As U.S. Market Shrinks, Time to Look Overseas

Things change. As navigators know, magnetic poles of the earth move continuously. As we all know, our bodies change. Change is everywhere — politics, technology, prices, personal relationships. We find it strange that so many individual investors don’t also see that the geographic center of opportunity continuously changes too.

Those of us who grew up after WWII are at risk of assuming that the overwhelming economic prowess and stock market significance of the United States would always be that way. The fact is that it grew and then it began to shrink. The significance of that shift is seen in the relative GDP growth rates of the U.S. versus large segments of the world that are developing.

While none of us can invest with a 1,000 year horizon, it may be useful to consider that the economic center of the world was once Egypt, once China, once Rome, once England, and so on. The U.S. is part of that chain of economic leadership, but in recent years it has become clear that the economic center and growth leadership of the world is migrating toward Asia and the Middle East. At the same time, the stock profits opportunity is migrating in that direction too.

It’s no secret, but too many individual American investors have yet to fully realize this trend in their approach to investment allocation.

Evidence that the trend is not lost on large numbers of retail investors, however, is seen in the cash flows of mutual funds based in the U.S.

This chart of 3-month moving average cash flows to and from mutual funds investing in U.S. equities versus mutual funds investing globally, shows a decided preference for global funds for four of the past six years.

The five-year average monthly inflow to U.S. equity funds was $3.85 billion versus $7.95 billion for global funds. On a cumulative 5-year basis, U.S. equity funds brought in $231.25 billion net new money, whereas global funds brought in $476.94 billion net new money (more than twice the net new money for global funds than for U.S. funds).

The past year was more dramatic with U.S. funds experiencing a monthly average net outflow of $7.53 billion versus global funds experiencing a monthly average net inflow of $8.03 billion.

A few years of data is not proof of our point, but is it consistent with our point. Market profit opportunity has been and will continue to shift away from U.S. market to less mature markets.

This set of country real growth rates (growth rate minus inflation) for 2007 illustrates the wide differential between growth in the U.S. and other countries (or regions) for which investment funds are available.

Two very simple and broadly diversified ways to allocate equity assets to non-US markets (represented by SPDR S&P 500 (SPY) or Vanguard Total Stock Market VIPERs (VTI)) would [from lowest to highest risk and return potential] be through a world excluding US fund (such as Vanguard FTSE AllWorld (VEU)), or more aggressively with emerging market funds (such as iMCSI Emerging Markets Index Fund (EEM) or Vanguard Emerging Markets Stock VIPERs (VWO)), or very aggressively using individual country funds.

Comments

[Philly Jim:]

Let's just hope this new money keeps keeping the peace around the world. The culture and politics are vastly different in many of these new economies than that of the political culture here in the U.S.. The selling of women & children, eating of dogs and cats, murdering of adulterous women, and genocide aren't too common in the states. Oh, and we have a pretty good legal system that protects investors here in the ol' Jaded States of America. =)

2008 Mar 31 08:54 AM

[Ames Tiedeman:]

India. The time is now.

2008 Mar 31 02:56 PM

[fran:]

PHILLY JIM--

you are not a student of USA history from early 1600's to late 1900's? new england witchcraft, slavery, indian wars with ensuing forced migrations/reservation... civil war, civil rights violations--the list is long and comparable to other world societal groups in barbarism and cruelty. mankind is very eequally capable of of "bad behavior" throughout its development/maturation...

2008 Apr 02 01:21 AM