An intriguing idea even when U.S. benchmarks are beating foreign ones.
If domestic stocks are performing ably, why invest elsewhere? When the S&P 500 is returning double digits, it may seem unnecessary to include shares from foreign companies in your portfolio. While it may not be necessary, it could be a savvy move.
—Kevin B. Perlberg, CFP®
Markets go through different cycles. Foreign equity markets have lagged ours recently. The U.S. has looked like the proverbial “best house in a bad neighborhood.” When the emerging markets are hot, however, they can outperform the S&P 500 dramatically. During those periods, investments offering exposure to those markets carry the potential to yield more than investments merely tracking the S&P. Even when the U.S. stock market is flat or down, overseas markets may be up.
Outside of America, there are some companies with great potential. We hardly have a monopoly on innovations and fresh ideas, and sometimes overseas firms rise to set the pace for a particular industry. Or, a foreign firm may be able to adapt and market an idea from our shores with amazing success in Asia or Europe.
Emerging markets are still capable of rapid growth. As examples, consider the BRICS: Brazil, Russia, India, China and South Africa. The economies of all five of these countries expanded by 40% or more from 2003-13. China’s annual gross domestic product grew 164% over that period and India’s annual GDP roughly doubled. Growth from China alone now represents 15% of the world’s GDP.1
At some point, this kind of growth has to moderate. In Russia and Brazil, it definitely has – but the International Monetary Fund still projects China’s 2016 GDP at 6.3% and India’s 2016 GDP at 6.5%. That is more than twice our present pace of economic expansion. China’s economy has grown by at least 6% annually since 1983 – a run unequaled in modern economic history.1,2
International investing affords opportunities for diversification. Just as a portfolio can be too concentrated in one or two asset classes or sectors, investing entirely in domestic companies may be limiting when the U.S. stock market cools. During those times, exposure to overseas markets may help to improve an investor’s return.