A major benefit of an interconnected global economy is the ability of investors to tap into a country or region’s competitive advantages. Some countries have abundant natural resources, while others excel at manu facturing or engineering. The ability to allocate capital across borders allows the entire globe to benefit.
Emerging capital markets are making these opportunities increasingly available to U.S. investors. Japan, Germany, the United Kingdom, and France, with well-established capital markets, are already home to some of the world’s largest publicly traded companies. As many developing countries move toward democracy and capitalism, they are developing their markets in which companies are publicly traded.
Often, these companies are dominant in their respective industries. U.S. investors who constrain themselves to domestic equities may be limited to an increasingly small portion of the world’s publicly traded equities. Over the past few decades, foreign markets’ share of world market capitalization has grown from 34% in 1970 to 54% in 2012 (source: MSCI).
Compared to the rest of the Developed world, over the last five years, the United States was in the top five only twice, in 2008 and 2011. (source: Thornburg Investments)
Because markets in the U.S. and overseas generally don’t move in tandem, spreading investment holdings among companies and markets not closely correlated to those of the United States can reduce overall portfolio volatility.
Part of our asset allocation strategy is to diversify our portfolios globally in such a way as to capture the returns that are available throughout the world.