Given the events of the past several years, including the financial crisis, there’s no doubt that trouble in one region of the globe often ripples through an increasingly connected world. Indeed, we’ve seen that markets are more correlated than ever.
This isn’t always the case, of course. Sometimes there are disconnects among markets. But over the past 30 years correlation has increased significantly. Experts attribute this development to increased trade among regions, the growth of multinational companies and fund-management firms with globally diversified portfolios (meaning that when clients in one region ask for their funds, the manager might sell equities based in another region).
So what’s the case for diversifying your portfolio internationally? The strongest point is that looking overseas for opportunities expands your universe of growth companies. The U.S. market is well-developed, and although there are always high-quality U.S. stocks on sale, this country doesn’t have
a lock on great management.
Keep in mind that foreign stock exchanges are becoming a bigger part of the global market. “With well over 30 major equity markets globally,” Forbes said in 2012, “there is a strong chance that, in any given year, a country other than the United States will be the top performer. The same logic applies over a longer time horizon, and diversifying internationally is one way for investors to avoid effectively ‘betting’ solely on the U.S.”
Finding foreign candidates can be challenging. Stocks traded as American Depositary Receipts offer the easiest way to study overseas companies, as they file financial reports regularly with the Securities and Exchange Commission. This still excludes a great many companies with long track records of success, however.
Samsung, for example, is traded in Korea. But investors who want exposure to the company can consider an exchange-traded fund focused on Korea, which will have Samsung as a significant component, or smaller companies that supply the electronics giant.
There’s also always the option of investing in U.S. companies with significant foreign sales. Companies such as Deere, Caterpillar and Procter & Gamble are benefiting from the need to build infrastructure and consumer needs in emerging markets. It isn’t always the case that a U.S. company can be successful overseas. Wal-Mart, for example, has experienced some difficulties translating its U.S. success in China.