Investors are constantly trying to attain that holy grail of a diversified portfolio, one that can survive the ebbs and flows of a global economy. This often involves adding some foreign stock exposure into the mix. This international exposure has often been determined by where a company is located. However, this may lead investors to overlook the sectors they invest in at the expense of geography.
Globalization has broken down the barriers of where a company can do business. Entities now sell their products to customers all over the world, deriving a large portion of their revenue and earnings from overseas markets. This subjects them to the winds of currency swings, overseas growth rates and foreign stock markets’ gyrations. What is more relevant is what a company does, not where it does it.
Sector allocation remains one of the more important drivers of portfolio diversification and return enhancement. You can look back in history, or to the present day, to see evidence of this phenomena. The dot.com crash of 2000 left few technology companies unscathed both domestically and internationally.
In 2008, there were not many safe bets in financials as the entire sector suffered. Fast-forward to 2016 and it is hard to find an energy or basics material company that is delivering positive returns to investors, whether is it headquartered in the U.S., or Latin America.
So what does this mean? Not putting too many eggs in one basket or one sector, and not obsessing about geography. Look at a company not as a foreign or domestic player based on the geography of its headquarters, but rather on the geography of its client base. Strive for diversification of sectors and don’t try and time the market.
Global News Influences Global Sectors
Listen to the news or read a financial publication, and you can often gauge the repercussions on a particular industry. When Congress talks about regulating drug prices, pharmaceutical companies around the world suffer. When a major terrorist attack happens, travel related companies worldwide see their share prices fall. News of a global oil inventory glut continues to batter all energy related shares. It is impossible to pretend to be a domestic company and live in a silo, not feeling the effects of these events.
Economic Winds Blow Afar
A sinking Chinese stock market makes Chinese consumers feel less secure. That may manifest itself in reduced purchases of everything from Coca-Cola, Fords, Coach bags and iPhones. Large economic players have a disproportionate effect on companies around the world given their strong consumer buying power.
The Perils of Playing Geography
Many investors look to diversify geographies by purchasing ETFs of specific countries or regions. However, investors should heed the caveat to watch the correlation between them due to similar sector exposure. As an example, adding exposure to Taiwan may inadvertently add technology exposure, as that is a dominant industry in Taiwan. Purchasing a Hong Kong ETF will load you up on the financial sector as it contributes a large portion of GDP.
What Does This All Mean for Your Portfolio?
Instead of trying to micro-manage international exposure, look for a mix of sectors which will expose you to the different industries that contribute to our global economy. Keep those sectors relatively balanced, not allowing any individual one to grow out of proportion. Always look for solid companies with good growth prospects. Purchasing foreign firms as American Depository Receipts (ADRs) will enhance your liquidity. However, remember that even the strongest player in an industry may fall prey to global influences such as supply and demand, politics, acts of terror and consumer demand. In today’s market, geography doesn’t insulate you from global events.
Note: Elaine Phipps, MBA, CFA, is a Portfolio Manager at Point View Wealth Management, Inc., a registered investment advisor at 382 Springfield Ave., Summit.
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