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Global Investing: Where Hot Prospects Are Today & Tomorrow

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Take heart, international investors. The U.S. dollar has finally showed signs of coming off its highs, and fresh investment opportunities can be found thanks to an increasingly global economic focus in Continental Europe, the United Kingdom, Japan and beyond.

This spring, the dollar started to show weakness as global investors became more willing to take on risk, according to Steven Englander, global head of the Group of 10 currency strategy at Citigroup Inc. “Risk appetite is improving as Greek risk diminishes; inflation expectations bounce back; and the fear trade is being unwound,” Englander explained in a note published this spring (though he may be rethinking the prospects for diminished Greek risk as June progresses). 

Meanwhile, the historically weak euro is likely to get a boost as the European Central Bank carries out its quantitative easing program, announced in January. The ECB’s accommodative monetary policy and increasingly positive macroeconomic conditions should favor undervalued companies based in the European Union, says Oppenheimer Funds Chief Economist Jerry Webman.

“We think that as 2015 unfolds, the EU’s macroeconomic environment will begin to help competitively positioned companies domiciled in Europe realize their growth potential through productivity enhancements, savings in labor costs and increased access to capital,” states Webman in a white paper issued earlier this year.

Webman believes that investment opportunities in European equities have more to do with individual companies rather than the countries where they are headquartered. His position is backed up by a recent report from hedge fund firm Grantham Mayo van Otterloo. GMO asset-allocation team member Catherine LeGraw says her firm doesn’t bother to hedge its international-equity investments anymore because hedging, strangely, tends to increase portfolio risk under current market conditions.

Why? Because globalization has changed the currency exposure of most large-capitalization stocks, LeGraw says. “For example, roughly half of U.K. stock market capitalization is comprised of companies whose business has minimal exposure to the United Kingdom,” she writes.

Jeffrey Kleintop, chief global investment strategist for Charles Schwab & Co., says global investment diversification has paid off for U.S. investors this year—even after factoring in the dollar’s strong performance against weaker major currencies. Comparing global investment diversification to the Masters Golf Tournament, Kleintop believes that the world economy has changed to the point where growth can be found in every region.

“Markets have become increasingly globally diversified, requiring investors to adopt a global perspective. We’ve seen this trend in stocks mirrored nearly everywhere—even the Masters golf tournament. The geographic distribution of the home countries of the golfers at the [mid-April] Masters Tournament is almost exactly the same as the stocks in the MSCI All Country World Index,” he explains.

Current Bright Spots

Admittedly, strong dollar appreciation had (until recently) tempered the outcome for U.S. investors, as most global equity markets produced positive results in local currency terms in the first quarter of 2015, say Thornburg Global Opportunities portfolio managers Brian McMahon and W. Vinson Walden. But with the improvement of European economic data, the Eurozone became a bright spot even in U.S. dollar terms, with the Dow Jones Euro Stoxx 50 Index up 4.6% in Q1, according to McMamon and Walden’s April market commentary.

Mirroring Kleintop’s view of broad-based global growth, the fund managers note: “From an industry sector perspective, eight of the 10 sectors of the MSCI All-Country World Index delivered positive returns, with a range of negative 4.9% (utilities) to 8.3% (health care).”

Over the past year, the portfolio managers have increased their exposure to the health care, information technology and consumer discretionary sectors, while reducing their exposure to consumer staples, financials and telecommunication services. Among the fund’s top international performers are Aena S.A. airports of Spain (which had its initial public offering in February), Toronto-based Concordia Healthcare Corp., and Numericable of France.

Turning to their view of Japan, McMahon and Walden say that country also has benefited from monetary easing, and Japan has bested Europe’s performance with the Nikkei Index generating a return of 10.7% in U.S. dollar terms. The upside potential of overseas equities is greater than that of their U.S. counterparts, as are their more attractive valuations due to the end of U.S. quantitative easing, Thornburg’s International Value Fund managers assert in their April comments.

“Significantly, monetary authorities in Europe, Japan, China and many other emerging markets were already engaging in monetary stimulus, whereas the U.S. Federal Reserve had wrapped up its asset-purchase program in late 2014 and was signaling key interest-rate hikes were likely in the second half of this year,” write Bill Fries and Lei Wang.

While Englander, Citigroup’s Group of 10 strategist, is upbeat about Greece’s prospects and even its troubled economy’s potential impact on the Eurozone, other analysts still see room for concern. On a recent visit to the annual Chartered Financial Analyst conference in Frankfurt, with participants visiting from around the globe, Frost Investment Advisors President and Chief Investment Officer Tom Stringfellow found it hard to escape the escalating financial tension between Greece and the other EU member nations.

“Recent headlines still belie the undercurrent of mutual disdain between Greece and the Euro-partners, recently underscored by the Greek foreign minister’s comment regarding his respect for Germany, just not their politics. Not to be side stepped, German Chancellor Angela Merkel commented … that much must still be done to prevent Greece from falling further into bankruptcy,” Stringfellow explains.

However, he adds, Europe is on the mend, and the ECB projects economic recovery for the Eurozone, forecasting a GDP growth rate of 1.3%. Germany will be a leading factor, much as it was last year, Stringfellow predicts. “The primary growth driver is expected to be, once again, Germany,” he says. “This wasn’t lost on the financial markets either, as Germany’s equivalent to the Dow Jones Industrial Average, the DAX, is up nearly double that of the DJIA over the past 12 months.”

Longer-Term Trends

Looking out over the next decade, researchers at the Center for International Development at Harvard University point to South Asia and East Africa as sources of the strongest economic-growth projections and the highest rankings of productive dynamism worldwide. Looking at the productive capabilities embedded in a country’s exports, the economic experts see growth in emerging markets continuing to outpace that of developed countries.

“Our Economic Complexity predictions find India’s disputed upper hand in growth will expand into a widening gap in the medium term, with growth projections to 2023 predicted to be at 7.9% annually, well ahead of the 4.6% projected for China,” says Ricardo Hausmann, professor of economic development at Harvard, in a statement.

“Countries accumulate productive knowledge by developing their respective capacity to make both more products, and products of increasing complexity—this underpins economic growth,” Hausmann explains.

Countries such as India, Kenya and the Philippines have made important recent gains in diversifying exports into more complex products. “Historically, these gains in economic complexity have translated into higher incomes,” he adds, “which position them as the frontrunners globally for their growth prospects.”

— Check out ‘All the World’s Major Regions Are Growing Once Again’: Schwab’s Kleintop on ThinkAdvisor.