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International Investing
Diversifying in a Global Economy
Stock market volatility is a major reason for investing globally. All countries, including Canada, go through ups and downs of economic cycles. However, countries typically are not simultaneously at the same point in their cycles. Investing in several different markets can help reduce the impact on your portfolio when one region experiences an economic downturn. This variety in market performance can work to smooth your total portfolio performance through the power of diversification.
The Growing Influence of International Markets
Consider the dynamics:
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- Today, the majority of the world's investment opportunities lie outside North America. Twenty-five years ago, it was the reverse.
- Many of today's leading multinational companies are based in Europe, Japan, or the Pacific Rim, such as Nestlé, Toyota, and Hong Kong Shanghai Bank.
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Some investors believe that higher growth potential exists in many non-North American markets.
Expanding Your Opportunities
The Canadian market has delivered good long-term returns but has not been the leader in any given year. Each country has its own fiscal and monetary rhythm. The best performing market varies country by country and year by year. Local economic developments cause unique fluctuations within national financial markets, creating a variety of opportunities at any given time.
Market leadership changes hands frequently. Global investors benefit from these performance differences. Diversifying into many markets can reduce the impact of a downturn in any single equity market, including Canada, lowering your total portfolio risk.
Returns for Canadian and Largest Non-Canadian Markets
The following chart shows that market leadership among the major equity markets changes frequently. Diversifying into many markets may reduce the impact of a downturn in any single market. The market leader for each year is indicated in bold. The figures listed for each market by year indicate a percentage of return for an index representing that market.
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France |
Switzerland |
Australia |
Hong Kong |
Japan |
U.S. |
Canada |
| 1990 |
-13.2 |
-5.2 |
-15.9 |
9.4 |
-35.9 |
-4.9 |
-14.8 |
| 1991 |
18.1 |
16.3 |
35.1 |
49 |
8.7 |
33.1 |
12 |
| 1992 |
13.6 |
29.8 |
-0.8 |
45.4 |
-13.5 |
20.5 |
-1.4 |
| 1993 |
26.8 |
53 |
42.4 |
125.9 |
31.1 |
15.6 |
32.5 |
| 1994 |
1 |
10.4 |
12.8 |
-24.7 |
28.9 |
6.1 |
-0.2 |
| 1995 |
11.6 |
41 |
9.4 |
19.2 |
-1.9 |
33 |
14.5 |
| 1996 |
22.4 |
3.4 |
18.4 |
33.7 |
-15 |
22.4 |
28.4 |
| 1997 |
17.4 |
51.2 |
-5.5 |
-19.9 |
-20.2 |
37.6 |
15 |
| 1998 |
52.5 |
33.1 |
14.9 |
4.2 |
13 |
33.2 |
-1.6 |
| 1999 |
-14 |
-11.7 |
12.1 |
50.7 |
52.9 |
14.8 |
31.7 |
Source: Morgan Stanley Capital International; Frank Russell Company; Russell 3000® Index; TSE 300 Index
As we can see, it's difficult for a single country to sustain very good performance. While a region may perform extremely well one year, the next year's returns could be very different. Japan, for example, has had some extremely high returns, including the year 1999. However, the country has also produced some of the worst returns over the last 10 years.
We experienced a similar trend recently in the emerging and Canadian markets, as the crises in Russia and Asia finally caught up with Canada in the second half of 1998. After reaching the lofty high of 28% in 1996, and 15% in 1997, the TSE300 fell back to -1.6% in 1998, while US and European markets drove steadily ahead. However, the Canadian market came back strongly in 1999 posted a return of almost 32%! In fact, worldwide economic improvement has buoyed the emerging markets and Japan, while growth in the US and Europe slowed.
This experience demonstrates two things. First, that all stock markets move up and down. And second, that it is extremely difficult to predict how the markets will move. Many events that influence markets are simply unpredictable. Historical experience has shown that generally it has been more advantageous for long-term investors to adhere to a diversified investment strategy.
Nothing contained in this publication is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.
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