Stock Market Insights: International Investments – The Challenge of Finding True Diversification

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Photo courtesy Richard Baker

“New York City!” Remember the old salsa commercial where the cowboy looks at the back of his salsa and sees it was made in New York City? It’s kind of like that with international investments these days.

Most diversified portfolios will have a splash of international holdings, but finding good exposure outside the US is complicated. Investors researching opportunities in Europe or other parts of the world find that the stock they are looking at does most of its business in the US.

For example, stocks in Europe’s Stoxx 600, representing 17 countries, would make you think it would be a great place to look for European-only bargains. Still, surprisingly, those European countries do more business in the US than any other market. Almost a quarter of the Stoxx 600 total revenue comes from the US. The UK does the same. The companies in London’s FTSE 100 get more revenue from the US than from the UK.

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While US stocks continue to show surprising strength, the United Kingdom (UK) and Japan saw their economies pull back at the end of last year, which shows just how much the US economy and markets are in a different league.

The world’s other major economies are the minor leagues of investing. At the end of 2023, Japan, usually a strong international player, fell behind Germany as the world’s fourth-largest economy. While the US economy and stocks finished 2023 continuing to increase, Japan and the UK slipped into a recession.

Not only are those international companies fishing in the US economy, but they are small compared to US companies. Europe’s largest company wouldn’t even make it in the S&P 500 top 10. Further, the US’s top seven stocks, the “Magnificent Seven” (Apple, Alphabet, Microsoft, Amazon.com, Meta, Tesla, and Nvidia), are worth more than all Western European listed stocks combined.

Surprisingly, on February 22, 2024, Japan’s Nikkei index and Europe’s Stoxx 600 hit new all-time highs. Though this is good news, the word “finally” comes to mind. It took the Japan index 34 years to hit a record high, and both indexes hit new highs not because an international company did something incredible but because a US company, the chipmaker Nvidia, pulled the international markets up.

We still need to look overseas for diversification, but it’s getting more difficult. I have 4-15 percent international holding depending on the client’s risk tolerance in the accounts I manage. Still, finding great international stocks focused on their own economy and not piggybacking on the US isn’t easy, defeating the diversification goal.

We don’t buy New York City salsa at our house. My daughter, who is getting through college fueled by salsa, makes ours homemade. It doesn’t even hurt our feelings when people call us salsa snobs.

Have a blessed week!

www.FerventWM.com

Dr. Richard Baker, AIF®, is the founder and executive wealth advisor at Fervent Wealth Management.

Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.

Opinions voiced above are for general information only & not intended as specific advice or recommendations for any person. All performance cited is historical & is no guarantee of future results. All indices are unmanaged and may not be invested directly.

The economic forecast outlined in this material may not develop as predicted & there can be no guarantee that strategies promoted will be successful.

Fervent Wealth Management is a financial management and services entity in Springfield, Missouri.

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