Investing in international markets used to be relatively straightforward. Choose a few companies located outside the U.S, allocate them to your stock portfolio, and the resulting portfolio will most likely have diversification benefits, with different risks and returns profiles.
In addition, having a portfolio with international stocks provided a way to reduce the overall volatility since it was unlikely the global markets were moving in the same direction and at the same pace as the domestic markets.
However, over the past few years, the paradigms have shifted due to several factors, including demographics, aging baby boomers, increasing global digital payment platforms, rising income in emerging markets, digital real-time and stream gaming, development of vaccines, life-saving therapies, and demand for renewable energies Then add the COVID-19 pandemic. As a result, market participants are facing new challenges with the traditional methods of investing.
Despite the new paradigms, several international companies still have a competitive advantage in an industry or sector. For instance, the large pharmaceutic companies, Novartis and Roche which are headquartered in Switzerland or the luxury goods conglomerate LVMH, in France.
In addition, international companies tend to pay a dividend with an attractive yield. For example, although last year numerous companies receiving government assistance reduced their dividends, at the end of May 2021, the 350 companies in MSCI ACWI ex USA high dividend yield paid an average dividend of 4.2% compared to 2.1% for the broad MSCI ACWI ex USA index and 1.4% for the broad S&P 500 index.
It is essential to have a flexible approach when investing in global markets. An active mandate allows managers to select companies and sectors that can provide the desired rate of return and downside resilience. International stocks trading at a discount are more likely to average higher long-term returns in future periods.
We also see that, while the U.S. is weighted toward technology and healthcare, international funds are skewing heavily toward materials, financials, and energy.
Changing Global Market Dynamics
Investment opportunities are evolving with changing global market dynamics, including globalization and open trade. Globalization and increased innovation have provided companies with a more significant opportunity to engage in multiple markets.
In addition, the post-pandemic economic trends have accelerated the demand for technology and healthcare services, including digital payments, stream gaming, life-saving therapies, online doctor visits, and home diagnostics.
Mobile gaming has seen an increase in popularity, as it is estimated that almost 665 million players are spending over 278 billion yuan/$43.5 billion (https://www.statista.com/topics/4642/gaming-in-china/). Gamers invest time, effort, and money in developing characters or teaming up with friends to achieve the games’ objectives on screen. As a result, exciting video game content, especially with more social overlays, enjoys wide-ranging adoption globally.
The trends include rising incomes in emerging markets, greater spending power among women, and a consumer trend toward quality goods. We believe these could provide vital support to quality brand name luxury companies, including LVMH). However, the barriers to entry into luxury goods can be high because of the longer time horizon and significant investments needed to develop brand loyalty.
COVID Driven Trends
COVID-19 has accelerated the tailwinds for biodiversity, climate change, and carbon reduction. According to the KPMG survey of sustainability reporting in 2020, “the number of companies that acknowledge the risk of financial reporting has increased significantly since KPGM’s last survey in 2017.”
In addition, there is a trend for environment-friendly cleaning solutions. Finally, the global shift to energy transition is gaining traction as traditional utility companies rely less on carbon-based energy, nuclear and increasingly more on alternative fuels. Not surprisingly, the Western European countries are leading the transition. (https://assets.kpmg/content/dam/kpmg/xx/pdf/2020/11/the-time-has-come.pdf)
Another trend that saw accelerated growth throughout the year of 2020 was the rise of the digital economy. E-commerce, digital payments, social media and gaming were all sectors that gained an immense number of users onto their platforms in 2020. This is an area with wide reach into many different sectors as people change the way they shop, transfer money, socialize and interact with people and businesses alike.
The impact of the global pandemic was not spread equally around the globe as some cities and countries were hit harder than others. Similarly, the recovery from Covid will not be an even recovery and some countries will rebound quicker than others. Therefore, we believe in active management, especially for international equities because it allows for targeted investing.
Whether the goal is to avoid or overweight certain countries or choosing to take a position in companies operating in specific industries such as gaming, e-commerce or luxury goods, this is made possible by active investing.
Passive investing with an international index will provide diversity but does not allow for targeted investing. The iShares MSCI ACWI ex US ETF (ACWX) has almost 2,000 holdings across all non-U.S. countries. While the fund will have exposure to some of the top performing international companies, inevitably it will also hold some of the worst performers in the international markets.
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This report contains views on particular stocks held in our model portfolios at the time of publication. Our positions did not exceed 1% in securities/instruments or derivatives of the companies. Our opinion and decision to hold, increase or decrease our positions will change according to market data, market events, and other factors. The specific stocks noted in this report are for informational purposes only. It is not an offer or a solicitation. It does not consider your financial circumstances and objectives and may not be suitable for you.
The strategies discussed are strictly for illustrative and educational purposes and are not recommended, offered, or solicited to buy or sell any securities or adopt any investment strategy. There is no guarantee that any strategies discussed will be effective, and past performance guarantees future results. Although all investments involve risk, including possible loss of principal, some scenarios involve more risks; international investing involves political, liquidity, and currency risk.
* The analysis is based on monthly rolling 3-year returns for the period 12/31/1981 to 6/30/2016. US OE Large includes all share classes in Morningstar’s US OE Large Growth, US OE Large Value, and US OE Large Blend categories. The performance of passive funds is calculated as the average 3-year performance of all index fund share classes in each category. The performance of active funds is calculated as the average 3-year performance of all non-index fund share classes in each category. Results for each category are then averaged and the differences between active funds’ averages and passive funds’ averages are calculated.
The information provided in this white paper is obtained from sources believed to be reliable. No guarantee is made as to its accuracy or completeness. Due to rounding to the nearest dollar, the market values and percentages associated with individual positions or asset classes reflected in this white paper may not always add up to their reported totals. This material is published solely for informational purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or investment product. Opinions and estimates are as of a certain date and subject to change without notice. Past performance is no guarantee of future performance.
Glossary of Terms and Acronyms: ACWI: All Country World Index ACWX: ACWI Ex-US Index MSCI shares ETF: Exchange-traded fund iShares: A family of exchange-traded funds managed by Black Rock MSCI: Morgan Stanley Capital International