The launch of a new presidential administration has not surprisingly focused attention on Washington. Tax cuts hog the limelight along with border taxes and deregulation but are investors paying too much attention and should they be looking abroad?
Valuations suggest investors may be over-exposed to U.S. stocks but there is a deeper concern: to mitigate risks in our own economy. Remember that 2008 crept up on us while experts tinkered with financial models. If only they had looked out the window… Actually, I am making no dire predictions, quite the contrary.
If the global recovery accelerates, what happens in China will be as important, if not more so, as what happens in Washington. U.S. corporations will want more of that global pie and so will investors. Yet the pace of growth in foreign investment has slowed.
According to the Congressional Research Service estimates for 2016 suggest that U.S. foreign direct investment (FDI) abroad rose only slightly from 2015. Notably, FDI coming into the U.S. was greater than flows abroad for the second year running, something that has not happened since the early 2000s.
Force majeure, in the form of sanctions on some countries obliged companies to curtail their activities abroad in recent years, partly due to credit restrictions on their customers. I know of several U.S. companies that sent their lobbyists to Washington to plead the case that slowing the assembly of vehicles in Russia would lead to lay-offs in their factories at home.
The future path of investment now partly depends on President Trump’s call to U.S. automakers to repatriate production, his plans for a border tax and the decision to pull the country out of the Trans-Pacific Partnership that was to have created a 12-country free-trade pact. With headlines like these, it’s not surprising the focus goes local.
There is another reason to consider investing abroad, however. The Great Shrinkage by which municipalities withdrew investment from former manufacturing districts has its parallel in the corporate sector. Companies have preferred to buy back stock instead of investing. The cost of repurchases even at high prices is seen as preferable in a slow growth environment.
A slowdown marked the start of the year, with U.S. 1Q 2017 GDP coming in at 0.7% annualized. The numbers reflected a slump in consumer spending to 0.3%, the weakest since 2009. Drilling of oil and gas wells lifted business investment 9.1%, a relief after the March core capital goods number of 0.2% (3% on the year).
Rightly, investors care what’s in it for them, of course. Traditionally those like Warren Buffett have felt they have enough exposure to foreign markets through the activities of American multinational corporations. Few private investors would take issue with the Sage but they might want to look at one of the numerous exchange-traded funds that focus on emerging markets and technology.
Since 2009, the strength of the dollar has given U.S. investors little reason to look outside the country. Non-US stocks, by contrast, had a weaker recovery. When the rest of the world’s stock markets stalled in 2011, the U.S. kept going. Since 2009 the S&P 500 is up more than 280%. Non-US stocks are up by half that, leaving plenty of room to catch up. According to forward price-earnings ratios, emerging markets are trading at 12-to-14 times, versus the S&P 500 at 18.
The first thing the domestic investor is likely to ask is: what about the risk? Both currency risk and volatility are a matter of liquidity and boil down to how quickly you need to access your money.
There is the opposite danger, though, of focusing exclusively on one market. Those who are waiting for tax cuts to give the S&P a further boost should perhaps throw open the window.