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International Diversification


Should You Invest Where You Travel?

August is the peak time for vacation travel. Lots of Americans can be found these days all over the globe from Europe to Asia. If you are one of these lucky soles, chances are you will run across something that will catch your investment eye.

This could be as simple as a receipt for a French food treat or a company that is changing the way people do their banking like M-Pesa in Kenya or QPAGO in Mexico. The world is fill with opportunity to be uncovered if we open our eyes.

More and more investment experts are recommending caution with the continuing rise of US stocks. That is good advice considering the tripling of stock prices from the lows of 2009.

We don’t have a precise count but we read of more advisors suggesting asset protection strategies that include greater global diversification. This raises several questions: Is this a prudent (smart) move and is it right for you?

The Past Is Not Prologue

The practice of global diversification harkens back to a period when the world was less connected, when economic growth varied considerably, for example, between the US and Europe and even within Europe.

Prior to 1999 when the Euro came into circulation, Europe’s multiple currencies fluctuated independently creating an abundance of investment opportunities. That no longer is the case. For all its controversy the Euro has been a massive success in stabilizing exchange rates.

Good investment opportunities require something that math nerds call asymmetric information. This takes place when information is not widely known or understood and investors have the time to act. We all know what the Internet has done to eliminate asymmetric information. Currency exchange rates respond instantly to global events taking away any time to act on new information.

Access To Global Markets

Some or all of everything we own, wear, ride in or even eat, comes from somewhere else. The globalization of manufacturing assures the world economy is more synchronized that anytime in the past. So there are very few wide disparities in economic growth within the 20 largest economies of the world. The homogenization of the world prevents arbitraging the difference between regions.

Markets In Lock Step

To really succeed at arbitraging global markets, there needs to be a wide difference in performance. Why move out of the US market at a record high for some place like Hong Kong for example. The markets there are facing the same blotted valuations as the US.

A quick look at the world’s main stock indices illustrates the point. Year to date performance of the three main American stock indices has ranged from roundly 10% for the S&P 500 to 17.5% for the technology heavy NASDAQ.

Looking at nine major world markets only the CAC 40 (France), the NIKKEI (Japan) and SSEC (Shanghai) have seriously lagged the US. And if performance were measured over the last 12 months, only Shanghai at a 6% gain could be deemed a laggard. So where can you greatly lower you risk?

What About China

You may already have achieved global diversification in a passive fashion. If your portfolio includes Facebook, Alphabet or Microsoft these guys are about everywhere in the world you could imagine.

If you are tech averse and prefer more dividend yielding names like Coca-Cola or Colgate Palmolive you have global representation. More than half of all earnings come from offshore, so these names give you lots of global diversification.

But what about opportunities in China: lots of asymmetric information here. In a slow year, China’s GDP can grow 3-4 times faster than the US. China is loaded with rare earth elements. The government is investing in industrial development at an astonishing pace. The consumer is the end beneficiary of it all.

If China fits into your investment interest, Alibaba (BABA: NYSE) will give you diverse exposure to consumer spending in Asia. The company reports both in local currencies as well as US dollars so they are very readable. If you summer vacation travels take you to Beijing chances are you will run across at least one of Alibaba’s mobile services. Bon Voyage.