This week’s reader question is about global stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company.: What is your thinking on investing in international stocks? Will slower vaccine deployment abroad have an impact on valuations?
Josh Jurbala, Quantitative Investments Manager, had this to say:
We’ve been asked this a lot lately. The question is a smart one because you’re focusing on global stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. valuations as opposed to recent performance; this suggests a long-term mindset—which is the key reason we think foreign stocks are worth investing in this year and beyond. It’s DiversificationA strategy for managing investment risk by investing in a mixture of different investments. Since different asset classes face different risks, even if one type of asset declines in value, others may not. 101, yes, but it also recognizes that some global business leaders aren’t necessarily domiciled in the United States.
Depending on one’s ability to accept higher riskThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. for the potentially higher reward that comes with it, we generally recommend holding 20% to 30% of your portfolio’s equityThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid. allocation in foreign stocks, which is still considered an underweight to the global benchmark.
The charts below illustrate three factors that underpin our current overseas outlook: Vaccinations, performance and valuations.
It is important to remember a lesson we learned last year: The stock market is not the economy. This applies to the stock market’s composition, of course, but it also implies that investors and traders are forward-looking. In other words, stock and bondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. investors will look past short-term weakness in the economy and will price assets in anticipation of an eventual recovery.
Last fall’s battered cyclical stocks (small-caps, banks, leisure stocks) began to rally ahead of vaccine authorizations and rollouts. Emerging from the pandemic this spring, U.S. stocks seem to have priced in a full recovery and then some. To state it plainly, there are few underpriced opportunities in the U.S. market.
Meanwhile, foreign stocks offer a chance to buy low. And, if reopenings stutter out of the gate, any volatilityA measure of how large the changes in an asset’s price are. The more volatile an asset, the more likely that its price will experience sharp rises and steep drops over time. The more volatile an asset is, the riskier it is to invest in. could provide more opportunity as prices dislocate from fundamentals.
Dark times continue for countries struggling to vaccinate, but we believe the light at the end of the tunnel is bright. Plus, we aren’t simply buying markets. In our core strategies, we partner with active managers who are selecting individual companies that happen to be based in foreign countries. And our tactical strategies act as guides to where there are opportunities and risksThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline..
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