Go Global for Diversification That Travels Well
Investing solely in Canada can limit your investment opportunities and constrain your ability to benefit from diversification.
Canadian investors may believe they know Canada best. Accordingly, they are liable to put the bulk of their investments in stocks and bonds of Canada-based companies and in Canadian government fixed income securities. Yet this strategy has some holes. “Home bias”1 can limit your investment opportunities and constrain your ability to benefit from diversification.
Consider these revealing numbers:
- Stocks of the roughly 21,900 companies trading outside Canada represent more than 97% of the world’s $111 trillion equity market (see Exhibit 1).
EXHIBIT 1
Wealth of Nations
Percentage of World Equity Market Capitalization as of December 31, 2021
- The investment-grade bonds in the Bloomberg Global Aggregate Bond Index are valued at more than $86 trillion—and most of this debt is issued outside Canada (see Exhibit 2) and in currencies other than the Canadian dollar.
EXHIBIT 2
Foreign Legion
Percentage of World Investment-Grade Bond Market as of December 31, 2021
Global Ups and Downs
When Canadians invest outside Canada, they can capture equity returns from thousands of companies around the globe and potentially offset weak performance in one market with stronger returns elsewhere. Returns in 20222 offer a useful example of this phenomenon: The Canadian stock market tumbled 10.0% (through June), but non-Canadian developed markets like the UK (–6.9%) and Hong Kong (–0.9%) performed much better. And, in two examples from emerging markets, Chile soared 11.3% and Turkey gained 2.7%. Similarly, in fixed income markets, both yields and total returns typically vary across the globe and often do not move in lockstep, which is no surprise. Bonds issued in different countries and currencies can offer a range of yields and expected returns.
The Paradox of Size
A country’s size, population, or gross domestic product doesn’t necessarily tell us much about the investment opportunities in that country. Japan, for instance, is relatively small in landmass but accounts for 6% of the world’s equity market value—representing more than 2,500 companies, including familiar names like Toyota and Sony—as well as 13% of the investment-grade bond market. Even a tiny country like Switzerland is home to publicly traded giants like Nestlé and two of the world’s biggest pharmaceutical firms.
By looking outside their home market, investors can expand their choices and opportunities for higher expected returns. A global approach can also enhance diversification, which may help reduce portfolio risk and volatility. This isn’t guaranteed to produce strong returns every year, but it can deliver more reliable outcomes over time, helping investors stay on track toward achieving their long-term goals.
FOOTNOTES
1 For more information on home bias, see the following: “Home Bias,” Corporate Finance Institute, September 18, 2020; Eduard Gaar, David Scherer, and Dirk Schiereck,“The Home Bias and the Local Bias: A Survey,” Management Review Quarterly 72 (November 2020): 21–57; and “The Randomness of Global Stock Returns” (Dimensional Fund Advisors, June 2019).
2 MSCI country index performance, year to date as of June 30, 2022. MSCI data © MSCI 2022, all rights reserved.
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