Could You Have Too Much Invested in US Equities?



For almost the entirety of the 20th century, the U.S. was the dominant force in the world economy, but the rapid growth of emerging markets in recent decades has challenged the status quo. The U.S. share of the investable universe has fallen, and its control over the world economy has started to diminish. Economic growth in the U.S., measured by gross domestic product (or GDP), has been slower than in many other regions. Couple the expansion of the global investable universe with the growth of different fund vehicles, and international investing has become much easier to implement. As markets have become more efficient and technology has driven innovation, the costs of investing internationally have diminished.

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Public access to information across the world has also grown exponentially. A company’s operational and financial information can be compared to similar companies worldwide, as dozens of countries have adopted common financial accounting standards. All of these factors have made it easier for investors to gain access to markets outside their
home countries.

International fast-growing economies

Economies such as China (GCH) and India (IFN) have been growing at a faster pace than the U.S., a decoupling which has created new investment opportunities plus new demand for products and services. Even through the global financial crisis of 2007-2009, both China and India continued to experience significantly positive growth, while the economies of the U.S. and most of the developed world contracted.

Market Realist – Considering macroeconomic fundamentals

As we saw in the previous part of the series, even though more than 49% of global capitalization is in the form of non-US equities, US investors allocate only ~21% of their portfolios to foreign equities. This could be unwarranted, especially if we consider macroeconomic fundamentals.

GDP growth for the United States has slowed down in recent years, and emerging markets (EEM) (FEO) such as India and China have grown phenomenally. The contribution of emerging markets (VWO) to world economic growth has been staggering, and their long-term outlook continues to seem positive.

The above graph from JPMorgan Chase illustrates this point perfectly. While the weight of the United States (IVV) in the MSCI All Country World Index (ACWI) was 46% at the end of 2013, the contribution to world GDP was only 19%. On the other hand, the weight of emerging markets was only 13% in ACWI, and the contribution to world GDP was a massive 50%.[1. source: Meb Faber, JP Morgan Guide to the Markets]

To gain the benefits of international diversification and growth in emerging markets, investors may want to consider turning to emerging markets, particularly in Asian (GRR) nations such as China, India, and Indonesia.


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