In 2015, S&P 500 companies derived 44% of their revenues from foreign markets. It seems like many investors talk about the value of diversification, and usually diversification includes exposure to foreign markets. But, I look at the stat above, and it seems to me that investors long in US based funds already have plenty of exposure to foreign and emerging markets. In fact, investing in emerging markets may provide investors with a portfolio over-saturated with EM risks.
Companies such as Qualcomm and Intel receive tens of billions of dollars from sales in Asia, so going long in either company represents a vote of confidence for Asian economies, despite the fact that both companies are U.S. based.
I think globalization presents a new challenge to investors that hasn't been present in years prior. For those that want to be diversified and exposed to foreign economies, this many come as a good thing, as a S&P tracking index funds or mutual funds could capture overseas growth. But I also see this as a problem for the less sophisticated investor who doesn't understand the potential risks of emerging markets.
As an investor, what are your strategies for dealing with increased globalization? Are you pulling back on foreign exposure? Doubling down?
Let me know
Depends. US actually benefit most from globalization. This is one of those things economists across street agrees upon. Not because companies they work for have overseas business but because globalization is one of major reasons that push equity to record high.
Depends on where the foreign revs are coming from, what impact is expected from Vol, pass throughs and cost structure, how much is hedged. Some industries are counter cyclical or have low correlations. This is too broad a question. Is this for some term paper?
No its not for a paper. I agree its a broad topic, but I was hoping to hear a variety of responses. My thinking is that people buy foreign market securities with the idea that they are uncorrelated from domestic markets.
But I think people aren't really realizing that foreign markets are not as uncorrelated to domestic markets as perhaps they realized. Here's an article from Morningstar that kinda embodies what I'm saying: http://www.morningstar.co.uk/uk/news/96521/why-have-global-correlations…
So I'm really trying to talk about broad market correlation trends. Sorry about not narrowing down the focus.
I think in this day and age most all sophiticated and institutional investors understand that a large cap international corporation is going to give exposure to foreign markets. I think your question regarding strategies is a bit too situational to answer without more information about the hypothetical portfolio such as goals and investible universe.
I'm actually writing a thesis regarding this subject right now. Turns out that while industry diversification destroys value (an investor could buy a series of pure-play firms which will outperform the diversified firm) because of inefficient flows of capital from profitable to less profitable product lines, as well as agency problems.
International diversification adds value because of 2 things: first is internalization theory (do a quick google search, my post would get way to long otherwise). The second reason is that investors prefer companies to diversify abroad: they get access to foreign markets through the company. If they were to do this themselves they would have more information asymmetry through things like language differences etc. Also, the firm in their own country can be traded at lower (domestic) costs.
Thanks for this, I'd love to read you're paper when you're finished.
There are tons of research papers on how companies hedge their exposure and to what extent. Adding the investor sight to this discussion creates an even broader view. In my opinion the benefit of broader diversification in terms of different economic conditions of regions outway the disadvantages of a greater exposure to EM. Just think of the car industry, if BMW / GM had not expanded their business to Mex, China, whatever they simply would loose ground against their competitors.
Yeah, globalism increases the risk of TURNING THE FREAKIN FROGS GAY.
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