“Stocks from my country are superior.” Fisher Investments occasionally hears investors utter some version of this—a home-country bias that we believe amounts to a logical fallacy. Sure, there is familiarity—overseas companies can seem so…foreign. Investing in US stocks can feel like the easy, even patriotic, decision. This is particularly common in the US lately, as US stocks led in the 2009–2020 bull market—and have continued to lead since the end of 2020’s lockdown-induced bear market. But US stocks aren’t inherently superior. In Fisher Investments’ view, investing globally provides diversification options that mitigate country-specific risk and expand your opportunity set.
While US stocks have had a strong run lately, they don’t always lead. (Exhibit 1) Stocks from Europe, Asia and Canada collectively led plenty of times during the last eight bull markets.
Exhibit 1: World Bull Markets, Non-US and US Returns
Yes, on a cumulative basis, US stocks crushed international stocks in the 1990s and since 2009. But don’t let recent history fool you. Non-US stocks dominated in the 2000s and 1980s. Yet even these cumulative returns don’t tell the whole story. Leadership flipped many times amid broader bull markets. As Exhibit 2 shows, non-US stocks had several sustained bursts of outperformance during the 2009–2020 bull market. They also led for almost a year and a half in the 1990s, from January 1993–June 1994. US-only portfolios missed some big opportunities during these stretches, in our view.
Exhibit 2: US and Overseas Stocks Traded Leadership Throughout 2009–2020
Now, we aren’t suggesting flipping between US and non-US stocks to time these shifts—rather, we think this speaks to the benefits of owning the world. Globally invested portfolios lead US-only sometimes and lag at other times—but the point isn’t to maximize returns year in, year out. It is about the path to stocks’ long-term returns, which tend to be similar across well-constructed and diversified benchmarks over long periods. In our view, having exposure overseas can help give portfolios a smoother ride over time.
To further see the benefits of global diversification, consider why leadership shifts. Here is one reason: politics. While Tech and the Tech-like Interactive Media & Services industry represent 25.6% of the MSCI World Index’s market capitalization, they are 32.9% of the S&P 500—a large overweight.[i] While it has likely worked well in recent years for US-focused investors whose sector positioning is roughly in line with or exceeds the market’s, the US government has long chattered about reining in Tech and Tech-like companies, potentially raising risks. Proposals range from heightening M&A scrutiny to regulating them like public utilities. Now, we don’t think these proposals are currently an outsized risk—they are unlikely to pass our gridlocked government, and huge companies can usually stomach higher compliance costs. New rules, if they did manage to become a reality, could also entrench currently dominant companies by raising barriers to competition. However, if Congress did pass something disruptive, we believe US-only portfolios would likely suffer more than globally diverse ones. Investing globally would allow for geographic diversification within Tech, as companies in Europe and Asia would be less exposed to US regulatory risk.
The US’s large Tech weighting speaks to another single-country strategy drawback: sector concentrations and blind spots. Say you want exposure to an industry that historically has done well in maturing bull markets, when growth stocks usually lead—like large Luxury Goods firms. The S&P 500 has next to no exposure, giving US-only investors a blind spot to brand names with big global reach and the ability to grow sales even as economic growth slows here. To get exposure to this category, Europe currently has the biggest opportunity set. Elsewhere, Japan specializes in large industrial automation firms, which are relatively scarce in America, and Europe has more to offer in Utilities, typically defensive names that can come in handy during a bear market.
Again, the US is home to many great companies, and it has the largest stock market of any country on Earth. Yet there is a big world out there, and it has a lot to offer.
Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.
[i] Source: FactSet, as of 03/16/2022. MSCI World Index and S&P 500 Index sector and industry market capitalization on 03/15/2022.