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Portfolio > Economy & Markets > Stocks

Kleintop: 3 Reasons to Stay Globally Diversified

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Britain’s June 23 vote to leave the European Union hit U.S. investors with another in a series of exogenous political, economic and financial shocks.

Now, long-term investors wonder whether it’s time to retreat from global diversification to the perceived relative safety of the U.S. stock market.

Jeffrey Kleintop, chief global investment strategist at Charles Schwab, doesn’t think so.

Kleintop argues in a recent commentary that global stock returns are attractive and international exposure can be a boon to investors’ portfolios in a down market.

Equally important, investors don’t want to miss out on what he calls the next “investing megatrend.”

Over the past 45 years, U.S. and international stocks consistently outperformed each other in alternating periods of time, Kleintop writes.

On a three-year rolling basis, U.S. stocks have outperformed international stocks for 89 months, a tie for the longest run ever.

U.S. outperformance could continue, according to Kleintop, but “abandoning international stock exposure in your portfolio now as the duration of U.S. outperformance sets a new all-time record in July 2016 may turn out to be the worst time.”

Following, Kleintop explains his reasons for not retreating from global diversification:

Attractive returns

 1. Attractive Returns

Worried about losses over the long term from global diversification?

Kleintop looks to history, and finds that global stock returns have never been negative over the 10 years that followed valuations similar to where they are today.

True, no meaningful relationship between stock market valuations and short-term stock market performance exists, but over a longer period, a robust relationship emerges, he writes.

“Lower stock market valuations have preceded periods of higher future stock market total returns.”

 Experience fewer losses

2. Experience Fewer Losses

Kleintop maintains that the increased diversification international exposure offers can help buffer the investor’s portfolio against market downturns.

He explains that the lesser frequency of losses for global stocks can be seen by examining five-year rolling periods over the past 45 years of monthly data. These show that of the 540 periods, the MSCI USA Index suffered a loss in 80 periods, while the MSCI World Index experienced one in only 67 periods.

Kleintop points out that in the worst 10-year period for both indexes since 1969 — February 1999 to February 2009 — the MSCI USA Index fell by more than 40% (-4.2% annualized), while the MSCI EAFE Index lost just 10% (-1% annualized).

Stock board in Shanghai. (Photo: AP)

3. Next Investing Megatrend

“The middle class is going global,” Kleintop writes.

As a result, the next investing megatrend may be the adoption of middle-class lifestyles on a global scale. This would have major implications for global goods and services providers.

Kleintop cites World Bank estimates, indicating that 93% of the global middle class will be from emerging markets by 2030. Global middle-class consumption is forecast to soar to $56 trillion by 2030, up more than 160% from $21 trillion in 2009.

Providers of all types of goods and services will benefit by the adoption of middle-class lifestyles on a global scale, including carmakers and consumer discretionary goods companies, as well as financial and medical services providers.

Kleintop says that lack of international exposure would mean missing out as this megatrend could provide new growth opportunities for companies around the globe.


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