Kristen C. from Charleston, SC asks: Good Afternoon Mitch, I’m writing to hear your thoughts about international investing at the current moment. I know the pandemic is still a major issue in many developing countries, and vaccine distribution is nowhere near where it is in the U.S. Curious to hear your thoughts on the global economic recovery and whether now is a good time to have an international allocation.
Mitch’s Response:
Thanks for emailing your question, Kristen. I have not had a reader ask about foreign investing in quite some time, and it’s a great topic to revisit.
The short answer to your question is yes – there are many growth opportunities outside the U.S., particularly as we observe a ‘rolling’ global economic reopening that started in Southeast Asia (mainly in China), moved to the U.S. in the last few months, and eventually will land in Europe and make its way to developing economies as well.
Looking back over the last 2- and 5-year periods, you will find that the S&P 500 index has fairly widely outperformed the MSCI All Country World Index ex-US, and as it stands today global stocks are undervalued relative to US stocks1, in my view. This alone may drive some performance mean reversion looking ahead.
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I also find that many investors have what is called ‘home country bias,’ meaning they tend to over-allocate to the U.S. and under-allocate abroad. An investor’s level of exposure to international equities should correspond with their risk tolerance and desire for long-term growth, which for many investors may mean not having enough international exposure.
When I look out at the global economy, I see a lot of different opportunities for growth and value creation. Governments across the world appear to be posturing for additional spending in infrastructure build-outs, particularly in the realm of energy and climate-related projects. This push could drive demand for raw materials and building materials.
There is also, of course, the technology sector, which many investors may mistakenly believe is limited to the U.S. and China. There are many overlooked opportunities in Europe, Japan, and Emerging Markets particularly as it relates to supply chains. Several other sectors and industries are worth eyeing right now as well, such as tourism, travel, e-commerce, and digital payments (just to name a few). Spending and investment are not just limited to the U.S.
As it stands today, Kristen, flows into global equities have been robust over the past few months, and some of the recovery is likely priced into markets. But for long-term investors, I think international growth opportunities will continue to exist, and depending on your risk tolerance and desire for growth, it could make sense to maintain an allocation to international stocks as part of a diversified portfolio.
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