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CONTRIBUTORS

Peter Nori, CFA

Portfolio Manager/Research Analyst, Templeton Investment Counsel, LLC
United States

Matthew Nagle, CFA

Portfolio Manager/Research Analyst, Templeton Investment Counsel, LLC
United States

Heather Abdinoor, CFA

Portfolio Manager/Research Analyst

Key reasons for international equity allocation

  • Diversification Benefit: The dominance of a few mega-cap names in the US highlights one of the enduring arguments for international investing: diversification. Investing internationally provides broader exposure to various geographies, and industries. This diversification reduces risks tied to specific sectors or countries and lessens dependence on a narrow group of growth companies.
  • Developing Drivers: Investing internationally means participating in global structural trends such as energy transition, infrastructure investment, and defense spending. In Europe, there is a big push of fiscal stimulus reinforcing investment in dual-use technologies, automation, and cybersecurity, supporting a multi-year cycle of capital spending.  Japan, meanwhile, continues to benefit from the latest phase of Abenomics, where ongoing corporate governance reforms, wage growth, and shareholder-return initiatives are supporting both earnings and market participation.
  • Discounted Opportunity: Even after strong gains earlier in the year, forward price-to-earnings ratios remain significantly lower outside the United States.  It is true a softer US dollar has amplified returns for international equities, but it is not a prerequisite for outperformance. International markets have often delivered strong results even when the dollar is stable. Factors such as local economic growth, corporate earnings momentum, valuation catch-up, sector composition, and policy reforms historically have played a more decisive role in driving returns. Currency should be viewed as a potential tailwind, not the main rationale for global diversification. 

2025 belies a long spell of US outperformance

As we explain in this paper, international equities have opened a clear lead over the United States through the first three quarters of 2025, outperforming by around ten percentage points. The gap emerged early in the year, marking one of the strongest starts for developed markets outside the United States in over a decade, and it has persisted as investors rotated toward attractively valued markets and sectors with different factor exposures, particularly financials and industrials. A softer US dollar has amplified overseas returns in dollar terms, while policy support in Europe, including large-scale infrastructure and defence initiatives, has reinforced sentiment.

Our conclusion: It’s not too late

Making the case for international equities does not mean turning away from US markets. The United States remains home to many world-class companies, and its innovation ecosystem continues to lead in transformative areas such as artificial intelligence and biotechnology. However, the case for international investing has never been about choosing one market over another. It is about recognizing that compelling opportunities exist beyond US borders—often at more attractive valuations, with different sources of growth and risk.

For investors who have been underweight international equities, it is not too late to reconsider. The long-term opportunity remains intact, and recent market dynamics suggest that the tide may be turning. Valuation gaps are still wide by historical standards, diversification benefits are clear, and early signs of a sustained rotation are emerging. Add to this the potential tailwinds from currency trends, policy support in key regions, and a broader earnings recovery, and the argument for a more balanced global allocation becomes stronger. In an environment where leadership is likely to be more dispersed than in the past decade, international equities deserve a closer look as part of a forward-looking portfolio strategy.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal. Past performance is no guarantee of future results.

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

Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.

Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks.

International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically.

Investments in fast-growing industries like the technology sector (which historically has been volatile) could result in increased price fluctuation, especially over the short term, due to the rapid pace of product change and development and changes in government regulation of companies emphasizing scientific or technological advancement or regulatory approval for new drugs and medical instruments.

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. Past performance does not guarantee future results.

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