|Forbes.com, Summer, 2016. This article was written with Jim Cahn, the Chief Investment Officer at Wealth Enhancement Group. It was part of a series of articles developed under an agreement with Forbes to work with a variety of contributors and assist them in delivering actionable investment ideas each week. The site forbes.com is one of the top 500 sites in the world with nearly 10 million subscribers and nearly 100 million page views a month.|
The 2016 Olympics are upon us. We’ll be cheering for our fellow Americans, but as we watch, we will undoubtedly be inspired and amazed by the talents of athletes who are not from the U.S. This reminder that athletes everywhere are dedicated to their craft and capable of being from any country on Earth can also be applied to global markets.
The meritocracy of athletics is one element that draws us to them. For instance, Team U.S.A. is not merely comprised of the children of the representatives we had in 1988 or 1992. The complexion of the American team is the result of intense competition where the fastest, strongest and most skilled performers earn their spot. As Dawn Fraser, a three-time winner of the 100M freestyle swim, once said, “The Olympics remain the most compelling search for excellence that exists in sport, and maybe in life itself.”
In business, the same form of Darwinism exists. Businesses with the competitive advantage of a superior product, an ability to produce at the lowest cost, or a strong patent will eventually be valued at an appropriate level, regardless of locale.
The moral is that while the U.S. might be the best at accumulating Olympic medals and at maximizing the benefits of capitalism, it doesn’t mean there aren’t great athletes—or great businesses—located in other nations.
Can International Markets Overtake The U.S.?
Throughout the decades, U.S. and international stocks have experienced alternating periods of relative performance advantage. One study found that U.S. stocks (as measured by the MSCI USA Index) have outperformed international markets (as measured by the MSCI EAFE) in three-year periods over the past 89 months, which is tied for the longest stretch over the past 45 years.
This study is especially interesting because it doesn’t rely on the cumulative performance over those 89 months. It simply looked at the three-year results at the end of every month, and every month for the past 89 months the U.S. market has maintained its advantage.
The advantage enjoyed by the U.S. over the past 7.5 years doesn’t mean that non-U.S. markets will have to generate huge returns to bring the accumulated gap closer to equilibrium. In fact, it could be quite the opposite. Consider the fact that from February 1999 to February 2009, the MSCI USA Index fell by over 40%. Granted, developed market international stocks fell around 10% during the same period— which certainly doesn’t sound great— but the 30% advantage meant that international stocks only needed to earn 11% to get back to even. U.S. stocks, on the other hand, needed to earn roughly 70% just to break even!
Burgeoning Middle Class May Help Spur Global Growth
One great story associated with global economics is the burgeoning middle class outside the U.S. A World Bank study estimates that from 2009 to 2030, roughly 90% of the middle class will reside in emerging market countries. Additionally, the middle class globally consumed about $21 trillion worth of goods in 2009; by 2030, that figure will be close to $56 trillion. The majority of the increase will be driven by countries in the Asia Pacific region, with middle class consumption increasing from $5 trillion in 2009 to $32.6 trillion in 2030 in that area.
The economic winners and losers of this huge wave of people migrating into the middle class will almost certainly change several times between now and 2030. However, it’s difficult to see much impeding the current trend of a rapid increase in the global middle class from happening. We think this is just one more reason to own non-U.S. stocks and why incorporating them into a globally diversified portfolio will likely pay off in the long term.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. Investing involves risk including the loss of principal.