By Justin Thomson

The outlook for international equities amid the shifting market environment

November 2024 -

The rate-cutting environment will be particularly beneficial for ex-US markets.

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When assessing the outlook for any asset class, the tactical framework I would use is threefold – policy, positioning, valuations. From a strategic framework, it is about assessing the impact of change in the world.

The period between the GFC and COVID was a very unusual one: it was a period of benign disinflation, ultra-low interest rates and low volatility. With the inflation and interest rate shocks of 2022, that world changed and — notwithstanding the AI boom— so have the equity market dynamics. The rate-cutting cycle around the world, excluding Japan, will benefit international markets, particularly those economies that fund in dollars. After an extended period of underperformance versus the US, many investors — both active and passive are over-indexed to US equities. Ex-US Equities are demonstrably cheaper. This is not just about index construction — expensive tech versus cheap financials — but, comparing sector with sector, like with like, ex-US markets are cheaper.

When I think about investing in change, here are the things that have piqued my interest. Global value, where the valuation discount of the value index versus its growth equivalent is at a record high. A pick-up in non-tech CAPEX such as factory automation and relocating supply chains will benefit the industrial sector and certain sections of the commodity markets. Global small caps, which routinely trade at a premium to large caps and have recently been heavily discounted. At a country level, the macro picture in China continues to cast a shadow and we will have to get used to a structural downshift in the 5-6% growth rate clocked over the last decades. The UK, much maligned and under-owned, can do well assuming the incoming government delivers on the business-friendly overtures. The medium-term bull case in Japan holds as Corporate Japan transforms from market share to profit maximization. And finally, given the recent positive returns from Japan, Korea is worth following as it seeks to emulate its neighbour's value-up strategy.

Justin Thomson Head of International Equity and CIO

Justin Thomson is the head of International Equity. Justin is a member of the Management Committee and the chairman of the International Equity Steering Committee. He is a member of the Asset Allocation and ESG Committees. He also is the chief investment officer for International Equities. He is a vice president of T. Rowe Price Group, Inc., and T. Rowe Price International Ltd.

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202408-3827044

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