International equities—a compelling diversification opportunity

CONTRIBUTORS

Christopher Peel, CFA

Portfolio Manager, Research Analyst Templeton Global Equity Group

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In April of this year, market commentators began referring to the “Magnificent Seven.”¹ This recently coined term describes a group of seven large technology-focused companies—Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA and Tesla—which have dominated US equity markets in 2023. For the first nine months of the year, this small group of companies has driven the lion’s share of returns in the S&P 500 Index.

Such an unprecedented concentration in a small cluster of stocks presents challenges as well as opportunities. The key challenge is that, due to the size of the Magnificent Seven, investors in the S&P 500 Index are now disproportionately exposed to the future prospects of these stocks. Given this reliance on the fortunes of just seven stocks, we believe that international markets now offer an especially compelling diversification opportunity.

Diversification is an important risk-management strategy in investing, and should always be a factor informing portfolio construction. However, considering recent market trends, we believe that diversification has become especially salient. There now exists a convincing opportunity to diversify capital away from the small band of market leaders dominating the US indexes by increasing allocation to the more attractively valued and more diverse international markets.

Endnote

Source: O’Rourke, Mike CMT. The Closing Print newsletter. JonesTrading. April 27, 2023.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.

Equity securities are subject to price fluctuation and possible loss of principal.

Special risks are associated with investing in foreign securities, including risks associated with political and economic developments, trading practices, availability of information, limited markets and currency exchange rate fluctuations and policies; investments in emerging markets involve heightened risks related to the same factors. Sovereign debt securities are subject to various risks in addition to those relating to debt securities and foreign securities generally, including, but not limited to, the risk that a governmental entity may be unwilling or unable to pay interest and repay principal on its sovereign debt. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments.

China may be subject to considerable degrees of economic, political and social instability. Investments in securities of Chinese issuers involve risks that are specific to China, including certain legal, regulatory, political and economic risks.

There are special risks associated with investments in Greater China, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalization, and exchange control regulations and rapid inflation, all of which can have a negative impact. Investments in Taiwan could be adversely affected by its political and economic relationship with China.

Diversification does not guarantee profit or protect against risk of loss.

Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.

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