Key Takeaways
- International equities outperformed the U.S. by over 10% YTD.
- U.S. equities remain concentrated, while international markets offer broader diversification.
- A weakening dollar has enhanced returns from non-U.S. assets.
- Currency movements impact short-term returns but add little long-term value.
The overall U.S. equity market has fully recovered from its April lows, landing in an essentially flat position as of 5/31/2025. However, it’s been a wild ride for many investors. In contrast, international markets have outperformed significantly, with some regions delivering over 10% higher returns than the U.S.
International Markets: A Broader Base of Opportunity
The U.S. market remains highly concentrated, dominated by a small number of large-cap growth stocks. These names are acutely sensitive to changes in sentiment, regulatory shifts, and capital spending. International markets, in comparison, tend to offer broader sector exposure and more balanced composition.
Europe, for example, has limited exposure to these large growth stocks and offers a more balanced sector mix. This year, strength in banks and defensive sectors has helped Europe become the top-performing equity market, delivering a 21% return YTD.
Rising concerns about the U.S. fiscal deficit, slower growth and trade and tax policy uncertainty have impacted international capital flows with direct implications for asset prices and currency values. The U.S. dollar declined roughly 8% this year, while international assets received an additional lift, especially in equity and government bond markets.
Why Global Diversification Matters
In a world where countries are moving through very different economic and policy regimes, global diversification remains a key approach. It helps reduce concentration risk and provides a smoother investment experience across different environments.
Adding assets like international minimum-volatility equities and alternatives such as gold has further strengthened portfolio resilience this year. As the chart below shows, the global balanced 60/40 portfolio showed greater stability than the S&P 500 during tariff-driven volatility.
Price Changes Normalized as of 11/1/2024
Source: Bloomberg
Currency: Don’t Bet the House
This year’s volatility has raised questions about how to think about currency exposure in global portfolios. The key consideration is whether currency offers a risk premium that aligns with the portfolio’s objective or helps diversify total risk.
Unlike stocks or bonds, currencies don’t generate income or cash flows. Exchange rates are driven by inflation or interest rate differences, which can’t move in one direction indefinitely. Although the dollar has been strong in recent years, current dynamics have shifted.
At New Frontier, we do not take active currency risk in our strategic global portfolios or make short-term directional bets. For international equities, currency hedging adds cost, complexity, and taxes, with no improvement on long-term return.
In the short term, adding currency exposure to local market returns supports geographic diversification and reflects each country’s broader economic and policy environment. Consequently, we do not actively hedge currency in our global portfolios. On the fixed income side, we emphasize U.S. Treasurys, with only modest exposure to international government bonds, given their lower yields and additional currency risk.