James Alexander Booth
United Kingdom
5m
Hello to Copiers and Followers, The Nasdaq has recently had a good run higher, meanwhile, defensive stocks and overseas stocks have lagged. I think it's important to remember the underlying trend has been for overseas stocks to outperform US stocks. This trend started in the first first half of the year. The MSCI World ex USA Index surged by approximately 17% year-to-date through June 30, 2025, compared to a 5% gain for the S&P 500, marking the widest margin of outperformance since 1999. This trend began in mid-October 2022, with international stocks, measured by the MSCI EAFE Index, consistently outperforming the S&P 500 through 2025. Notably, in the first quarter of 2025, the MSCI EAFE outperformed the S&P 500 by 11.14%, the strongest relative performance since 2002. I believe this to be a significant trend that I expect to rexecert itself based on valuation differences, with the United States valuations close to record valuation. Data shows that fund managers and retail investors are near extreme allocation to US stocks. Throughout history these excessive allocations have mean reverted, as have valuations. I remain cautious about US stocks based on valuation and the rapid pace of debt growth, hence my allocation to high growth overseas stocks and sectors such as healthcare which will benefit from the secular trend of aging populatikns. The Nasdaq has recently enjoyed a strong rally, driven by technology and growth stocks, while defensive sectors and international markets have temporarily underperformed. However, this short-term divergence masks a significant longer-term trend: international stocks have outperformed U.S. stocks since mid-October 2022. The MSCI World ex USA Index surged approximately 17% year-to-date through June 30, 2025, compared to a modest 5% gain for the S&P 500, marking the widest margin of outperformance since 1999. In Q1 2025 alone, the MSCI EAFE Index outperformed the S&P 500 by 11.14%, the strongest relative performance since 2002. This trend is driven by compelling fundamentals. U.S. stock valuations, particularly in growth-heavy indices like the Nasdaq, are near historic highs, with the S&P 500’s price-to-earnings ratio approaching levels seen during past market peaks. Data from sources like the Bank of America Fund Manager Survey indicates that fund managers and retail investors are heavily overweight U.S. equities, with allocations nearing extreme levels. Historically, such overcrowding has preceded mean reversion, where overvalued assets correct, and capital flows to undervalued opportunities. In contrast, international markets, particularly in Europe and emerging economies, offer more attractive valuations. For instance, the MSCI EAFE’s forward P/E ratio is significantly lower than the S&P 500’s, providing a margin of safety and growth potential.My cautious stance on U.S. stocks is further reinforced by macroeconomic concerns, notably the rapid pace of U.S. debt growth. The Congressional Budget Office projects the U.S. debt-to-GDP ratio will continue rising, potentially crowding out private investment and increasing market volatility. Meanwhile, international markets benefit from structural tailwinds, including undervaluation, improving economic policies in regions like Europe, and robust growth in select emerging markets.My portfolio allocation reflects this outlook. I favor high-growth overseas stocks, particularly in markets with strong fundamentals and lower valuations, such as Asia-Pacific and select European sectors. Additionally, I am overweight in healthcare, a sector poised to benefit from the secular trend of aging populations globally. The United Nations projects the global population aged 65+ will grow by 50% by 2050, driving demand for healthcare services, pharmaceuticals, and medical technology. Healthcare stocks, often considered defensive, also offer growth potential and resilience during economic downturns, making them a compelling complement to international equities. While the Nasdaq’s recent strength highlights the momentum in U.S. growth stocks, history suggests that valuation extremes and excessive allocations eventually correct. The outperformance of international stocks since mid-2022, combined with favorable valuations and macroeconomic trends, supports my expectation that this trend will reassert itself. By maintaining exposure to high-growth overseas markets and healthcare, I aim to capitalize on these opportunities while mitigating risks tied to U.S. market overvaluation and debt dynamics. Regards, Jim
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