Three decades ago, the financial shocks investors worldwide weathered during 2008 might have reverberated less because economies and markets were more defined by national borders and not so intertwined. Now, when one economy or market hits a road bump, many more are just as likely to react, just as much. Affluent U.S. investors understand this and realize the U.S. investments that once were the centerpieces of their portfolios no longer should dominate them.
The Benefits of International Investments
“There has been an increased allocation to international (non-U.S.) investments over the last 20 years,” says George Maris, who manages international, global and U.S. portfolios of large-company stocks for Northern Trust. “Originally, ‘international’ would have been viewed as an interesting diversifier in terms of getting some outsized investment returns at the cost of increased investment volatility.”
Only in the last three decades, however, have U.S. investors found that the higher equity returns in countries with greater economic growth rates outweigh the risks that come with international investing. Moreover, the rise of multinational corporations placed many investors into the global arena by default.
Advancements in national laws and accounting rules as well as more investor-friendly market practices and trading technologies have made the case for global investing in a core stock market portfolio, Maris says. Now, with about half of total world stock market value domiciled outside the United States, suitable risk/reward strategies can be devised irrespective of locale.
Advanced Economies or Emerging Economies
Most analysts divide the global playing field between advanced economies and emerging economies. Advanced industrialized nations, such as Canada and Germany, have long-standing links to the United States through trade and political alliances. As a result, their major home-based companies operate in the same investment environment. Emerging economies, including the so-called BRIC nations — Brazil, Russia, India and China — may some day follow suit. But the fortunes of most companies in these nations still depend on indigenous economic and political trends, which may not track with trends in the major industrialized nations.
“For the emerging markets, it’s still useful to keep that [category] as a distinct asset class,” says retired asset manager Gary Brinson. That means investors need to make a separate decision about including emerging market stocks in a portfolio, just as they would in considering investment grade bonds versus high-yield “junk” bonds.
Still, opportunities and risks in global investing may be more nuanced than a simple division between emerging and developed economies implies. For example, the fates of commercial and investment banks headquartered in developed economies were not uniform in the recent economic crisis, according to Maris.
“In this latest crisis, countries such as the United Kingdom, Ireland and Spain that had an over-extension of credit, especially real estate credit, have suffered just as the United States has,” he says. “However, countries that didn’t have such an over-extension of credit — such as France or Germany — fared much better through this crisis than we have.”
In another vein, Maris says that not all companies in emerging economies are tied primarily to in-country trends, such as consumer spending and local interest rates. Certain emerging countries, such as Brazil, India and China, have spawned giant corporations whose business scope, financial underpinnings and management skills match any multinational corporation based in a developed nation, he says.
Pointing to oil giant Petrobras Brazil, India-based global steelmaker ArcelorMittal and the Bank of China, Maris says, “There are clearly companies within these emerging countries that are global leaders in what they do. They have acted much more like developed market companies than we normally think of with emerging market companies.”
This leaves global investors to face an age-old question: How actively should their portfolios be managed for optimum results and at what cost? For many, a decision to invest globally, like a decision to invest at home, must be made with an eye on the investment management costs and benefits.
The evolution of investor-friendly global investment strategies and convenient vehicles has not advanced to the point that investors can take a passive, long-term point of view, according to Robert Aliber, professor emeritus of international economics and finance at the Booth School of Business of the University of Chicago.
“Long-term foreign investment is an oxymoron,” he says, noting that two or three years is a reasonable time horizon. “You have to be opportunistic.”
Globalization also means that events such as the recent recession and financial crisis wield a far deeper, wider-reaching and longer-lasting impact on the investment landscape than ever before.
“Every time you are given an inflection point, such as a financial crisis, it changes the scenario,” Maris says.
Inflation & Investment Bubbles
Three related themes bear watching as the world struggles to recover: consumer behavior, government policy and investment bubbles. All three will play out globally in the years ahead.
The deleveraging of households is underway in Europe as well as the United States, eroding consumer demand for domestic and foreign goods. For investors, a more cautious consumer means that companies that prospered in a period of economic tranquility may not survive “in a more difficult world where consumers are going to be more conscious of value,” Maris says.
In terms of government policy, Brinson says that fiscal stimulus, generated in almost lock-step fashion by governments around the world, poses a risk.
“I think the effects are not easily known, because in history we’ve never seen such a dramatic period of pumping money into the system,” he says.
Inflation-protected government bonds, issued by the United States and other nations, may be one way to prepare for the consequences of government spending.
Aliber is less worried about inflation, however, than about the next speculative investment bubble. Many investors might agree that housing during the last 10 years, Japanese stocks in the 1980s and the U.S. dot-com craze of the 1990s each constituted a bubble.
But he says spotting developing bubbles now is even harder because, like sound investments, they increasingly disregard borders.
For instance, when crude oil prices in 2008 spiked up to nearly $150 a barrel, “we heard a lot about peak demand,” Aliber says, “but it was all a bubble.”
Despite the potential challenges the global markets face, allocating a portion of their equity investments internationally may help position investors to benefit from the higher economic growth rates being realized by many countries outside the United States. And that may be an opportunity worth exploring.