment mix.
1 As of May 15, 2017, the International Value Equity portfolio we oversee held shares of Toyota and BMW, with position weights of approximately 2.5% and 2.0%, respectively. As of the same date, the Global Value Equity portfolio we oversee likewise held shares of Toyota and BMW, with position weights of approximately 2.8% and 1.5%, respectively.
2 As of May 15, 2017, the International Value Equity and Global Value Equity strategies we oversee held this company’s shares, with position weights of approximately 1.3% and 1.5%, respectively.
3 As of May 15, 2017, the International Value Equity and Global Value Equity strategies we oversee held this company’s shares, with position weights of approximately 1.9% within each strategy.
4 As of May 15, 2017, the International Value Equity and Global Value Equity strategies we oversee held this company’s shares, with position weights of approximately 3.4% and 2.4%, respectively.
5 Added here to show that an accelerated – but not overheated – level of inflation appears to be getting traction not just in Europe, but worldwide.
The MSCI ACWI (All Country World Index) Index is a free float-adjusted market capitalization weighted index that is designed to measure equity market performance across developed and emerging markets worldwide.
The MSCI Europe ex UK Index is designed to measure equity market performance across 14 developed countries in Europe, excluding the UK.
The views expressed represent the Manager's assessment of the market environment as of June 2017 and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager's views.
Carefully consider the Funds' investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Funds' prospectuses and their summary prospectuses, which may be obtained by visiting delawarefunds.com/literature or calling 800 362-7500. Investors should read the prospectuses and the summary prospectuses carefully before investing.
IMPORTANT RISK CONSIDERATIONS
Investing involves risk, including the possible loss of principal.
Past performance does not guarantee future results.