Introduction
This podcast is intended for investors who partner with a financial professional – what we like to call The Advised Investor. I’m your host, Dennis Lee, welcome to the show.
… Previously on “Markets”
Let’s start with a recap of last month’s episode. I’m sorry you don’t have the ability to skip this part as you do on Netflix. But it’s a good practice to review previous concepts because while markets can move fast, the implications for investors … are much slower to change.
We spoke about being at the peak of inflation, and potentially getting close to the peak in rates. And what should you do in this environment?
First, take advantage of higher bond yields. Fixed income can provide you with attractive yields for the first time in years, at relatively low risk. (Like taking little, steady steps down precarious terrain.)
Second, lean into value stocks over growth stocks. That is, focus on companies that rely less on borrowing money to grow at a breakneck speed.
And whatever you do, don’t sit on the sidelines by holding cash. Inflation, while coming down, is high enough to meaningfully eat away at your money.
Now onto the show
These implications still hold true, even as financial markets have started off strong in 2023. March has come in … like a lamb. Winter is coming, they said! Hunker down and prepare yourselves for a stormy and tumultuous market!
But stocks in particular did spectacularly well in January and February, erasing some of the losses we experienced in 2022. It’s a reminder that staying invested is one of the most critical behaviors when it comes to your money.
What happened? Well, inflation seems to be slowing. As I shared in our previous episode, inflation has caused a chain reaction that generally has gone like this: high inflation pushes the Fed to raise rates, making it expensive for companies to borrow money, which makes it harder for them to grow, which drives their value down.
Lower inflation means the Fed could slow down their rate rises, and the chain reaction, we hope, will stop reacting, and work in favor of markets.
The bad news? First, even though inflation is slowing, it’s still fairly high. And as long as it remains high, the Fed could continue to raise rates, and it sees unlikely that they will cut them this year. Second, it’s possible that whatever good news we’ve had in the last few months is already priced into markets.
You know this intuitively if you’ve ever browsed Zillow for a home. Imagine you find a listing for a good value in a less-than-desirable neighborhood. But then you hear that there are plans to spruce up the area with an attractive downtown. The price of the home will quickly go up to reflect that news. While you still may want to consider buying, it’s not necessarily a great value for your money.
So while 2023 started off hot, we’re still living in the same world as before, with the same uncertainties. Will inflation slow enough? Will the Fed continue to aggressively raise rates if not? And is the recession still coming?
All of those questions still remain, and so the implications for investors remain the same. And I will repeat the mantra:
Take advantage of higher bond yields.
Lean into value over growth.
Don’t sit on the sidelines in cash.
But we can’t end our show there… I hate shows that don’t advance the plot at all in a given episode. So I’ll continue to ask some more questions, as I have in the title of this episode.
And the question for this month is…
Why bother with international investing?
At BlackRock, we often get this question from US investors. Followed by several other questions. And because I’m feeling a little combative today, I’ll answer this question with some questions of my own.
Why do you believe investing will succeed over the long-term? Why are you optimistic overall?
Well, here’s one answer to the question. You invest because you generally believe that markets will trend upwards over the long-term. If you were completely pessimistic about the world, you probably would keep your money in a safe and store up necessities. And we actually saw this during the onset of the pandemic in 2020. Investors dumped out of markets, and invested in toilet paper instead.
But you put money to work in the market because historically, a portfolio that is diversified across different sectors, asset classes, and regions – has seen improvements on the whole. Put another way, while there indeed remains persistent inequality in the world, the average person today compared to a hundred years ago has more opportunity at their disposal, more technology to benefit from, and more commerce bustling around them.
As analysts like to say, the world experiences economic growth. And the companies that you invest in become worth more.
With me so far?
Here’s another question. Where are you invested? At a very simplified level, stocks are in your portfolio for growth, bonds are in your portfolio for diversification and income, and alternatives are in your portfolio to seek outsized or uncorrelated returns. We’ve covered in previous episodes that bonds are having a moment – and may now actually give you pretty healthy yields at lower risk.
But stocks, or equities, are an incredibly important part of your portfolio for helping achieve the returns you might be looking for.
And very likely, that slice of your portfolio is going to look U.S.-centric.
According to portfolio data that BlackRock has collected over the last few years, on average, the stock portion of U.S. portfolios are 75% U.S. stocks.
And why wouldn’t you favor U.S. stocks? You live in the U.S. You know U.S. companies. You like this country’s prospects. And perhaps more importantly, U.S. stocks have done remarkably well. Facebook, Apple, Alphabet, Netflix, Google, Microsoft, Tesla were some of the world’s best performing stocks in recent years, and they are all U.S.-based companies. U.S.A.! U.S.A.! U.S.A.!
Expanding the universe of returns
But will this always be true for every time period? And are you sure this trend will continue for the next 10 years?
Here’s something to chew on. Would you have guessed that between the years 2000 to 2018, that U.S. stock performance ranked 27 out of 45 countries in the All Country World Index*? Much of that can be explained by the tech bubble and the financial crisis, in what many call “The Lost Decade,” during which country equity indexes from Brazil to Bangladesh experienced over 300% returns.
The point here is not that the U.S. is poised to do badly, or that other countries necessarily will “do better.” The point here is that investing is complicated and unpredictable, and that sometimes, optimism on a particular set of investments can be priced in. The U.S has done very well in the last 10 years, perhaps better than most expected. But the next 10 could look different than the last.
So let’s go back to our first question: Why do we believe investing over the long-term will be successful? The answer was that we believe on average, that across sectors, industries, and yes – regions, the world will continue to grow, innovate, and change.
Why bother with international investing? Because it makes sense to expand your universe of investment returns.
Put another way, would you bet it all on your local team to win the championship every year, or invest in the growth of the entire league?
The bottom line
The same thesis that compels investors to invest at all, applies to global stocks. We suggest you consider expanding the universe of returns through international developed and emerging market stocks, especially in an environment where the U.S. may not see the same kind of returns as the last 10 years.
You can still be bullish on the U.S.A. Just turn the dial up on the world.
Talk to a financial professional and adjust accordingly.
Important Notes:
International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets and in concentrations of single countries.
Past performance is no guarantee of future results.
Investing involves risks including possible loss of principal. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of March 2023, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the listener.
This material is provided for educational purposes only and is not intended to constitute investment advice or an investment recommendation within the meaning of federal, state or local law. You are solely responsible for evaluating and acting upon the education and information contained in this material. BlackRock will not be liable for direct or incidental loss resulting from applying any of the information obtained from these materials or from any other source mentioned. BlackRock does not render any legal, tax or accounting advice and the education and information contained in this material should not be construed as such. Please consult with a qualified professional for these types of advice.
Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments.
Diversification and asset allocation may not protect against market risk or loss of principal.
Prepared by BlackRock Investments, LLC, member FINRA.
© 2023 BlackRock, Inc. or its affiliates. All rights reserved. iSHARES and BLACKROCK are trademarks of BlackRock, Inc., or its affiliates.. All other marks are the property of their respective owners.
