Allocating to International Markets Nowadays

Investing best practices continue to advocate for diversifying US markets exposures with allocations to international markets. With similar headwinds negatively impacting international markets to the same, or in many instances worse, degree as the domestic asset markets, many investors likely question the near- to medium-term value of this diversification. Doubling down on this investor skepticism for international investing: the fact that foreign markets, in general, only offered diversification by lagging US asset markets over much of the past 10 years (chart below).

Since its early-September 2021 inception, Solyco Wealth underweighted international exposures for both its equities and fixed income allocations across its four model portfolios. Certainly numerous specific situations and equities across non-US markets offered abundant opportunities to reap significantly positive returns uncorrelated with domestic investments: MercadoLibre (MELI) in 2020, PetroBras (PBR) 2006 to mid-2008, AliBaba (BABA) 2017 to 3Q21, and many more. However, the relentless encroachment of domestically listed, US companies on international markets in the age of globalization also must figure into investors’ analysis as well, in our opinion.

If a US-listed company, with readily available financial data, corporate presentations, and management commentaries – not to mention shares that trade on a widely recognized exchange during domestic working hours – offers similar end market exposure to a foreign-listed equity, the value of diversification, in our view, should be heavily scrutinized. We remain cognizant of the familiarity, or “home,” bias that this view reflects. Similarly, we posit that firms and individuals solely focused on international investing remain susceptible to a propensity to “talk their book,” exhibiting similar behavioral biases. To combat these behavioral hurdles, Solyco Wealth executes a 180-degree lookback as part of its evaluation process of domestic and international equities. This process enabled us to discover and add to our model portfolios what we evaluate to be outstanding international operators like Sociedad de Quimica y Minera out of Chile, Taiwan Semiconductor, France’s TotalEnergies, and the Swiss engineering and industrial concern ABB, among others.

While we have yet to “pull the trigger” with respect to adding China-specific exposure to our portfolios due to government policies and resulting increased regulatory scrutiny, we continue to closely monitor select Chinese equities. The downdraft in equities prices in China resulted in a very attractive valuation proposition, as shown in the chart to the right. However, we have yet to gain sufficient comfort to deploy capital.

Similarly, with several countries’ central banks ahead of the Fed in raising interest rates, we continue to watch emerging market debt, both in local currency and in US dollar terms. Without a resolution on the Russia-Ukraine situation, however, we remain loath to accept these assets risk-reward ratios.

Looking forward a host of factors probably alter the international investing landscape: demographics, trade restrictions, geopolitical strife and wars, tax policies, etc. Just as with our current approach, however, we recommend that investors adopt: 1) a standard approach to generate investment options across a wide variety of markets, 2) a set framework with which to evaluate and rank these options, and 3) a policy for periodically evaluating these choices in the context of current market conditions, investing goals, and investment alternatives.