Market Overview
Why International Markets Still Matter
With the domestic economy expected to expand a respectable 2.5% in 2018, why look for investments anywhere else?
Because, when presented with such prospects as India’s projected 7.4% GDP growth, the virtue of respectability looks downright quaint.
The comparison is not exactly fair. India has so much more room to grow than the U.S.: $7,200 per capita GDP as compared to the typical American’s $59,500 spending power, and India has more than three times America’s population. But what was said about respectability can be said about fairness.
The key argument in favor of looking for investment opportunities abroad is the timing of the economic cycle. The United States has been in expansion since 2010. Economists believe it still has considerable upside through 2018, but will it be expressed as dramatically in terms of share price appreciation as it was this past year?
The Organization for Economic Cooperation and Development projects that the U.S. economy will grow at barely two-thirds the rate of the world as a whole in 2018. The top two countries for projected real GDP growth are, to no one’s surprise, India and China. By this measure, neither country really experienced the Great Recession and, in fact, seem to be slowing down compared to their double-digit 2010 growth. They appear to be contra-cyclical to the American economic sequence and might represent a hedge for a portfolio of U.S. equities.
If any other incentive is needed for geographic diversification, consider the risk as well as the reward. The CBOE volatility index, Wall Street’s “fear gauge,” was bouncing around along historic lows through 2017 and January 2018. Then, almost literally overnight, it tripled. The major indexes whipsawed down and up. The S&P 500 lost 8% of its value in three days before taking a bounce. The Dow Jones Industrial Average, which took only eight trading days to go from 25,000 to 26,000, then lost more than 2,000 points in six trading days. If the Big Board is going to expose us to the same risk levels as exchanges in purportedly less stable regions, maybe it is time we availed ourselves of the same upside opportunities.
People who work in the financial sector for a living tend to use “economy” and “country” as synonyms. It is a convenient way of talking about the effects of independent central banks and taxing authorities, but the real truth is the economy is truly global. Despite the current protectionist mood in the U.S. and elsewhere, just about any company sizable enough to belong in the retail investor’s portfolio probably has international operations of some sort. It is also possible to invest in fast-growth economies by selecting widely held stocks of domestic companies that operate in the markets you want exposure to.
Colgate Palmolive is one of the largest companies in India, leading the markets there for toothpaste, shampoo, and fabric softeners, according to its annual report. Another example: Reuters describes Caterpillar as “a bellwether for industrial demand in China”.
Picking familiar names might be the best way to invest in unfamiliar territories, but it does seem to be the long way around. Considering that these multinationals could also be operating in markets an investor wants to be insulated from, it might be wiser to invest in emerging markets funds.