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One More Potential Reason to Invest Abroad

Foreign companies tend to have less debt than their U.S. counterparts.

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After a lost decade for foreign stocks relative to U.S. equities, many predict that foreign shares will win the 2020s. Such forecasts mostly boil down to the valuation gap between U.S. shares and their less-expensive international counterparts. As of June 30, 2020, Morningstar Investment Management's forecast was a nominal 10-year annualized return of 7.4% for international developed stocks versus just 1.9% for U.S. stocks.

While all forecasts should be taken with a big grain of salt, this alone may compel you to increase your foreign-stock allocation. But there's another potential reason: balance-sheet risk. Overall, U.S. companies carry more debt than international ones. The companies in the S&P 500 have average debt/capital ratio of 45.4% versus just 32.6% on average for companies in the MSCI All-Country World ex USA Index.

Kevin McDevitt does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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