Global Diversification Still Requires International Securities
Getting outside US stocks can play a potentially pivotal role complementing the performance of the US market.
Investors often ask if globally diversified stock portfolios are necessary when the US stock market has many multinational companies or those earning revenues from non-US countries. The data suggest these companies are no more successful at global diversification than a faux mane is at turning a golden retriever into a lion.
We can test the global diversification benefit of companies with non-US revenues by looking at their average returns in months when US stock returns and international returns diverge. Stocks offering sufficient non-US exposure should presumably move more in line with the international market. However, companies with non-US revenues appear to merely track the broader US market on average. In particular, when the US market is down—and investors would hope for global diversification to kick in—companies with non-US revenues are similarly down. These results echo academic evidence showing that stock prices tend to move based on where they trade more than where the business resides.1
Developed ex US and emerging markets stocks combine for about 39% of the global stock market.2 That’s a meaningful chunk of the equity investment opportunity set, and based on these results, they have potential to be a pivotal complement to the US market.
EXHIBIT 1
One of These Things Is Not Like the Other
Average monthly returns when US and developed ex US stock returns have opposite signs, January 1979–December 2022
FOOTNOTES
1. Kenneth A. Froot and Emil Dabora, “How Are Stock Prices Affected by the Location of Trade?” (working paper, National Bureau of Economic Research, May 1998).
2. As of December 31, 2023
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