As the era of artificially low interest rates has come to end, North American investors are increasingly embracing international equity markets due to their attractive valuations, strong earnings growth potential and significant long term underperformance versus US peers. 

 John Krystofik, Liquidnet’s head of international equity sales, Americas said: “Should this period of elevated interest rates and US dollar weakness persist, it sets the backdrop for higher levels of overseas trading to continue for quite some time.”

Notable Trends & Macro Drivers

The fall of last year marked a pivot to international equity markets from North American investors with a focus on the reopening of the Chinese economy. The relative cheapness of the Chinese equity market was too difficult for many to ignore as the country’s economy restarted and a huge wave of pent-up domestic demand was unleashed. Krystofik noted that the oversold nature of a variety sectors in China at that time rivaled that of the Japanese after the bursting of the country’s epic equity market bubble in the early 90’s. Investors looked for different ways to get exposure to this rebound and also chose undervalued European equities in sectors such as mining, metals and luxury goods.  

North American institutional investors have most recently flocked to Japanese equities, as the country attempts to escape from a decades-long deflationary spiral, with wage increases taking hold and a renewed emphasis on improvement in corporate governance. Many investors also feel that Japan offers another unique way to get exposure the Chinese growth, minus the geopolitical or regulatory risks. Such sentiment was recently emphasized by famed investor Warren Buffett after a rare visit to Japan in April, along with positive commentary pertaining to his investment in the Japanese trading companies.

Many central banks around the world continue to unload their US dollar holdings while heavily accumulating gold. As we think about this de-dollarization trend, it speaks to further US dollar weakness which has historically resulted in decent outperformance for international equities on a relative basis. Krystofik also explained that investors’ positioning is another interesting factor to consider. Inflows into US equities in 2022 were still higher than that of the rest of the world. As a result, the share of US equities as part of the overall global equity market hit an all-time high last year. 

 “All these factors coming together have contributed to a higher appetite for overseas risk,” he added. “I wouldn’t be surprised if the Fed is forced to maintain rates at high levels for several years as inflation remains stubborn and they err on the side of avoiding the policy mistakes of the 1980s.”

The international equity narrative is corroborated by recent fund flow data indicating net inflows into international equities year-to-date, whereas flows to US equities are currently net negative.

Addressing the needs of the buy side

As more and more North American investors look to trade overseas equities, buy side traders look for solutions that go beyond simply giving them access to every liquidity venue.

“Liquidnet not only benefits from its presence in 49 countries, it also offers a full suite of execution tools across dark and lit venues. Our focus on providing liquidity solutions is broad and deep, whether it be through offering a premium suite of algos, execution consulting, program and high touch overnight trading or advanced investment analytics” said Krystofik. 

One of Liquidnet’s differentiating tools is Investment Analytics (IA).

“IA can provide signals to showcase the market microstructure dynamics impacting a stock, which helps a firm make better-informed execution decisions at various time intervals. This offering has been further refined most recently to provide North American investors with more data points helping them with their overseas trading,” added Krystofik.  

“Today’s equities trading landscape is highly competitive and international equity trading is a trend that will only intensify. Buy side traders need to differentiate and Liquidnet can provide them with the right tools and solutions to do so,” Krystofik concluded.