A Global Perspective: The Possibilities in International Equity Investing
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A Global Perspective: The Possibilities in International Equity Investing

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International Equity Investing

The Possibilities in International Equity Investing

When we’re in our comfort zones, we’re more likely to feel safe and familiar—and this same psychological effect is at play when we’re choosing where to invest. In fact, it’s widely understood that investors tend to prefer investing in their home country instead of taking a more global perspective, a behavior known as home bias.

However, investors could consider expanding their geographic exposure. From Shanghai to London, 20 of the world’s stock exchanges have a market capitalization above $1 trillion.

This infographic from MSCI highlights the possibilities in international equity investing. Let’s dive into some of the key concepts covered in the visualization.

Consider Correlations

For starters, by looking abroad, investors may be able to include markets in their portfolio that have relatively low correlation with their home market. This means the market movements are not as closely aligned, and the markets may behave differently from one another.

For instance, the U.S. has varying degrees of correlation with international stock markets. A correlation of 0 indicates there is no relationship between the market movements, while a correlation of 1 indicates that they move the exact same percentage in the same direction.

CountryCorrelation With U.S. Market
Japan0.11
Taiwan0.21
Korea0.24
China0.43
UK0.58
France0.59

Daily correlations based on data from December 31 2015-December 31 2020.

In the past, adding less correlated markets to a portfolio has helped to reduce overall volatility.

Manage Potential Concentration Risk

Technology companies have become more dominant in major U.S. stock indexes due to their strong performance. In the MSCI USA Index, for example, the weighting of FAANG stocks has doubled from about 8% in 2019 to more than 16% in 2021.

This increased concentration means that more of the performance and risk of each index can be driven by this small number of stocks. Branching out geographically can help to reduce that concentration risk.

Access Alternative Revenue Sources

Investors that focus in the U.S. may find their exposure to revenues and potential growth from other regions is limited. For example, only 31% of the MSCI USA Index’s revenue exposure comes from areas outside North America.

On the other hand, the MSCI All Country World Index derives about 70% of its revenue exposure from regions outside North America. As investors move towards a more global portfolio, they increase their exposure to revenue and potential growth from other regions.

Gain Exposure to Economic Growth From Other Regions

While GDP growth in developed economies has been more consistent, growth in emerging markets has been higher. For example, emerging markets typically experience higher GDP growth as they transition to industrial economies with higher standards of living.

Here is historical and projected data for various regions, based on average annual GDP growth.

Historical and Projected GDP Growth by Region

 2001-20202021P-2025P
Europe1.45%2.82%
North America1.63%2.84%
Pacific2.52%2.80%
World3.33%4.12%
Emerging Markets5.12%5.10%

Note: Projections as of April 2021. The Pacific region represents Japan, Hong Kong, Singapore, Australia, and New Zealand.

Emerging markets had GDP growth that outpaced other regions in the past, and the International Monetary Fund projects that they will continue to experience above average growth.

Increase Exposure to Innovation

Thematic investing is one way to gain exposure to innovation, and international investing is another potential method.

Innovation goes far beyond Silicon Valley, and is heating up abroad. In fact, over 70% of total R&D spending in 2018 originated outside of North America. Israel, Korea, and Taiwan were the top spenders as a percentage of GDP. By taking part in international equity investing, investors can aim to capitalize on new developments.

Access Attractive Valuations

Emerging markets have an attractive price relative to their return on equity, a measure of a stock’s profitability.

 Price to Book ValueReturn on Equity
U.S.4.413.7
Emerging Markets2.09.2
Europe & Middle East1.98.5
Pacific1.66.4

Data as of December 2020.

Emerging markets offer the second highest return of equity of the group, at a much lower price to book value than U.S. stocks. In other words, emerging market stocks offer strong investor returns in comparison to the price paid to obtain them.

Broadening Horizons With International Equity Investing

While many investors succumb to home bias, they could consider a wider set of investment options around the world. By engaging in international equity investing, investors can:

  • Aim to increase diversification and manage risk
  • Take advantage of growth opportunities
  • Access emerging markets

Global markets are changing. As innovation and growth accelerate outside North America, investors may want to consider new possibilities.

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Markets

The Top Google Searches Related to Investing in 2022

What was on investors’ minds in 2022? Discover the top Google searches and how the dominant trends played out in portfolios.

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Trend lines showing when the top Google searches related to investing reached peak popularity over the course of 2022.
The following content is sponsored by New York Life Investments

The Top Google Searches Related to Investing in 2022

It was a turbulent year for the markets in 2022, with geopolitical conflict, rising prices, and the labor market playing key roles. Which stories captured investors’ attention the most? 

This infographic from New York Life Investments outlines the top Google searches related to investing in 2022, and offers a closer look at some of the trends.

Top Google Searches: Year in Review

We picked some of the top economic and investing stories that saw peak search interest in the U.S. each month, according to Google Trends.

Month of Peak InterestSearch Term
JanuaryGreat Resignation
FebruaryRussian Stock Market
MarchOil Price
April Housing Bubble
MayValue Investing
JuneBitcoin
JulyRecession
AugustInflation
SeptemberUS Dollar
OctoberOPEC
NovemberLayoffs
DecemberInterest Rate Forecast

Data based on exact searches in the U.S. from December 26, 2021 to December 18, 2022.

Let’s look at each quarter in more detail, to see how these top Google searches were related to activity in the economy and investors’ portfolios.

Q1 2022

The start of the year was marked by U.S. workers quitting their jobs in record numbers, and the effects of the Russia-Ukraine war. For instance, the price of crude oil skyrocketed after the war caused supply uncertainties. Early March’s peak of $125 per barrel was a 13-year high.

DateClosing Price of WTI Crude Oil
(USD/Barrel)
January 2, 2022$76
March 3, 2022$125
December 29, 2022$80

While crude oil lost nearly all its gains by year-end, the energy sector in general performed well. In fact, the S&P 500 Energy Index gained 57% over the year compared to the S&P 500’s 19% loss.

Q2 2022

The second quarter of 2022 saw abnormal house price growth, renewed interest in value investing, and a bitcoin crash. In particular, value investing performed much better than growth investing over the course of the year.

IndexPrice Return in 2022
S&P 500 Value Index-7.4%
S&P 500 Growth Index-30.1%

Value stocks have typically outperformed during periods of rising rates, and 2022 was no exception.

Q3 2022

The third quarter was defined by worries about a recession and inflation, along with interest in the rising U.S. dollar. In fact, the U.S. dollar gained against nearly every major currency.

Currency USD Appreciation Against Currency
(Dec 31 2020-Sep 30 2022)
Japanese Yen40.1%
Chinese Yuan9.2%
Euro25.1%
Canadian Dollar7.2%
British Pound22.0%
Australian Dollar18.1%

Higher interest rates made the U.S. dollar more attractive to investors, since it meant they would get a higher return on their fixed income investments.

Q4 2022

The end of the year was dominated by OPEC cutting oil production, high layoffs in the tech sector, and curiosity about the future of interest rates. The Federal Reserve’s December 2022 economic projections offer clues about the trajectory of the policy rate.

 202320242025Longer Run
Minimum Projection4.9%3.1%2.4%2.3%
Median Projection5.1%4.1%3.1%2.5%
Maximum Projection5.6%5.6%5.6%3.3%

The Federal Reserve expects interest rates to peak in 2023, with rates to remain elevated above pre-pandemic levels for the foreseeable future.

The Top Google Searches to Come

After a year of volatility across asset classes, economic uncertainty remains. Which themes will become investors’ top Google searches in 2023?

Find out how New York Life Investments can help you make sense of market trends.

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