In 2012, investors focused on the United States. From September to December the election and fiscal cliff machinations were all that mattered. What happened beyond Washington DC or US borders appeared far less important. In 2013, investors could be remiss if they ignore the rest of the world.
If on January 1 you held a globe that was tinted with hues representing global economic activity, most of the world would be a cool blue, indicating subdued growth. There would be a few isolated hotspots where economies were outperforming, and a number of dark, muddy zones representing countries struggling with recession. Our bet is that over the coming year, global hues will become gradually brighter – not brilliant – but subtly better. In the search for portfolio return, it may become increasingly important for investors to park some of their money overseas in countries that are transitioning or about to transition to a more colorful topography.
For the last several years, the United States has seemed to be the safest bet for stocks. From 3/9/09 to 12/31/12, the S&P 500 is up approximately 107%. While many European and emerging market stocks performed well in 2012, the fear of a flare up of the euro zone debt crisis or a hard landing in China kept many investors away. For Europe and China the concerns are easing. In 2013 global equity markets could be a better bet than the U.S. Here are two examples of why.
For a long while now the euro zone has been mired in a banking crisis, a debt crisis and stagnating economic growth. While austerity measures and weak business confidence continue to plague economic growth, the risk of a banking collapse has eased with actions taken by Mario Draghi, President of the European Central Bank. In addition to lending money to European banks, the ECB has offered to buy up sovereign debt if it would help keep countries solvent. Draghi has gone so far as to say that the ECB “is ready to do whatever it takes to preserve the euro.” With tail risk reduced and stocks sporting relatively attractive valuations, there is room for equity prices to climb further as Europe emerges from recession.
China has a new political leader – Xi Jinping – and as most new world leaders, he wants to make a good first impression. Chinese growth rates fell last year to 7.4% from over 10% in 2010. As a result, Xi is likely to encourage action to spur economic activity, particularly in the form of renewed spending on infrastructure. Some meaningful economic indicators for China are already turning higher. While the Chinese tend to move slowly and remain challenged with a highly expectant young population, there is room for higher stock prices stemming from increased domestic and overseas consumer demand.
Global investing is not without risk. There are transparency issues, geopolitical dynamics and currency concerns that go beyond traditional market risk. In addition, inflation can spike or deflation can overwhelm different parts of the world. It is not a quiet landscape.
There is also the challenge of “too much information” when trying to sort through the myriad of investment offerings. If you decide to venture overseas in your portfolio, there are several ways to narrow the selection of your investment. Stick with mutual funds and exchange traded funds if you are doing your own research; they offer a wide array of choices and provide diversification of international holdings, an absolute must when specific company information is not easily attainable.
Your choices can include:
1. Long term growth funds focused
on promising companies that are expected to outperform over an entire business cycle.
2. Tactical, unconstrained funds that follow economic activity and corporate productivity across borders.
3. Deep value funds that look for mispricing opportunities.
4. Funds that offer income through dividend paying stocks.
5. Low cost, index funds that follow particular benchmarks and are easy to track.
Think again of our globe that is color-coded for economic activity. The palette is constantly changing as companies, as well as countries, respond to a dynamic global market place. The key for investing is to stay current and flexible and be willing to branch away from a home- bias. Half of market capitalization is outside of the United States and many good companies are headquartered overseas. With tail risk receding and some country’s business cycles bottoming, there are a number of opportunities abroad for your portfolio in 2013.
Betsey Purinton, CFP® is Managing Director and Chief Investment Officer at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail her at firstname.lastname@example.org.