This week’s Periscope outlines why we make international investments and presents some cool charts. So read on!
Why We Invest Internationally
This post provides a little timely perspective and a broad overview of our investment philosophy. We wrote a white paper about why we invest internationally. If you’d like the details, you may download the complete investment philosophy here.
We believe that the right way to invest is to use more than strategy and to remain humble. Diversifying our investments is an important part of the equation.
Importantly, Covid-19 may delay or disrupt all of these forecasts.
Check out the following chart. Only five companies comprise nearly one-fourth of the S&P 500 index. That’s not diverse—we need to keep looking!
International Investing is Timely
We use Litman/Gregory (L/G) research to help us make our asset allocation decisions—meaning how much do we put in China and the rest of the world. Right now, L/G believes the future looks more bright for international investments than US companies for three big reasons.
First, US markets have grown much faster than most of the rest of the world. They are “frothy” if you will. Price matters—we don’t want to overpay. If we can buy similar quality companies overseas for lower prices, it’s a prudent place to make our investments.
Second, “a global economic recovery supported by massive amounts of fiscal and monetary stimulus” is L/G’s major theme for the next few years. Governments and companies all around the world are working to solve this pandemic. The markets are predicting good results. The corollary to this theme is also true. In fact, it’s a truism: “Don’t fight the Fed.” I could add more details about zero interest rates and investors chasing the same hot stocks but I won’t. The bottom line is we want to be on the international trains when they leave the station.
Third, what’s happening in China is historic. The USA is fighting, with all our might, to hold onto the #1 economy. The sheer size of #2 (China) and growth trajectory makes it prudent for us to be a part of it. More on China next, but first, here are some possibilities in next few years:
- China may strengthen relationships with neighboring countries.
- China’s currency may further separate from the US dollar.
- China’s economy may further separate from US consumers.
As time goes on, I believe we’ll get even better diversification from investments in China and the rest of the world.
China is HUGE!
The world’s largest economy is still, by far, the USA, as shown in the following chart.
On a relative basis, China is bigger than the USA. The following chart compares the economies around the world on a pay parity scale. It costs less to live in the rest of the world, and this chart attempts to account for that.
China, India, Brazil and other large countries are on a faster growth path than the USA. We want to have some of our investments in these countries.