June 2024
Here are some key takeaways from their conversation:
• Most investors tend to have a home country bias, allocating most of their investments toward domestic stocks and companies.
• Most investors hold less than 10% of their portfolios in international stocks, despite the U.S. making up only 24% of global GDP.
• Jon says U.S. stocks are currently more expensive compared to international stocks. Furthermore, international stocks can offer higher dividend yields than U.S. stocks.
• Warren Buffett has invested a significant amount in Japan, indicating long-term potential. The weaker yen, economic reforms, and tourism boom have attracted a considerable amount of foreign investments in Japan recently.
• Chris and Jon touch on the potential of emerging markets like India, Brazil and Vietnam, which have growing middle classes and are making favorable progress in fiscal policy.
Watch previous episodes here:
Ep. 88 Market Highs Amid Consumer Struggles
Ep. 87 529 Plans: How to Maximize Benefits
Hello everyone, and thank you for joining us for another episode of THE FINANCIAL COMMUTE. I'm your host Chris Galeski, joined by Wealth Advisor Jon Wingent. Thank you for joining us.
Thanks, Chris. Good to be here again.
I love having you as part of the team, mainly because you're from London and you bring over sort of that international appeal and flavor that many of us could potentially ignore.
That started us on a conversation about international investing. And you and I have talked about the US and many places having a home bias when it comes to investing, right? I mean, we talk with firms around the world. You know, if you're located in Australia and you're an investment firm like ours, there's a chance that you have 70 or 80% of your stock exposure to be Australian stocks.
And so it's not uncommon for that to happen here in the US and have that home country bias and be focused here on the US and try to avoid international stocks. And so that's where this conversation really started. The attractiveness of potentially international investing. And you wrote a white paper recently. We have it right here. I think you're going to publish it here soon.
One of the key points that I thought was very interesting, Jon, is that most investors hold less than 10% of international stocks in their portfolio. Yeah, the US only makes up, what, 24% of global gross domestic product.
Yeah, I mean absolutely. And there is a huge domestic bias here. Less than 10% of investors' portfolios... actually flip that on the international side. When I was in the UK and we talked about domestic buyers, there's also still a large weighting to the US there. If you look at an index like the MSCI World, you know that nearly... two thirds of that is U.S.
So even to your point, 24% of global GDP, two thirds of that index is actually U.S. stocks.
And that's because US stocks have just grown so much in value. Let's talk a little bit about this disconnect between the US and the rest of the world over the last 15 years, sort of post the financial crisis, I mean, US stocks from 2000 to 2009, it's called the Lost Decade. Yeah. Coming out of the tech bubble, then things rebounded and then we had the financial crisis, the GFC in 2008, 2009, US stocks had just gotten battered down, especially compared to international markets.
And then since then it's just been sort of all of U.S. Right.
I mean, it has if you go back to those depths of the credit crisis or just coming out of that, the S&P 500 at that time was about 700 points. I mean look where it is today, over 5000. The US really rebounded a lot stronger than the rest of the world. They're led with things like fiscal and monetary stimulus.
And you mean money printing.
Well money printing. Yeah. But you know, you saw this expansionary period from 2009 to 2019, in the US, which was the largest expansionary period in history, and it really led it. So if you were invested in the US, you know, you're looking at about 15% versus 7% internationally over that time. So for such a long period of time, it feels like it's the only game in town.
So naturally, international investing can get overlooked.
And we're not calling an end to U.S. investing going forward. It just, you've got some counter points as to why international is really attractive right now. Let's talk a little bit about that.
I think there are really two key things from the US why you might consider international investing or increasing your exposure because it's up 10% right now. One is valuations. The US is expensive right now compared to European valuations. So if we looked at a standard valuation method to measure the price earnings ratio. So you look at the price versus the earnings of a company that runs at about 20 times on average.
And on the S&P 500 here in the US. You know, you compare that worldwide to on average 13 times. So in short international stocks are cheaper than the US.
So that's one on valuations. The second thing is dividends. So dividends internationally are about double that of what they are here in the U.S it runs at about 3% on average, a dividend permit from a US stock. So again, if you're an income-seeking investors, which actually for a long period of time, stocks were the go-to place for seeking income from dividends when interest rates weren't where they are now, they're virtually zero.
And look, I'm glad that you brought up dividends because it's normal for stocks to have so it be in a trading range for a period of time, you know, a couple of years, 4 or 5 years even. You know, there have been decades where stocks, both U.S. and international, have been flat. But because you're collecting a dividend over time, you're getting a decent return.
So, you know, dividends account for a large amount of long-term performance. And so getting double the dividend yield in international stocks versus the U.S., that is a very attractive point.
Yeah absolutely. It's that compounding effect.
Yeah. Now you also mentioned Japan. It's one of those very interesting things. I mean you look at Japan, they're a powerhouse when it comes to technology and business. Their markets have struggled for, you know, 34 years getting back to the highs of the late 80s. But they're making some big changes. And in yen terms, you mentioned that this is probably the best-performing market, so far for the year.
Yeah. In yen terms it is. Yeah. Dollar adjusted. The US is still leading the way. But that's an interesting point to make because the yen being weaker at the moment I mean that's not necessarily something that will structurally last. So you can't get in the cheap. But you can get into a market cheaper that has in local terms the best-performing market this year to date.
So there's a lot is going for Japan right now, and it's off the back of actually quite a lot of changes over the years. This really could go back to 2012 when Shinzo Abe came in as prime minister and it was called Abenomics. He had the three arrow approach, so he was looking at fiscal monetary and reform.
And that's really come to bear more recently. So we're seeing that in Japan right now.
Reforms. A huge part. That's something that, you know, political leaders or people that are in charge will talk about. But it takes a while to get implemented. It's not something that you can just flip the switch right away.
It doesn't, you know, it doesn't happen overnight. These things are multi-decade things. So going back to 2012, we're just over ten years beyond that. So we're seeing that reform. And there have been more recent reforms as well, which is really added on top of that and built to the more recent price we've seen in the Japanese markets.
Yeah. I mean, even though the yen is weaker, especially compared to the dollar, the dollar is very strong. So most things are weak compared to it. you know, it's still attracting a lot of tourism and that's a big play there as well. You talk about tourism, you talk about foreign interest, being interested in Japan, most notably, the biggest name that stands out is Warren Buffett.
He's put a lot of money in. I mean, he put China, he put money into China in 2019. He's in the last year put significant money into Japan. I mean, I think that shows that there hasn't traditionally been a large foreign interest in Japan. And you get an investor like Buffett and he's in it for the long term.
We know that he's got a very well-documented track record in history for that. So someone like Buffett is going in for the long term now, that's certainly an interesting signal. Yeah.
I think one of the key takeaways is that, you know, from a valuation standpoint, price-to-earnings ratio, international markets are a lot cheaper. They started the European Central Bank and the Bank of Canada have started to cut interest rates. I know there's been a lot of talk here in the U.S about not cutting rates, not necessarily increasing either, but keeping them where they're at.
The fed is meeting later this week, so it'll be really interesting to see what comes out of that. But we're still dealing with some inflation issues here in the US. Typically, if a central bank is going to cut interest rates, they're doing that because they want to spur growth in economic activity and make it cheaper to borrow money. That could be another key point as to why it might be an attractive, time to be looking at international investing.
Yeah, absolutely. Japan is trying to encourage more domestic investment. So the like, the, like the interest rate moves. One of the things they introduced in Japan more recently was the Nippon investment savings account. So to encourage domestic saving, so not just international interest, but also, you know, they've got a very well-established, market markets, very open, very transparent.
It's increasingly seen as an attractive alternative to China, for example, if you're looking for that, eastern Asian investment. So, so there's a lot a lot is going on. I mean, meetings that I'm having with clients right now.
Now. Well, we'll be catching up, you know, where have you been? Japan. Oh, we're going to Japan. I think we have a team member going to Japan next week. So it's a hot destination right now. And if you've got dollars, great place to be right now.
I'm very jealous because I would love to go to Japan. It just seems like an amazing place to go visit. But you know, I'd love the points that you brought up. And you know, it's not just about the US versus international. It's making sure that your dollars are working well for you. I mean, even you take developed international out of the equation.
Emerging markets. There's some attractiveness between markets like Brazil, India and Vietnam. I mean, they are poised for growth because now they've got more favorable fiscal policies in place for themselves, not compared to the US or others, but for themselves. Their fiscal policies are better. They've got more, stability politically, and they're taking efforts to reorganize like the global supply chain.
And what that means is the growth of the middle class. So you go back to the US here in like the 50s and 60s, and really that growth of the middle class, this is what some of those emerging markets are likely to go through.
It's the consumer class and places like India you know they've got demographics on that side. Yeah. So Japan, that's a challenge for them. On demographics. Same with China. And in the US you go somewhere like India. You have the population that's really coming into the working environment, coming into the earning phase of their life.
Now this huge middle class, the consumption and the consumer is driven from that part of, that part of society. So they've got demographics on their side and that's favorable looking forward.
Yeah. No I love it. Jon, thank you so much for joining us. And you know, I mentioned, if you're one of those investors that looks at your portfolio and you see, you know, less than 10% of your holdings are invested in international markets, you may want to have a conversation with us to determine, you know, repositioning or making sure that you've got the right amount.
Information and references to specific investmentsherein are for illustrative purposes only and are subject to change withoutnotice. It is not intended as investment and/or financial advice and should notbe construed as an offer or solicitation to buy or sell any security or assetclass. The views and opinions expressed by the speaker are as of the date ofthe recording and are subject to change. Morton Wealth makes no representationthat the strategies described are suitable or appropriate for any person, andit should not be assumed that Morton will make investment recommendations inthe future that are consistent with the views expressed herein. Morton makes norepresentations as to the actual composition or performance of any security. All investments involve risk, including the loss ofprincipal. Past performance is no guarantee of future results. You shouldconsult with your financial advisor to thoroughly review all information beforeimplementing any transactions and/or strategies concerning your finances.
