western Europe? emerging markets?

Over the past few months I’ve read many recommendations that US investors can avoid possible turmoil in the domestic stock market by reaching abroad both to western Europe and to emerging markets around the world. This is a strategy that has worked well since I began managing portfolios in non-US markets in the mid-1980s. There was also an argument to be made that the euro was substantially undervalued vs. the US$ late last year (whether a rebound in the euro automatically translates into a relative gain in EU stock markets is a slightly more complicated issue) and that recovery from the pandemic was only happening with a lag there.

There may be a stock here and there that’s interesting, but the world has changed enough in the past half century that I think reallocation to foreign markets is a bad idea.


The four largest economies there are:

–Germany, where locals are generally uninterested in stocks and many companies remain private, financing themselves through bank loans

–the UK, perhaps the ghost of US future, which decided to cut off the flow of immigrants by exiting the EU, thereby losing access to to its largest export market. And–what a surprise–all the non-EU companies that were using the UK as a staging area for their own European manufacturing efforts left

–Italy hasn’t had economic growth for 25? years (maybe more)

–this leaves France, which has very strict rules on foreign ownership (some years ago it declared Dannon yogurt to be a national treasure that foreigners can’t own, the kind of thing that has driven entrepreneurs to pick up stakes)

Europe has better infrastructure than the US (who doesn’t?) and is generally way ahead of us on most social issues, ex immigration. On the other hand, the overall population is maybe a decade older than us, so it’s demographically less attractive.

the Pacific

–Japan. France on steroids, except with the working population shrinking since before the turn of the century

–Australia. The only place so for on the list I’d feel safe in. A pretty small market, though

emerging markets

–eastern Europe = ways to reach into Russia, which is not a high priority item at the moment

–Africa, the Middle East and Latin America, ex Mexico (which I have no opinion about). These are places for super-experts. The biggest issues I see are political stability, the completeness and integrity of financial statements, and the ability to sell if need be. This last is a lot more important than it sounds. In some places, a $5 million position might amount to several months’ trading volume. A seller would be lucky to keep his intentions secret for a week, before the stock price would collapse.

–the Pacific. In the emerging markets heyday maybe a quarter century ago, the biggest stars were:

——Hong Kong, an investor’s paradise under Deng; a place to avoid under Xi.

——Singapore, small market without China sizzle, but relatively safe

——Thailand, Malaysia, India, Pakistan… unstable governments, not particularly friendly to foreigners

In sum, I can see the conceptual appeal of trying to go elsewhere to avoid near-term risks in the US stock market. And a small percentage shift is probably ok. But for me the risks outweigh the rewards.

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