Many U.S. based investors largely invest in domestic companies and institutions, whether through equity investments in U.S. companies, the purchase of debt issued by those same companies, or debt issued by state and federal governments. However, ignoring the myriad opportunities available outside the United States can potentially hinder performance in the long term.
Of course, there are arguments to this view that are worth noting. First, most large U.S. companies operate globally; in fact, there are numerous companies included in the S&P 500 Index that derive a majority of their revenue from outside of the U.S., hence U.S. investors in the index are already garnering that exposure. Behaviorally, too, investors sometimes take issue with committing capital to an area of the market that is not familiar to them and where it may be difficult to gauge success. Finally, a more recent argument has been focused around performance, as U.S. assets have strongly outperformed in the post-financial crisis era, creating a complacency around the need for foreign exposure.
Our view is twofold. One, over time, globalization has resulted in market-leading companies which are domiciled all over the world. These companies, although they may have their headquarters in Berlin or Tokyo, are likely doing significant business in the U.S. as well as in other markets in which they can be competitive and successful. Two, at this juncture, international assets are trading at attractive valuations. Post financial crisis, international and U.S. equities both rebounded; however, the sovereign debt crisis in Europe and several years of political floundering in Japan created a gap between the gains earned internationally and here in the U.S.
Several risks remain for the outlook of international stocks, not least of which is political change, particularly in the notable markets of Germany, France, and England. While we are currently underweight international developed stocks as a result of this uncertainty, we believe that the outlook is likely to continue to improve, and we encourage our clients to talk to us about why diversifying might make sense, both in the near term and longer term strategic allocation.
Q2 2017 - Economic and Market Perspective
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