John Templeton is said to have almost single-handedly pioneered global investing.
In 1980, a Maoist guerrilla organisation called the Shining Path took over Peru, imposing what it called "a dictatorship of the proletariat." Western economies branded the organisation a terrorist group and curtailed economic activity. The Peruvian stock market collapsed.
Peruvian stocks were dirt cheap and the bargains tempting. As foreigners were not permitted to buy stocks, Templeton formed a Peruvian corporation and used it as a holding company. When the reign of the Shining Path ended and political stability was restored, economic activity picked up, taking the Peruvian stock market along with it. John Templeton won hands down.
He is said to be the first Western investor to see the potential of Japan's post-war economic miracle.
When Templeton began investing in Japan in the 1960s, it was considered an emerging market and a risky investment adventure. He found stocks trading at a P/E ratio of only 4 times his estimate of earnings while stocks in the US were trading at around 19.5 times. This despite the Japanese economy growing faster than the US. By 1985, when the country exploded onto the global economic landscape, Templeton had already made a fortune.
His optimism in the face of bleak pessimism was his greatest weapon as an investor. But so was his ability to scout across borders for bargains.
Good ideas don’t have borders.
Diversification is measured across numerous dimensions: assets, stocks, industries, sectors, and strategy. And it is not rare to find investors fairly well spread along these lines. However, when it comes to investing overseas, many investors ditch diversification at the border. Don’t be one of them.
Global investing is not only about FAANG stocks, which are undoubtedly coveted by investors across the globe. An Indian Fintwit handle recently requested others to tweet the names of global stocks they would like to own. Nvidia, which is into artificial intelligence, Home Depot, Starbucks, Coca-Cola, Tesla and BlackRock were a few mentioned.
Global investing allows you to get exposure to sectors that are not publicly listed in India; mining stocks, for instance. Globally there are no shortage of options- Sibanye Stillwater (headquartered in South Africa), Trilogy Metals (Canada), Glencore (Switzerland), BHP (Australia), Rio Tinto (London) and Vale (Brazil).
In a conversation in 2019 in Chicago, Rupal Bhansali, the chief investment officer and portfolio manager of Ariel's international and global-equity strategies, articulated this brilliantly.
If she wanted to own a tyre company and restricted herself to the US, she would be forced to own Goodyear, which she believed was not idiosyncratically a good name to own. Its manufacturing process was not well evolved. They had not invested sufficient in technology and R&D, or in training their workers. They were facing difficulties in ramping to the higher rim-size models of tyres, which are prevalent in SUVs and premium cars. The traditional 16-inch tyre market was commoditized and that was not where the money was. Besides, it was an extremely leveraged company. But if she decided to scout for the best tyre company in the world, she could invest in either Michelin (France) or Bridgestone (Japan).
If diversification is the only free lunch in investing, as Harry Markowitz declared, Indians might be leaving a lot on the table by ignoring global stocks. There is tremendous value in diversifying your portfolio across geographies.
The behavioural impact: When the intangibles rest on misplaced conclusions.
Investors tend to have a home bias because it is a preference for the familiar. They feel that they know their local markets and firms better than those overseas. In this day and age, this is a flimsy excuse. Asymmetries in knowledge and information are not insurmountable. The world is increasingly flat, and barriers to the movement of information and capital continue to come down.
Another intangible is the pride in their nation and its champions of industry. Misguided patriotism is not a legitimate reason to shirk global investing. If it was an “unpatriotic act”, the government would not have permitted retail investors the option of investing abroad. Further, no one is suggesting that you invest globally to the exclusion of Indian stocks. It is only a portion of your portfolio that will have a global allocation. Maintaining your patriotism and investing internationally are not mutually exclusive. Similarly, global investors who invest in the Indian stock market are not unpatriotic to their respective countries either. They are just logical and unemotional about it.
For Americans, domestic stocks represent 55% of the global stock market. For Australians, their market represents only 2% of the global stock market. When it comes to India, we corner around 2.5% of global stock markets. Clearly, by limiting our investments to only domestically listed companies, we are curtailing our portfolio’s wealth creation potential.
No country is destined or entitled to outperform. And to invest with that assumption is extremely naïve. The last decade has shone the spotlight on US stocks. But don’t forget the “Lost Decade”, following the burst of the tech bubble, when the S&P 500 lagged behind Europe and China.
In 2017, the stock markets in Argentina, Turkey and Nigeria had a banner year. In 2018, Ukraine and Macedonia put up a spectacular performance, followed by Qatar. In 2019, Greece was not only the top performer in Europe, but across the globe. Russia, Italy and Brazil also stood out. In 2020, Vietnam, South Korea, Taiwan and Denmark delivered admirably. In May 2021, European stocks have hit new all-time highs, as optimism over the economic recovery continues to lift share prices across the region.
Diversification, in all aspects, makes your portfolio less vulnerable to vagaries of the market. And if done judiciously, will make meaningful contributions to your portfolio over the long haul.
Disclaimer: The stocks mentioned are purely for illustrative purposes and are not recommendations.