International markets in broad terms have underperformed the U.S. markets in eight out of the last ten years. Recent geopolitical issues and the COVID crisis have sparked debates about the decline of globalization. It would be easy for an investor to look inward with their investments rather than look outside our borders. Despite the urge to focus solely on U.S. investments, doing this may not be the best course of action.
The Potential Benefits of Globalizing
Globalizing portfolios and incorporating more and diverse asset classes can reduce overall risk, diversify income streams, and provide more growth opportunities. As global capital markets have evolved and matured, the access and liquidity to them has greatly improved. As a global investor, we need to carefully consider an extensive set of available investment choices to construct portfolios that fully address financial needs and requirements. Limiting investment choices to a select few places where companies are domiciled can hinder the path towards an optimal portfolio.
At the security level, one reason to globalize portfolios is the opportunity set for investors greatly expands across all asset classes. Additionally, the proliferation of investment products such as individual country and regional ETFs (exchange traded funds) and international fund managers improve the ability to customize international exposure. Exclusionary type vehicles are also available. For instance, if an investor is nervous about investing in China, there are ETFs that have emerging market ex-China exposure.
Globalizing portfolios is a long-term investment decision. However, there are some interesting tactical benefits to looking at international markets today. At year end, international stocks were trading at a wide discount on price to earnings ratio to U.S. stocks. In fact, the MSCI AC World EX-U.S. Index trades at a 28% discount to the S&P 500.1 Additionally, this same index indicates a dividend yield that is 1.6% higher than the S&P 500.2 Lastly many of the broad-based international indices are more diversified than the S&P 500 where the top 5 names represent 25% of the index.
Is the Globalization Era Dead?
The Russia-Ukraine war along with rising tensions between the U.S, Taiwan, and China have raised concerns about the end of globalization. The post COVID inward focus on production of goods domestically also dealt a blow to globalization. However, what we cannot ignore is that we are all global consumers of goods and information. Through technological innovation and the increased use of social media, individuals gain rapid access to information about the world around them. In managing wealth for clients, we receive many questions equally balanced of how domestic and international events impact their portfolio. Understanding how these global events affect your investment portfolio and additionally having solutions to take advantage of potential opportunities across the globe is a key benefit of managing wealth in a global context.
How Should We Invest?
There is an inherent home bias that investors across the globe employ. A home country bias is the tendency to invest more money in your home country than internationally. Having some home country bias may be warranted but our belief is international exposure should be present. Exposure should not just be concentrated in one asset class like equities. Investors may want to consider globalizing their fixed income investments as well as their real assets. Currency exposure also plays a big factor in international returns and knowing whether you remain hedged or unhedged on a dollar basis can have a large impact on the portfolio.
It is important to know how you are exposed internationally, whether you are managing the investments yourself or using an advisor. Though the drumbeat may be loud to have more and more of your investments domiciled in the U.S., having some international investments may enhance your returns and lower your risk, which is the goal of sound portfolio construction.
The opinions expressed are those of Harrison Financial Services as of March 15, 2023 and are subject to change. There is no guarantee that any forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment or security. Please remember that all investments carry some level of risk, including the potential loss of principal invested. Indexes and/or benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance and are not indicative of any specific investment. Diversification and strategic asset allocation do not assure profit or protect against loss. For more information about Harrison Financial Services, visit hfs.nm.com.
1 JP Morgan Asset Management, 12/31/22
2 JP Morgan Asset Management 12/31/22
