Why Diversify Internationally?

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One of the easiest and simplest diversification strategies is to diversify across borders.Since the performance of equity markets varies across countries in any given year, an investor can boost their returns by spreading their assets across many countries. For example, emerging markets that are highly dependent on commodity exports perform well when commodity markets boom. By diversifying between developed markets and these emerging markets, investors can earn higher returns.

In addition, no one country’s equity market is the top performing market year after year. For example, Canada was the best performer in 2016 but ended up being the worst in 2017 due to decline in energy prices.

The following quilt from Schwab shows the importance of allocating assets across countries:

Click to enlarge

Source: Why Global Diversification Matters by Anthony Davidow, Charles Schwab

Change in Number of Listed Stocks by Country 1993-2017

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The number of public listed companies has declined for many years now in the US. I have written many articles before on this topic. More recently last weekend I posted a blog quoting Vanguard.

While the number of public firms has decreased in the US, some markets abroad have seen strong growth in the number of public companies. According to an article by Duncan Lamont at Schroders, some markets have seen explosive growth since 1993.

The chart below shows the Change in Number of Listed Stocks by Country 1993-2017: 

Click to enlarge

Source: What is the point of the equity market?, Schroders

Emerging markets such as Poland, Russia, Indonesia, China, India, etc. have seen more companies going public in recent years.

The decline in the number of public firms is not limited to the US. Other developed countries such as the UK, Canada and Germany also have lower number of public companies now than in 1993.

Implications for investors:

I have discussed before that going abroad gives American investors more investing options. The above chart shows that foreign markets especially those in emerging countries offer many investing opportunities.

On Big Oil’s Profit Gusher: Chart

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Crude oil prices closed at over $69 for June delivery (Brent). Oil prices have shot up more than 150% since the lows of $26 reached in early 2016.Rising oil prices is helping oil majors earn higher profits. According to an article at U.S. funds, big oil is generating as much profits at $60 as when the price was $100. From the article:

Some resource investors might worry that all this extra supply could depress prices and hurt profits. That’s a valid concern, but it’s worth pointing out that since its recent low of $26 a barrel in February 2016, the oil price has surged nearly 150 percent—all while the number of active wells in North America has risen.

It doesn’t hurt, of course, that demand for petroleum products is just as strong as it’s ever been right now. According to the latest monthly report from the American Petroleum Institute (API), U.S. demand in February reached its highest level since 2007. This was only the third February ever, in fact, that gasoline demand exceeded 9 million barrels a day, reflecting strenthening consumer sentiment and economic growth.

And as I shared with you last month, major explorers and producers’s profits are now in line with what they were when oil was trading for $100 a barrel and more.

According to Bloomberg, the majors are now “prioritizing investors over investments, channeling the extra cash that comes from $60 crude into share buybacks and higher dividends.”

I should add that, besides offering better opportunities for investors, energy independence helps make the U.S., its allies and, indeed, the whole world more secure.

Source: U.S. Energy Is Breaking All Kinds of Records — Are You Participating?, U.S. Funds

Oil majors are rewarding shareholders as earnings rise. For example, French major Total (TOT) announced a 28% increase in profits and a 10% increase in dividends. In addition the firm announced share buybacks as well.

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Disclosure: No Positions

Developed Equity Markets Outperform Emerging Markets in the Long Run

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Emerging equity markets tend to offer higher returns than developed markets during some periods but not all the time. Emerging markets also go thru boom and busts like the developed markets but the magnitude of rise and fall in those markets is much higher than their developed world peers.

In the really long run emerging markets under-perform developed markets in terms of returns. Emerging markets returned 7.4% per year compared to 8.4% for developed markets according to Credit Suisse Global Investment Returns Yearbook. From the 2018 edition of the popular study:

Figure 3 shows the long-run performance of emerging versus developed markets. In the early part of the 20th century, emerging markets outperformed, but were hit badly by the October 1917 Revolution in Russia, when investors in Russian stocks lost
everything. During the global bull market of the 1920s, emerging markets underperformed, but they were affected less badly than developed markets by the Wall Street Crash. From the mid-1930s until the mid-1940s, emerging-market equities moved in line
with developed markets.

 

Source: Credit Suisse Global Investment Returns Yearbook 2018

 

How Big Are FAANGs?

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The market capitalization of the FAANG stocks (Facebook, Amazon, Apple, Netflix and Alphabet (parent of Google)) is bigger than the economy of some countries. I came across the following detail on the size of these tech giants:

Bigger than Japan

FANGs is an acronym for Facebook, Amazon, Apple, streaming service Netflix and Google (now owned by parent Alphabet). These five alone have a combined market capitalisation of $3trn. That’s greater than the UK’s annual gross domestic product (GDP). If you then add in another US tech giant, Microsoft, whose market cap is $700bn, plus the FANG’s equivalents in China – Alibaba ($500bn) and Tencent ($560bn) – then these eight behemoths together are valued at more than the GDP of the world’s third-largest economy, Japan. So great is the worth of just the three largest FANGs that if they were countries each would be eligible for membership of the G20, a club of the world’s richest nations.

Source: Investors should stand clear as the tech giants stumble by Jonathan Compton, MoneyWeek

The entire article is worth a read.

Disclosure: No Positions