Invest Globally, Not Just Locally

Yesterday's announcement that the India’s largest industrial company, Tata (TTM), purchased the prestigious, formerly European Land Rover and Jaguar lines from the United States industrial company Ford (F), once one of America’s largest industrial companies, is yet another high profile indication of the historic shift of economic power from Europe and the US toward the India / China region.

The chart below shows the 3-year relative performance of the S&P 500 (SPY), India (IFN), Ford and Tata. India topped the US, and Tata topped Ford.

There is a demographic inevitability to the rise of India and China which together constitute roughly 1/3 of the world’s population. They started, and are still, at low levels of GDP per person; and they have far to go before reaching the level of affluence of Europe and the United States. That means “growth” and growth is fundamental to stock market value increases.

This week there has been a lot of negative news about how the S&P 500 today is approximately where it was 9 years ago. However, there has been good opportunity in other markets at the same time, as the MSCI country indices of India, China, Brazil and Russia illustrate.

It may be time for more US investors to widen their horizons and break away from the constrictions of rules of thumb that dictate massive overweighting of US stocks versus the rest of the world.

It has been a number of years since the US stock markets were more than 1/2 of world market free float capitalization. Recently, the US stock market was in the neighborhood of 45% world market cap.

Why should investors think that they should own 80% to 85% US stocks and 15% to 20% foreign stocks? Following that aging rule of thumb didn’t do much good for the past 9 years — although we must point out that a 15 year analysis for US stocks looks much better.

We think investors should begin their stock allocation thought process with global market cap allocation, and then make deviations (overweighting and underweighting) for regions or countries from that base, and not from a base that begins with 80% or more of US stocks. We live in a global economy and we should invest with a global perspective.

US stocks may deserve a strong overweighting in some periods and an underweighting in other periods. If investing is an economic decision and not a patriotic expression, then its time to challenge old rules to see things more the way they are and are likely to be, and not so much how they were or we wish they would be.

The plain fact is that the rest of world excluding the US (proxy: (VEU)) has been a better stock investment than the US (proxy: (VTI)) for long-term holding for most of the the last quarter century.

Comments

[TM:]

Richard, I agree. I have been speaking with a lot of different investment banks and all of them seem to be significantly enlarging their presence in India. I wish there was some type of forward looking indicator to track the significance of that, but I have a feeling it is pretty high. Essentially, you are going to have a bunch of banks introducing Indian equities to .a lot of clients who would have otherwise not have had a means to invest in the country. It is definitely something to keep an eye on. I have been looking at IFN and EPI

2008 Mar 27 11:20 AM

[Rajiv Sethia:]

Just to add to the fine commentary above - we should not forget these are volatile markets that are still at historical highs despite the recent correction. The bracketing of these together is a myth spread by Goldman that the popular media has been quick to jump on. Each of them is a completely different animal: considering politics, the economy, and the stage of human development. Despite a common market uptrend in the past decade these do not share much else with each other - which may be a good thing as uncorrelated markets are difficult to find.

The "demographic inevitability" isn't inevitable, just as it wasn't for most of the two centuries prior to the last 20 years. Weak institutions, fickle economic policy, political challenges, societal strife (particularly India and China) and governance issues can still trounce sound economics quite easily in each of these countries. Exchange controls over capital flows make true asset pricing difficult. But I do agree with the author that these may represent good diversification opportunities for a mainly US based portfolio.

2008 Mar 27 11:35 AM

[adventure62:]

I agree with Mr. Sethia but let me point out few things about US corporations. Everyone has seen the failure of several companies
TYCO, WCOM,.....A good number of US corporate management is only interested getting their stock options and inflating the short term stock values. Very few companies have management that is not looking at personal financial greed. There is a severe corporate governance and ethics issue in corporate America. Until these isues are fixed, American companies will loose out to better managed foreign companies. Subprime issue shows the fickle and corporate greed of American financial institutions. If one takes all these variables of corporate America and compares the foreign markets, US market is equally risky. Manufacturing has gone from America and that means loss of R&D and other work. US companies will not be able to survive very long if they continue to focus on short term stock manupulation. Just look at the pay package of CEOs. It says a lot about companies !

2008 Mar 27 01:19 PM

[Philip Obal:]

Should have written and submitted this article a year ago! Good thought then, now, and in the future.

2008 Mar 28 12:51 AM

[Tony Daltorio:]

You are spot on-I agree with you 100%!

2008 Mar 28 01:22 PM