Should You Invest Globally?

Strap on your egghead hat and let’s review another reason to invest outside the U.S.!

For the first half of 2017, if you invested overseas, you were rewarded more so than if you only invested in the US. Take a look at performance quilt below (a performance quilt shows how different investment classes performed each year):

performance quilt

Source: Barclays, Bloomberg, FactSet, MSCI, J.P. Morgan Asset Management. REITs: FTSE NAREIT All REITs; Cmdty: Bloomberg UBS Commodity Index; Global Agg: Barclays Global Aggregate; Growth: MSCI World Growth; Value: MSCI World Value; Small cap: MSC World Small Cap. All indices are total return in local currency. Data as of 30 June 2017.

So, you may be wondering whether now is the time to allocate a portion of your portfolio to international holdings. The short answer is yes – most investors would be well served by allocating to markets outside our borders. But there are other ways to gain exposure to international markets – by investing in companies (and mutual funds that invest in these companies) that are based here in the United States, but operating globally.

 

Let’s examine some recent data from research firm FactSet:

Earnings of S&P 500 Companies

  • As of early August – with 91% of the companies in the S&P 500 reporting actual results for Q2 2017 – 73% reported positive EPS (Earnings Per Share) surprises and 69% have reported positive sales surprises; and
  • For Q2 2017, the blended earnings growth rate for the S&P 500 is 10.2%.

But FactSet asked this question: how did companies with higher global revenue exposure perform relative to companies that had more domestic revenue exposure?

US Earnings Continue to Improve, But More So for Global US Companies

FactSet’s analysis divided the S&P 500 companies into two groups: those that generate more than 50% of sales inside the U.S. and companies that generate less than 50% of sales inside the U.S. The results are listed in the chart below:

Here are some more interesting conclusions drawn from FactSet:
 

Earnings

  • The blended earnings growth rate for the S&P 500 for Q2 2017 is 10.2%.
  • For companies that generate less than 50% of sales inside the U.S., the blended earnings growth rate is 14.0%.
  • For companies that generate more than 50% of sales inside the U.S., the blended earnings growth rate is 8.5%.

Sales Growth

  • The blended sales growth rate for the S&P 500 for Q2 2017 is 5.1%.
  • For companies that generate less than 50% of sales inside the U.S., the blended sales growth rate is 6.0%.
  • For companies that generate more than 50% of sales inside the U.S., the blended sales growth rate is 4.7%.

Summary

By ignoring global markets – and companies that derive significant revenues outside the U.S. – you may be shortchanging yourself.