Edge Capital Research Team
Research Insights Why Global April 2016
Why should I invest in any equity outside the United States? It is a relatively simple question, and one that we hear more and more often. The question has become more emphatic with the passing time and continuing trend of US out performance (economically and in financial markets).
We will try to keep our answer simple as well. Because it makes sense. A long-term, disciplined investor has to look past where we are in the current portion of the cycle to what is likely next to come. Chasing the performance of what has worked most recently will eventually catch up with you as inevitably the rush pushes valuations up to a point where future returns fall. While the United States is the largest single economy in the world, it still represents a little less than a quarter of global economic activity. While the US equity market is the largest by capitalization (in the MSCI All Country World Index), it is only a little more than half of total market value. In terms of the number of publicly listed companies, the US has less than 20% of the companies listed in the developed world (OECD countries) and even lower if we include emerging markets. It is a big world out there.
Granted, the US is more mature in its economic recovery and US-based investors are likely more comfortable grappling with the problems we see at home than the ones we see abroad. Doing so ignores facts that, in the big picture, support why we want a balance of geographic equity exposure for the long-term. Below are the top five big-picture reasons we think global diversification makes sense. There is no way of knowing when we will reap the benefits, but these reasons support why we will in time.