Originally published by BetaShares
The American midterms are back on us and, as was often the case in Australia and abroad in 2018, it is a time of great political instability and uncertainty. In recent months, markets have already been observed that are driven in both directions by trade and tax policies, geopolitical tensions and probes about possible wrongdoing by the Trump administration. In addition, the & # 39; October effect & # 39; (ie the theory that shares tend to decline in the month of October) in full swing – during the month the technology sector had its worst day in seven years and worries of rapidly rising prices sent to Wall Street to the worst day in eight months also.
Important for markets, next week will be the US midterm elections, which, even without the presence of such a divided president, have historically been the source of increased volatility in the US equity markets. Goldman Sachs (NYSE 🙂 stressed this in a report in April and noted that “stock market volatility was generally high during election years, averaging 15% over 11 electoral years since 1974, compared with a median of 12% in all years since 1970. “[1]
While some observers point out that stock prices in the US usually rise after the elections, scholars strongly advocate that the Democrats control the House and the Republicans to hold a majority in the Senate (closely) , Goldman Sachs expects uncertainty to stay longer than usual this year.
S & P 500 median monthly realized volatility
With all this uncertainty in place, it could be time for investors to broaden their horizons and diversify their portfolios by looking beyond the US for international exposure to equities. But where?
Consider the land of the rising sun …
When we first look at Japan, we see a market that is increasingly determined by strong valuations and economic growth.
Historically Japan was seen as expensive, especially when measuring the price to profit multiples and the dividend yield. But just like a sense of normality of the White House, this is no longer. At the macro level, Japanese stocks now trade at multiples that are cheaper than US stocks and the dividend yield on Japanese equities has increased close to the US. Furthermore, Japanese companies have room to increase their dividends because they have the lowest payout ratio of all developed markets. A further underlining of this potential growth story is that more than 50% of Japanese companies have more cash than debt.
While trade wars and political misery threaten to disrupt an expensive US stock market (in comparison with Japanese forward P / Es), Japan shows an opportunity to offer value. This underlines the economic figures halfway through the year which confirm that Japan has finally found its basis after two decades of demoralizing economic stagnation. GDP in Japan is now expanding by 1.9% year-on-year, private consumption grew by 0.7% and operating expenses rose 1.3% in the previous 12 months
… and a possibility further to ASIA.
Emerging markets, especially in emerging markets, have developed for some time (pun intended) to very attractive investment opportunities.
As my colleague Justin said in his recent blog, we think about technology mostly in North America. More specifically, we think of Apple (NASDAQ :), Facebook (NASDAQ :), Google (NASDAQ :), Netflix (NASDAQ :)). But while we look further abroad, there is a new kind of technology companies that help stimulate growth in developing countries.
Even with Amazon (NASDAQ 🙂 as a synonym for e-commerce, China actually has the largest share of the world’s e-commerce market. Indeed, the Chinese e-commerce giant Alibaba (NYSE 🙂 has a share of 40% [2]. To put this further in perspective, Alibaba’s sales via its online platform are three times larger than what Amazon sells worldwide. One of the world’s largest search companies also exists in China (Baidu) and Tencent is a global technology title that, in addition to many other things, is the largest messaging app in China
Apart from such impressive domestic statistics, foreign direct investment (“FDI”) remains essential for emerging markets in Asia and long-term economic growth. This is because BDI can lay the foundation for future economic growth in the long term through such things as technology transfer, financial capital provision and integrating a country into global export markets and exposing it to global competition, which generates continuous improvements
In this respect, investors removed the effects of the ongoing trade war with foreign direct investment, which rose 8% in China in September. Investments increased by almost $ 98 billion in the first three quarters of this year – 2.9% more than in the same period last year. This shows that foreign investors looking for growth in the long term are increasingly looking abroad for the second largest economy in the world and more than American political machinations.
Investing beyond the western borders.
Diversification is a well-known message when it comes to building a portfolio and although many Australian investors have diversified their portfolios outside the domestic stocks and to the US, it remains important to look further abroad. Government stimulus efforts around the world and improving corporate fundamentals have shown the international equity stage a remarkable comeback of the global financial crisis. Yet imbalance and political unrest seem to shake the US market and while this effect is felt in equity markets around the world, the argument remains that global diversification is essential for controlling volatility. This is because a portfolio that is globally diversified must be better positioned to withstand large periods of volatility than one that is concentrated in simple Australia and the US
[1] Goldman charts uncertainty surrounding US mid-term elections Source: https://www.ft.com/content/8cbb703a-44b1-11e8-93cf-67ac3a6482fd
[2] Source: this is just the beginning of the explosive growth of e-commerce in China http://fortune.com/2017/12/04/china-ecommerce-growth
