Expanding your universe of returns


Gordon Fraser, James Bristow and Jeff Spiegel – BlackRock International and Emerging Market Equities. BlackRock’s Jasmine Fan, Tanvi Pradhan and Elizabeth Turner also contributed to this commentary.

International cargo port

U.S. equities have been the strongest performing asset class for a long time, outperforming other countries and regions over the last decade. But that may be changing. As the global economic recovery takes shape, it may be a good time to think internationally within your diversified portfolio.

Here, the BlackRock international and emerging markets equities teams share timely perspectives on key questions from investors. They explain the benefits, risks and near-term trends of international and emerging markets stock exposure in a long-term portfolio as well as their outlook.

 

Why invest in stocks outside the United States?

The U.S. is not the only country generating strong earnings. In fact, as the following chart illustrates, the U.S. represents only 15% of global GDP. The other 85% abounds with opportunity as countries earn a bigger share of the global economy.

IMF world economic outlook as of October 2019

Interestingly, targeted investment themes working well in the U.S. have great potential in other countries. For example, 75% of the electric vehicles market is outside the U.S. In addition, a number of companies are well-positioned to benefit from global trends like e-commerce and gaming.1

 

What are foreign market risks and potential upsides?

In our experience, many investors shy away from foreign stocks because of the volatility in those markets. But that’s where actively managed funds make a big difference to help them achieve their financial goals. Investors can rely on experienced portfolio managers to make well-informed decisions and carefully manage investment risks.

Immersed in what’s going on in every corner of the world, our large, global investment teams, have “boots on the ground,” for example, to research opportunities in local markets. We also have the resources and expertise to effectively measure risk and return potential and analyze data in the context of macro trends.

International investing does involve special risks, including currency fluctuations, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments.

These risks are often heightened for investments in emerging markets as they are more likely to experience currency devaluations. Many of those securities markets also have lower trading volumes and less liquidity than their developed-country counterparts.

There are also upsides to consider. For example, volatility can be beneficial for investors because fund managers can capture outperformance. Market movements can present attractive entry points to add desired positions in a portfolio, particularly in emerging markets where stock prices move around a lot — even for companies with fantastic growth prospects.

 

Regarding international and emerging market stocks, what are the main themes for investors to watch in the global recovery?

As the global economy rebounds from the COVID-19 pandemic and vaccine uptake continues, we expect many regions to recovery steadily over the next 12 months. We also envision more normalized manufacturing activity, stronger consumer confidence and rising trade volumes.

The increased economic growth will likely lead to higher revenues and valuations among international companies, particularly in emerging markets. Here are a few additional forces supporting the global recovery.

  1. Fiscal stimulus and more predictable U.S. trade and foreign policy under the Biden administration are beneficial for global growth. The International Monetary Fund recently estimated that emerging market economies will grow +6.3% in 2021 compared to -2.4% in 2020.2 Asian countries, including China, are leading the 2021 projections.
  2. The ongoing trend of a weaker dollar amid easy monetary policy has the potential to drive emerging market equities to outperform over the next few months.
  3. While the U.S. remains a primary engine for the most cutting-edge research and innovation, international markets are driving many new business ideas and technological advancements. For example, Europe owns the most advanced renewable energy technology. And Asia saw the fastest growth in the business-to-consumer space, enabled by technological solutions such as mobile payments and online retail.3
  4. Companies around the world are generating more revenue growth and have started to take a larger share of the revenue pie. As a result, the average international revenue growth of companies in the S&P 500® Index (all are U.S. companies) has been decelerating in the past few years. We expect this trend to continue into the next decade, powered by strong economic growth and favorable demographic trends in developing countries.

S&P 500 international revenue growth bar chart

*2020 data as of January 2020 to isolate the impact of COVID-19. Source: Thomson Reuters DataStream, as of Dec. 31, 2020, based on the cap weighted average year-over-year foreign revenue growth of companies in the S&P 500 index.

 

In summary

The global economy is poised for recovery, giving investors reasons to consider international and emerging market equities as part of their core portfolio strategy. To learn whether foreign-market stocks could help support your financial goals, asset allocation strategy and risk tolerance, speak with your Ameriprise financial advisor.