- Maintaining an allocation to international stocks enables US investors to diversify their portfolios.
- Some international stock markets may benefit in the second half of 2021 from both an economic recovery and a weak US dollar.
- International investing also may expose investors to geopolitical, currency, and other risks.
- Professional management may help US investors gain the potential benefits of international stock investing while managing the risks.
While media coverage may give the impression that the high-flying US stock market is the only place to be for investors, a world of opportunities also exists outside the US. Midway through 2021, the success of the world's other 192 countries at managing COVID-19 and restarting their economies varies widely. The World Bank expects 90% of developed market economies to regain their pre-pandemic per capita income levels by 2022. But the bank also expects a slower recovery for emerging-market (EM) and less developed nations with only about one-third fully recovering by next year.
But an uneven recovery is still a recovery and that economic uptick, combined with a weakening US dollar and stock prices that are relatively low compared with the US, are all creating short- and medium-term opportunities for international investors. Further into the post-pandemic future, the continuing growth of consumer spending in China and other EM nations is likely to offer long-term opportunities for US as well as global investors. These opportunities are in addition to the ongoing diversification benefits that international stocks offer to US investors.
To be sure, risks also exist, mostly from the persistence and uncertain potential trajectory of COVID-19, and from geopolitical tensions. This uncertainty is exemplified by ongoing high levels of COVID infection in many less-developed countries and rising friction between an increasingly assertive China and the US as well as between China and other countries including the UK, India, Australia, and Canada.
These geopolitical risks have been brought home to US investors with the expansion in June of an earlier executive order barring them from owning shares in Chinese companies that both the Trump and Biden administrations have said aid China's military and spy agencies. Geopolitical risk advisor David Bridges also points to what he describes as rising left-wing populism as another source of risk for global investing, which has benefited from the presence of market-friendly governments in many countries over the past several decades. In EMs such as Peru and Mexico, political entrepreneurs aligned with these movements have gained power partly by promising to reverse earlier market-oriented reforms.
Despite those risks, though, many countries—particularly in east Asia—are recovering strongly from an unprecedented global recession and many companies and industries present opportunities for value- as well as growth-oriented investors.
Why international—and why now?
5 fast facts about foreign funds
The long-running US stock market rally has left some investors with more domestic stock exposure than they may want. Overexposure to any one country leaves you vulnerable to a downturn there and to missing potential returns elsewhere.
Fact 2: The US is not always the best-performing market
US stocks have outperformed international stocks recently, but many countries have claimed the title of best-performing market over the years. Historically, one country may outperform others for a time but not indefinitely.
Fact 3: International investing is not excessively risky
Portfolios with both international and US stocks have historically been less risky than those with only US stocks. That's because global stock markets have not historically always risen and fallen in lockstep. Fidelity research shows that allocating between 30% and 50% of a stock portfolio to international stocks can provide appropriate diversification to help manage risk.
Fact 4: US multinationals do not provide adequate international diversification
Stocks of large US-listed companies with international operations frequently rise and fall along with the overall US stock market and provide less diversification than international stocks would.
Fact 5: International investing doesn't require currency hedging
Currency hedging is the practice of holding both a stock denominated in a foreign currency and an equal but opposite short position in the currency itself. Some investors do this to try to prevent changes in currency valuations from hurting their investment returns. It may sound smart, but the time and cost spent on hedging currency doesn't always pay off. Since 1973, currency hedging has hurt stock returns roughly half of the time. That's because timing currency movements is extremely difficult, even for professional investors.
Historically, the world’s stock markets have not risen and fallen in lockstep. Instead, some have gained while others have fallen or moved sideways. In fact, since 2005, stock markets from 12 different countries have taken turns claiming the title of “best performing market.” This divergence of performance means that maintaining exposure to international stocks may nearly always provide diversification for an investor’s portfolio.
Diversification: Diversifying your portfolio is nearly always beneficial and international stocks may offer opportunities to diversify at reasonable prices. The strong ongoing recovery in US stocks since a massive selloff in March 2020 reflects the abundant liquidity injected into the financial system by the Federal Reserve. While many other governments are also using stimulus policies to aid their post-COVID recoveries, the effects on markets outside the US have been less pronounced. Many international stocks represent relative bargains, which suggests they may offer opportunities for attractive returns as well as providing diversification for US investors' portfolios. But keep in mind that diversification and asset allocation do not ensure a profit or guarantee against loss.
Bill Bower, manager of the Fidelity® Diversified International Fund (FDIVX) says several reasons make him believe international stocks may be an especially attractive complement to US stocks. "The first," he says, "is history." US stocks have outperformed the rest of the world for much of the past decade, but not over longer time periods. In fact, international stocks, represented by the MSCI All Country World ex USA Index, have handily outperformed the S&P 500® for most multiyear periods.
Attractive valuation: The second reason is that prices of international stocks are low relative to those of US stocks. As of June 14, the price-to-earnings (P/E) ratio of ACWX, an exchange-traded fund tracking the MSCI All Country World ex USA Index, stood at 20.85, compared with 32.43 for IVV, an ETF tracking the S&P 500®.
A weaker dollar: The massive increase in US government spending and debt is also helping international stocks by driving down the value of the dollar against other major currencies. Historically, international stocks have risen when the dollar has declined, and as international equity strategist Burr Clark puts it, "The continual printing of money in DC is going to have a toll on the dollar."
To be sure, though, while history and currency may both be on the side of international stocks, the future is not the past and the international order may operate differently in the era of COVID than it did before. Seemingly settled assumptions about transnational supply chains, the free movement of goods, people, and capital, trade policy and international law are all still evolving in the COVID-aware world in ways that may have implications for investors. As new realities force changes to old assumptions, investment managers with strong fundamental research capabilities may be able to spot opportunities in the shifting landscape.
The extraordinary—and mostly unexpected—events of 2020 underline the riskiness of making forecasts for the rest of 2021, but also the riskiness of not being ready for whatever may come. With that in mind, maintaining a well-diversified portfolio may be as important as ever to help you reach your goals, and diversifying across geographies can help you do that.
Those who want to invest outside the US can get professionally managed exposure through both passive and active investment funds. Actively managed funds that practice rigorous research can potentially help you gain exposure to industries, companies, and geographies that offer opportunity while avoiding those that don't. Fidelity has a number of tools to help investors research mutual funds and ETFs including the Mutual Fund and ETF evaluators on Fidelity.com. Below are the results of some illustrative screens (these are not recommendations of Fidelity).
Fidelity international funds
- Fidelity® Diversified International Fund (FDIVX)
- Fidelity® International Capital Appreciation Fund (FIVFX)
- Fidelity® Worldwide Fund (FWWFX)
- T. Rowe Price Global Stock Fund (PRGSX)
- MFS Global New Discovery Fund (GLNAX)
- Marsico Global Fund (MGLBX)
The Fidelity screeners are research tools provided to help self-directed investors evaluate these types of securities. The criteria and inputs entered are at the sole discretion of the user, and all screens or strategies with preselected criteria (including expert ones) are solely for the convenience of the user. Expert screeners are provided by independent companies not affiliated with Fidelity. Information supplied or obtained from these screeners is for informational purposes only and should not be considered investment advice or guidance, an offer of or a solicitation of an offer to buy or sell securities, or a recommendation or endorsement by Fidelity of any security or investment strategy. Fidelity does not endorse or adopt any particular investment strategy or approach to screening or evaluating stocks, preferred securities, exchange-traded products, or closed-end funds. Fidelity makes no guarantees that information supplied is accurate, complete, or timely, and does not provide any warranties regarding results obtained from its use. Determine which securities are right for you based on your investment objectives, risk tolerance, financial situation, and other individual factors, and reevaluate them on a periodic basis.