Investors in U.S. stocks are expected to have a negative .5% return on their investment in domestic equities. The U.S. stock market may very well be ending its worst decade ever. This is a great time to change your thinking and attitude toward foreign stock markets. Diversification, finding low valuations, finding growth opportunties and taking advantage of long-term currency adjustments – these are all good reasons to add, or increase, international stock exposure in your portfolio allocation.
Go Global
Going global is a good, sensible theme for 2010. It’s one of the few things that passive and active investors can agree on, even though they have opposite reasons. Passive investors believe that you can’t beat the market, so they favor a little-bit-of-everything approach to reduce the risk from any one investment going bad. By their philosophy, the maximum diversification comes from spreading your bets all over the globe, not just in your home country. Ideally, the passive investing camp says, Americans’ investment in U.S. stocks should be no higher than U.S. stocks’ share of global market capitalization. That share has fallen from 70% in 1970 to 48% in 2009, according to MSCI Barra (MXB), which calculates market indexes.
Most Equity Investing is Domestic
You can even argue that Americans should underweight U.S. stocks to offset their heavy exposure to the U.S. through the homes they own on American soil. Not many Americans are that internationally diversified. A typical 401(k) in the U.S. has about five times as much invested in U.S. stocks as in foreign stocks, according to a survey by Hewitt Associates (HEW).
Diversification and Greater Investment Returns
Active investors are also exploring investments abroad, but not just for diversification. In contrast to index-fund investors, they believe you can beat the market—and many happen to think that some of the best bargains for 2010 lie outside the U.S., in markets that have been less picked over by professionals. An investor who miraculously managed to select the top 10 stocks in the world in each market sector each year for the eight years through December 2008 would have had a cumulative return of almost 7,000%, says MFS Investment Management, the Boston-based fund manager. In contrast, MFS adds, an equally foresighted investor who was restricted to the top-performing stocks in the Standard & Poor’s 500-stock index would have had a cumulative return of just under 1,500%. In other words, if you have any faith in your stockpicking, you will want to roam the world for candidates.
Whatever their motivation, many Americans are likely to intensify their search for investments abroad in the coming year. An online investors’ survey for Bloomberg BusinessWeek in early December found that 40% of American investors plan to increase their exposure to international stocks over the next five years, up from 22% a year ago.
The survey included 770 Americans as well as 158 international investors who had been recruited to participate in periodic online polls by Bloomberg BusinessWeek Research Services. Some things don’t change quickly, though: Asked which stock market would produce the best returns over the next year, Americans were still more likely to pick the U.S. than any other country. Among foreign investors surveyed, the U.S. came in fourth after China, India, and Brazil.
U.S. Stock Market Not as Dominant
Those non-U.S. investors may be on to something. In comparison with the outlook in the recuperating U.S., prospects for growth are much stronger in Asia and in resource-rich nations such as Brazil, Canada, and Australia, where business confidence recently reached its highest level in seven years. “The U.S. economy, with all due respect, is not such a dominant part of the global economy as it used to be. We’re going to have decoupling” of other countries from the U.S. in terms of economic performance, says Oded Shenkar, a professor at Ohio State University’s Fisher College of Business. The case for going global is even stronger if you believe that the dollar will sink in 2010. Returns on foreign stocks and bonds are worth more to Americans when the dollar falls against other currencies. The Federal Reserve has vowed to keep short-term interest rates extremely low until the U.S. economy gains strength, which may not be until summer or later. Low U.S. rates put downward pressure on the currency.
Multinationals
Buying multinationals is an easy way to bet on global growth without mucking about in names you’ve never heard of. Not just any multinational will do, though. Makers of consumer staples that serve the growing markets of Asia and Latin America are a good bet for 2010, says Rajiv Jain, head of international equities for Vontobel Asset Management in New York. Diageo is one, of course. Others include Coca-Cola (KO), Nestlé, McDonald’s (MCD), and BAT (BTI) (if owning a tobacco company doesn’t bother you). Many of these companies have handsome dividend yields as well as price-earnings multiples that are historically low in comparison with those of growth stocks, Jain says.
If you want even more exposure to growth in the developing world, try a company like Nestlé India—not a multinational, of course—which has had 11 consecutive quarters of strong revenue growth. “If you look at their numbers, you would never know there was a recession,” says Jain.
In contrast, this is not the best year to go all-in with industrial companies. There is still massive overcapacity in manufacturing in the U.S. despite plant shutdowns and layoffs. China made its own excess of productive capacity worse when it staved off an economic slump by building plants, equipment, infrastructure, and housing.
The tech sector should do somewhat better than general manufacturing because it enjoys shorter product cycles: If customers have any money at all, they tend to replace their computers and communications gear when the stuff becomes obsolete. Worldwide semiconductor sales rebounded more than 50% from their February 2009 lows through October, notes economist Edward Yardeni of Yardeni Research in Great Neck, N.Y. But tech stocks have risen a lot from their nadirs, so they’re no great bargains at current prices.
Banks and other financial companies don’t look like good deals, either. They continue to be weighed down by weak loans and investments that were made during the go-go years.
Contributor: BusinessWeek
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- Diversification at Harvard
- Emerging Market Equities – BRICs and Other Considerations
- Emerging Markets in Your Portfolio
- International Investing
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