International stocks have dominated capital market returns so far this year, prompting investors to pour nearly $75 billion into non-US equities through September 30, according to Morningstar. Yet, the case for overseas investing hinges on a longer-term rationale: Broadening your investment horizons opens up a world of opportunity.
MORE TECH, LESS COMMODITIES
Currently, non-US companies across both developed and emerging markets together comprise 48% of the global stock market—a figure that is more likely to trend up than down. But sheer numbers only tell half the story. The types of companies thriving overseas are changing, too.
Take the developing world, where technology has overtaken commodities as the engine for profits. In 2006, 30% of the MSCI Emerging Market Index was comprised of energy and materials stocks. By 2016, that number had been cut in half. On the flip side, the percentage of technology companies in the index has nearly doubled over the last 10 years. And, technology firms now comprise six of the 10 largest companies in the index, by market capitalization.
HIGHER ADOPTION RATES ABROAD
While most people think of Silicon Valley as the cradle of new ideas, innovators are plentiful overseas. In fact, research and development spending as a share of GDP is 50% higher in Israel and South Korea than in the US.
Plus, in some regions, consumers are adopting technology more rapidly than here at home. Developing-world countries and companies are rapidly becoming Internet trendsetters—especially in online retail and digital payments. In some countries, the lack of a developed retail infrastructure actually proves to be an asset for e-commerce leaders.
Notably, in several emerging markets, e-commerce penetration is higher than in developed markets despite lower per capita incomes. For example, online penetration of retail is much higher in China and South Korea than in the US (Display). In this instance, US retailers can learn from the experiences of their overseas peers, not the other way around.
LOCAL RESEARCH: A FOREIGN CONCEPT
The technological innovation driving new sources of growth and prosperity abroad presents both challenges and opportunities. Finding true pioneers requires more than just screening for growth or profitability by standard equity measures. Investors need to develop an intimate understanding of local consumer trends and tastes, while focusing on industry-specific metrics.
On-the-ground expertise can help in this regard, especially since investing in non-US stocks may offer greater opportunity for stock selection. Why? Although far more efficient than in the past, non-US markets are still less efficient than the US. Together, developed international and emerging markets host many more companies than the US, but there are far fewer earnings estimates available for the average company outside the US. This creates the potential for investors with deep local experience to benefit from an information advantage.
The bottom line? The world grows more interconnected all the time, and technological innovation moves rapidly across industries regardless of borders. Make sure your portfolio puts out the welcome mat.
The views expressed herein do not constitute research, investment advice, or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.
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