Attractive returns and a wide range of opportunities are among the reasons why the U.S. market has historically dominated among investors. However, one market observer sees U.S. stocks as expensive and is currently looking for opportunities in cheaper markets that he believes can deliver better risk-adjusted returns. “We think markets outside the U.S. are more attractive from a valuation perspective than in the U.S.,” Morningstar CEO Kunal Kapoor told CNBC Pro earlier this month, before he made the remarks. Previously, the U.S. stock market has risen sharply this year, with the S&P 500 index rising 26% so far. “Many U.S. large-cap stocks appear expensive and therefore have lower returns going forward,” Morningstar analysts wrote in a 2025 outlook note. Looking to 2025, they noted, “asset class valuation models point to lower U.S. returns. ” Against this backdrop, the firm maintains its “market weight” stance on U.S. equities but remains bullish on cheap stocks in sectors such as energy trading below their fair value. “I’m not suggesting that investors should look entirely outside the U.S., but rather our recommendation is that they may partially restructure their portfolios to increase their holdings of non-U.S. stocks over the next five to seven years, as forward returns are likely to Higher outside the United States,” Kapoor explained. ‘Attractive areas’ Looking ahead, Morningstar executives are optimistic about markets such as Japan and China that offer opportunities in “attractive areas.” Specifically, the Chinese stock market “stands out from a valuation perspective because of the gap between the fair value of many well-known companies and their current stock prices,” Kapoor explained. Morningstar’s optimism on China comes as the Chinese government has introduced a series of stimulus measures, including interest rate cuts, lower bank cash reserve requirements, easing property purchase rules and liquidity support for the stock market, and most recently a debt swap program. The firm acknowledged that investing in the Chinese market does bring geopolitical uncertainty, adding that “prudent management of total portfolio risk is critical, including adjusting total positions to address various regulatory, geopolitical and economic risks.” Morningstar The company sees opportunities in “higher quality, moat names” such as fast-food chain Yum China Holdings and technology giant Tencent. An economic moat refers to a company’s competitive advantage. “Undervalued Segments” In Japan, Kapoor likes the market to offer “undervalued segments.” Japanese markets have been on a downward trend of late, but the benchmark Nikkei 225, which includes the top 225 companies on the Tokyo Stock Exchange, is up 14.6% since the start of the year, while the Topix is up 12.2%. Kapur noted that factors such as changes in corporate capital allocation strategies and the recently launched Japan ISA scheme, which allows residents to invest in the stock market without paying dividends or capital gains tax, have put Japan in the spotlight for investors. “That’s why you see investors like Warren Buffett holding large stakes in Japan,” he added.
