Why Bother With International Investing Now?
If you’re overweight U.S. stocks, you’re not exactly putting all of your eggs in one basket, but you’re definitely loading one up dangerously close to the brim.
This is Part 2 of a series on investing in international and emerging markets. Part 1 answers the question “Why bother with international investing?” Part 2 makes the case for “Why now?”
Ok, I will readily admit that U.S. stocks have had a good run in the last few years. Keen observers called the market rally in 2020 a “K” shaped recovery – with the idea that the winners kept winning, and the losers kept losing (though I never understood what the vertical line in the K was supposed to represent).
And boy, did the U.S. have winners: Facebook, Amazon, Apple, Netflix, Alphabet (Google), and Microsoft, made up 60% of the S&P 500’s returns in 2020. Their outperformance has been so pronounced that they are grouped together by a clunky yet well-known acronym, FAANGM (if it were me, I’d rename it to FANAMA, but I am not in charge of these things.)
Beware of concentrated risk through FAANGM
But what’s wrong with too much of a good thing?
Your portfolio today may be reliant on just a handful of names. At the end of 2020, FAANGM made up 22% of the U.S. stock market. If you’re overweight U.S. stocks, which you almost certainly are, you’re not exactly putting all of your eggs in one basket, but you’re definitely loading one up dangerously close to the brim.
Where the U.S. leads, others follow
Everything that made the last decade of growth in the U.S. exciting could be applied to emerging markets for the next decade. There are 1.2 billion people in China and India who do not have access to the internet.
Many of the technologies that have catapulted the United States forward are beginning to play out around the world, especially in emerging markets. For every Facebook, there’s a TikTok. For every Uber, there’s a Didi.
Then there are areas where others may even be ahead. Europe and China are the two leading markets for Electric Vehicles.2 Brazil, China, Spain and Australia derive a larger share of energy from renewables than the U.S.3
A longer-than-needs-to-be tangent on 5G
Investors in my view are underestimating the advent of 5G technology, precisely because it’s hard to imagine how it might change our world. But if 5G merely sounds like an upgrade to your phone, you’d be terribly wrong. This is not a Playstation 4 to Playstation 5 type advancement. Here’s a quick summary:
1G: 1980s, enabled speaking through cellphones, and had a maximum speed of 2.4 kilobits per second.
2G: Late 1990s, allowed SMS (texting), MMS (photo-messages).
3G: 2000s, increased speeds enough to allow web-browsing, e-mail, video downloads. Made our life on computers much more portable, but our lives still did not revolve around our rectangles because it simply wasn’t fast enough.
4G: 2010s, HD video streaming! Web conferencing! Mobile gaming! Utopia! And if you are keeping track, we are now at 10 to 20 megabits per second (almost than 10,000 times faster than 1G).
Each of these developments was a huge advancement. Think of the numbers before G not as a multiple, but an exponent. 5G technology would move us to 1-10 gigabits per second, potentially up to 1,000 times faster than 4G. I’m having a hard time wrapping that number around my primitive head. Like, does that mean I can watch Netflix a thousand times faster?
The best way I’ve come to understand 5G is this: any time technology is a little bit annoying to you, or you prefer the old-fashioned way to the latest innovation, you’ll probably will stop feeling that way with 5G. (For one, my Amazon Fire TV stick is much slower than I’d like it to be). Self-driving cars are perhaps the most obvious beneficiary, where split-second reactions and super-accurate measurements are vital. Telemedicine is already becoming more practical, but what about remote surgery? Seems niche, but will it be with 5G? And why have a robot that can take out your garbage when you can do it on your own in 10 seconds? Because it could be reliable, practical, and eventually cheap enough to do so.
All that to say...Ericsson, Huawei, Nokia, Samsung, and ZTE are the top five companies in terms of 5G infrastructure development. The U.S. isn’t far behind, but we’re not necessarily front-runners on a potentially decade-altering technology.
U.S. stocks don’t benefit from global growth as much as they used to
Lastly, U.S. companies no longer derive their growth from international markets like they used to. There’s an outdated idea that you can own a U.S. company or multinational and get your exposure to global growth. But that has been slowing down for over a decade, and the pandemic has deteriorated global supply chains that may slow that trend even more.
The figure below on the right shows that S&P 500 companies are seeing only 2% growth from foreign markets as of January 2020, before the pandemic even began.
Bottom line
“The world is changing,” everyone has said since the beginning of time. But we actually may be seeing a meaningful shift in how the world is wired, and it’s happening at a time where investors who are overly reliant on U.S. stocks (and FANAMA) may be left in the lurch.
Consider bumping up your allocation to international and emerging markets.
International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets and in concentrations of single countries.