Client Portals

Stay with International3 min read

Oct 10, 2018 - John Osbon ( 5 mins to read)

US-based investors holding international investments are sorely tested these days. Stock markets outside the US have not been generous in returns recently, certainly not as good as US stocks. Furthermore, the dollar is up 9% this year, wiping out what gains are available overseas. Headlines aren’t helping. Brexit talk, regime change and America First have contributed to the concern for international investors. Have we reached a point where the reasons to abandon international investments outweigh all possible benefits? Here are the reasons to stay with international investments.

International concerns, large and small

Adding to the uncertainty in developed international markets is the rise of political extremists in some smaller emerging market economies. Brazil is a good example. First there were eight years of leftists. Now it looks like the rightists will win the election this month. There are no center left or center right politicians in sight. Political extremism has been a significant contributor to the lousy stock market performance of Brazil and the collapse of its currency. Similar statements could be made about Turkey, Poland and Indonesia.

Pros see opportunity

Jeremy Grantham of GMO has a reputation as a perma-bear due his gloomy forecasts. However, he is optimistic about emerging markets, the riskiest of international investments. To use Jeremy’s British phrase, emerging markets are ‘priced not too badly’ and he is urging his grandkids to invest half of their money there. Grantham made a lot of money over decades by swimming against the tide. He is worth listening to on the emerging markets asset class.

Why be patient?

With middling performance, political unrest and seemingly better prospects in the US, investors can reasonably ask why they should bother with international investments. There are four reasons to be patient:

Your dollar buys more: Dollar strength this year means you can buy more stocks outside the US. On average, about 9% more. Since the dollar fluctuates it is reasonable to assume it will go down in value at some point and those non-US stocks become more valuable.

Valuations are better: Stocks in developed markets outside the US have lower price to earnings ratios than the US. A lower P/E generally carries higher potential.

Yields are higher: International stocks yield one to two percentage points more than here. In a low interest rate world an extra percentage point in yield can make a big difference.

Diversification always matters: Diversification is often called investing’s only free lunch; over the long term it tends to improve returns and reduce risk. After 10 years of great US returns it’s easy to think that international stocks will never outperform the US. In fact, many investors are abandoning diversification as unnecessary and too much trouble. That’s a perilous approach. No asset class has consistently outperformed all others decade after decade. Roles will reverse eventually and the true value of diversification will re-assert itself. That time could be as soon as one month (after the election; Iran oil sanctions bite hard), five months (two US rate rises, six months (Brexit has happened), or farther down the road.

Reasons for optimism

The very reasons that some investors are fleeing markets and going to cash are the very reasons to maintain your portfolio balance. Market timing adds to risk and subtracts from performance…it’s a game designed for losing. Headlines are screaming sell…they often do when fundamentals are improving. And lagging international stock prices (and strong dollar) are essentially a discount for long-term investors.

If you would like to see how we have positioned Osbon Capital portfolios for long-term international investing please send us an email. We’d be happy to show you how we do it, and compare it to your portfolio.

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