Steve Watson is a global equity portfolio manager for Capital Group Private Client Services, based in Hong Kong. In this interview, he explains why he is particularly optimistic about international stocks.
To be frank, international diversification has not served investors very well for the past seven to eight years. The S&P 500 has significantly outpaced the rest of the world. Why? A big reason is that while the U.S. was hit hard by the 2008 financial crisis, the policy response was swift. America applied a fair amount of stimulus and got its economy going again relatively quickly. Europe and Japan did not respond as quickly or forcefully, and that has taken a toll.
The rest of the world has also been beset by its own problems. Great Britain voted to leave the European Union. Right-wing populist parties have asserted themselves in Europe, and there’s a two-speed economic recovery there, with Germany humming along while other countries struggle with low growth and high unemployment. Beyond that, China experienced a slowdown as global demand for its goods declined. And Japan’s record of turning around its economy is spotty.
Several reasons, including historical precedent and current valuations. There have been a number of periods when U.S. stocks have beaten international stocks, and vice versa. In fact, it’s typical for the baton to be passed back and forth between the U.S. and the rest of the world. Generally, the baton doesn’t stay in one place that long. This is a very long stretch relative to history for the U.S. to have done so much better. But that has created a dramatic valuation gap between the U.S. and the rest of the world. There are many attractively priced foreign companies with global footprints that sell at significant discounts to their U.S. peers. And the developing world is trading at a notable discount to other parts of the world.
It’s impossible to successfully time markets. It’s also important to realize that shares of good companies can do very well in the face of discouraging headlines. For example, there was a lot of concern last year about the supposed coming collapse of China — debt problems, political uncertainty and a property bubble that was going to end in tears. It seemed very bad, but lots of Chinese stocks are up 50% or more over the past year. Why? The economy is doing much better than predicted, and shares of some companies just got too cheap.
We need to be open to the possibility that we will see a hit to global trade volumes. But there is more to globalization than the trade in physical goods. As international companies have grown over time, many have opened offices and factories in markets around the world. Globalization often means finding companies that are not only shipping goods around the world but growing on a very localized basis.
I’d also point out we’ve seen protectionist movements before. In the 1970s and early 1980s, there was a lot of sparring among countries. For example, the U.S. put restraints on auto imports from Japan. Several countries put import restrictions on steel to protect their domestic markets. Those tariffs and non-tariff barriers certainly affected those industries, but they did not keep the world from growing, nor did they prevent us from finding good global investments. The bottom line is that globalization is alive and well.
One area is banks and financial services companies. Low interest rates create opportunities around the world. Some European insurance companies offer value. In another part of the world, there are some very well-managed banks in India. They have been great investments both recently and over the very long term.
Broadly speaking, there is a lot of legitimate concern about political stability and economic growth in many corners of the world. But there are also many opportunities for patient, long-sighted and value-focused global investors, particularly relative to what we’re finding in the U.S.