Global Equities: Diversify Your Portfolio, Grow Your Wealth

Investing in global equities can be a great way to diversify your portfolio and reduce risk. By investing in international stocks, you can gain exposure to a wider range of economic and market forces across different regions and nations. This can help you benefit from the returns of well-performing regions and offset any underperformance in others. While investing in global equities does come with its own set of risks, such as currency fluctuations and political instability, it also offers access to emerging markets with higher economic growth rates and attractive valuations. Ultimately, the decision to invest in global equities depends on your financial goals and risk tolerance, but it can be a powerful tool for investors looking to expand their opportunities and manage risk effectively.

International investments can balance out the risks of a portfolio that only contains domestic securities

Firstly, international investments can reduce investment risk. If US stocks underperform, gains in international holdings can smooth out returns. For example, an investor may split a portfolio evenly between foreign and domestic holdings. The domestic portfolio may decline by 10%, while the international portfolio could advance by 20%, leaving the investor with an overall net return of 10%. Risk can be further reduced by holding a selection of stocks from both developed and emerging markets in the international portfolio.

Secondly, international investments can diversify currency exposure. When investors buy stocks for an international portfolio, they are also effectively buying the currencies in which the stocks are quoted. For example, if an investor purchases a stock listed on the London Stock Exchange, the value of that stock may rise and fall with the British pound. If the US dollar falls, the investor's international portfolio helps to neutralise currency fluctuations.

Thirdly, an international portfolio can allow investors to take advantage of the market cycles of different nations. For instance, an investor may believe US stocks and the US dollar are overvalued and may look for investment opportunities in developing regions, such as Latin America and Asia, which are believed to benefit from capital inflow and demand for commodities.

Finally, international investments can provide exposure to higher growth rates. Non-US stock markets offer investors exposure to higher rates of economic growth via emerging and frontier economies. For example, exposure to Indian, Indonesian, Brazilian, and Chinese economies exposes investors to economic growth rates almost double those of the US and global projections.

However, it is important to note that international investments also come with additional risks. These include higher transaction costs, currency volatility, and liquidity risk.

Global equity investing has expanded remarkably over the past four decades

This expansion of global equity investing has opened up a broader opportunity set for investors. By investing internationally, investors can access hundreds or even thousands of foreign securities, increasing the diversification of their portfolios. Markets outside the US do not always move in tandem with the domestic market, so owning both international and domestic securities can help to reduce volatility and spread out risk.

In addition to diversification, international investing offers exposure to higher growth rates in emerging and frontier economies, such as India, Indonesia, Brazil, and China, which are expected to experience economic growth rates almost double those of the US and global projections.

Global equity investing has also become more accessible thanks to the development of international mutual funds and ETFs (exchange-traded funds). These investment vehicles make it easier and more affordable for investors to access foreign markets, providing the benefits of diversification without the challenges and costs associated with trading on international exchanges.

The growth of global equity investing over the past four decades has transformed the investment landscape, providing investors with expanded opportunities, exposure to higher growth rates, and a more diverse range of markets and securities to choose from.

Non-US markets can offer investors exposure to higher rates of economic growth

Investing in global equities can be a great way to diversify your portfolio and gain exposure to higher rates of economic growth. Here's why non-US markets can be a compelling opportunity for investors:

Expanded Opportunity Set

The global equity market has experienced remarkable growth over the past four decades, with the value of global equity trades now exceeding global GDP. This growth has been predominantly driven by markets outside the United States. While the US market still holds a significant share, its dominance has been decreasing over time. In 1970, US equities accounted for 70% of the global stock market capitalization, but today, that number stands at 41%. This shift towards a greater non-US share of global equity markets is expected to continue.

Exposure to Higher Growth Rates

Non-US stock markets, particularly emerging and frontier economies, offer investors access to higher rates of economic growth. While global economic growth is projected to be around 2% over the next two decades, investing in countries like India, Indonesia, Brazil, and China provides exposure to economic growth rates almost double the US and global projections. These markets are expected to experience robust growth, providing investors with attractive opportunities.

Geographic Diversification

Investing internationally allows you to diversify your portfolio beyond the US market. Markets outside the US don't always move in tandem with the domestic market. By owning both international and domestic securities, you can smooth out some of the volatility in your portfolio and spread out your investment risk. This diversification can help protect your portfolio from country-specific or regional economic downturns and increase your exposure to different sectors and industries.

Compelling Structural Stories

Some international markets are driven by compelling structural stories that result in impressive returns. For example, Japan is moving out of a long period of deflation and stagnant growth, creating a positive environment for consumer spending and corporate reforms. Similarly, India is experiencing strong earnings momentum due to falling interest rates and robust services export growth, making it a leading destination for "friendshoring" in emerging Asian markets.

Exposure to Attractive Valuations

Non-US markets often present attractive valuations compared to the US market. Lower forward price-to-earnings ratios in international markets have been associated with higher future returns. By investing in international mutual funds or exchange-traded funds (ETFs), investors can access hundreds or even thousands of foreign securities, taking advantage of differences in valuations and reducing the risks associated with individual stocks.

In summary, investing in non-US markets provides exposure to higher rates of economic growth, diversification benefits, and access to emerging economies with compelling structural stories. By investing globally, investors can broaden their opportunity set and potentially enhance their portfolio's performance.

International stocks can provide exposure to a wider array of economic and market forces

Different markets and economies can and often do produce returns that vary from the US market. This means that, by investing in international stocks, you can benefit from the diversification of returns. In any market environment, spreading investments across both domestic and international opportunities can position your portfolio to benefit from the regions that are performing well and help offset any underperforming areas.

For example, when the US economy is down, some international economies may be up, and vice versa. This diversification can be beneficial to your portfolio in the long run. Additionally, investing in international stocks can provide exposure to emerging markets, such as China, India, or Brazil, which tend to have higher volatility, a younger population, and rapid economic growth.

It's important to note that investing in international stocks also comes with certain risks. These include country/regional risk, currency risk, and political and economic instability, especially in emerging markets. However, historical data shows that investing globally could result in similar volatility to investing solely in the US, which might be surprising to many investors.

International mutual funds or ETFs can increase portfolio diversification

For example, Vanguard recommends that at least 20% of your overall portfolio should be invested in international stocks and bonds. However, to get the full diversification benefits, consider investing about 40% of your stock allocation in international stocks and about 30% of your bond allocation in international bonds.

International mutual funds or ETFs are also a cheaper and easier option for investors because they don't have to worry about the costs and timing considerations involved in trading on international exchanges or through American Depositary Receipts.

Additionally, geographic diversification takes advantage of the cyclicality of leadership in stock market returns. For instance, looking at the returns of the S&P 500 versus the MSCI EAFE over the past 40 years, it becomes evident that each allocation has its period of outperformance.

Furthermore, non-US stock markets offer investors exposure to higher rates of economic growth, particularly in emerging and frontier economies such as India, Indonesia, Brazil, and China. These economies are projected to have economic growth rates almost double that of the US and global projections.

In summary, international mutual funds or ETFs provide access to a diverse range of foreign securities, helping to reduce volatility and providing exposure to higher economic growth rates, making them a valuable component of a well-diversified investment portfolio.

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