Global Allocation Shift: Why Capital Group is Eyeing International Markets

One of the world’s largest asset managers, Capital Group, revealed a strategic tilt toward non-U.S. equities, citing increasing risks in the American market and untapped opportunities abroad. The move signals a critical shift in institutional investor sentiment, where diversification away from U.S. benchmarks is no longer just optional — it is becoming a necessity.

Capital Group emphasized that structural reforms, attractive valuations, and favorable policy settings in foreign markets are presenting stronger relative value compared to the U.S., which is now weighed down by political gridlock and rising uncertainty following the federal government shutdown.

U.S. Market Headwinds: Shutdown and Data Delays

The U.S. market has long been considered the global leader for equity investors. However, ongoing political dysfunction in Washington has eroded confidence, particularly after the latest government shutdown that threatens to delay crucial data such as nonfarm payrolls and inflation figures.

Without reliable data, the Federal Reserve’s next steps are harder to predict. Investors worry this could mean higher volatility in the short term, with limited visibility into the underlying economy. Combined with expensive U.S. stock valuations relative to global peers, the risks are stacking higher.

Opportunities Abroad: Reform and Valuation Advantage

Capital Group’s report points out that many non-U.S. markets are undergoing reforms that could unlock significant equity value. From corporate governance improvements in Japan and South Korea, to fiscal stimulus and industrial policy upgrades in Europe and emerging Asia, institutional investors see a chance to capture growth before it is fully priced in.

Valuation spreads also favor international equities. While U.S. stocks trade at stretched multiples, many European, Asian, and Latin American names remain discounted, particularly in the financials, infrastructure, and consumer staples sectors. For global asset managers, this offers a compelling arbitrage opportunity.

Currency and Yield Dynamics Support the Move

A softer U.S. dollar has added another layer of attraction to foreign markets. Dollar weakness increases the relative return of non-U.S. investments when converted back into U.S. currency, enhancing the appeal of global diversification.

Additionally, certain regions show more favorable yield curves and macro balance sheets compared to the U.S., where inverted curves still pose recessionary risks. This divergence may further incentivize investors to deploy capital overseas.

Risks to the Strategy

Despite the appeal of global diversification, shifting allocations outside the U.S. carries several risks:

• Geopolitical Volatility: Emerging markets face political instability, policy swings, and occasional capital flow shocks.

• Global Growth Divergence: Economic recoveries are uneven, with some regions showing resilience while others lag.

• FX Volatility: While a weaker dollar helps, sudden reversals in currency trends could erode gains.

• Execution Costs: Trading, taxation, and liquidity factors can weigh on cross-border portfolio shifts.

Investor Sentiment: The Push Beyond U.S. Benchmarks

The broader implication of Capital Group’s decision is clear: large asset managers are no longer willing to over-concentrate portfolios in U.S. equities, especially with valuations stretched and politics uncertain. Institutional flows into global and emerging market ETFs have already begun to pick up, reflecting growing demand for geographic diversification.

For retail investors, this highlights the importance of global portfolio exposure as a hedge against U.S. volatility. With opportunities emerging across Asia, Europe, and Latin America, diversification could enhance returns while reducing risk concentration.

Conclusion

Capital Group’s pivot to non-U.S. equities marks a watershed moment for global investing. With U.S. stocks under pressure from political instability, high valuations, and monetary policy uncertainty, international markets are stepping into the spotlight.

For investors, the message is clear: now may be the time to look beyond Wall Street, as reforms and relative value abroad create new opportunities in global equities.