Sector Makeups Are Very Different Around the World

Markets Blog Posted by lplresearch

Thursday, April 15, 2021

Is it time to add international stocks to portfolios? Valuations are attractive in Europe and Japan relative to the United States. The environment is favorable for the value style—and international markets are full of value stocks that should benefit from economic reopening. We expect the U.S. dollar to move lower, which would boost international returns for U.S.-based investors. And we like the idea of diversification. So after such a tremendous rally in U.S. stocks—more than 80% for the S&P 500 Index since March 23, 2020—is it time for tactical investors to make a move?

There are many elements to making this decision, but an important one that some may overlook is the stark differences in sector composition across these international markets, as shown in the LPL Chart of the Day.

“The huge allocation to technology and internet companies in the U.S. and China stock indexes has offered a big advantage during the pandemic compared with Europe and Japan,” according to LPL Equity Strategist Jeffrey Buchbinder. “The progress on COVID-19 and the reopening of global economies suggest that an opportunity for European and Japanese stocks may be coming soon, but we still think the fundamentals favor the U.S. and Asia-focused emerging markets.”

View enlarged chart.

At first glance, the wide range of technology sector weightings stands out—27% in the S&P 500 Index compared with only 8% in Europe and 6% in China. But if we add digital media (think Facebook, Google, and Netflix) and e-commerce (think Amazon and Alibaba) to technology—so called “tech plus”—China’s weighting goes all the way up to 50%. The U.S. “tech plus” weighting is 39%, Japan’s is 17%, while Europe’s is just 10%.

The U.S. and China are more growth oriented markets—with a lot of so-called “stay-at-home stocks” and secular growth stories. Europe, on the other hand, is more focused on “old economy” sectors such as financials, industrials, healthcare, and consumer. Japan has healthy technology exposure and is generally more economically sensitive than Europe, which we like. Industrials and consumer discretionary make up the biggest portions of the MSCI Japan Index, followed by technology, supporting our preference for Japan over Europe.

So should you take some profits in your U.S. stocks and add to developed international? Based on these sector allocations, and the relative outperformance of the U.S. economy compared with Europe’s and Japan’s, we don’t think so. Our technology sector view remains positive, we favor balanced exposure between growth and value, and we prefer economic sensitivity. That keeps us in the U.S. and emerging markets, including China, right now. But we’ll keep watching.


This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

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All index and market data from FactSet and MarketWatch.

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