Laura Leyshon for The Globe and Mail
Bargains without borders
Many experts see the state of worldwide markets as a rare opportunity to find deals in other countries
Spreading investment dollars around globally, not just in your own backyard, has long been touted as one of the foundations of sound financial planning.
That theory has come under attack as of late. Stock markets in all corners of the world sprang a leak in 2008 as the financial crisis took hold, and even geographically diversified investors were left with few life rafts to cling to as share prices sank to unthinkable lows.
Globalization, fuelled in large part by free trade and advanced communication technologies, may have made the world's markets more interlinked. But certain regions are still not as highly correlated as others, and many experts see the worldwide meltdown of securities as a rare opportunity to go bargain hunting across borders.
It might be just a matter of knowing where to look.
"Markets around the world are similarly cheap," says John DeGoey, vice-president with Burgeonvest Securities Ltd. in Toronto and a certified financial planner. "A person who is prudently trying to plan for their long-term savings should be looking to buy low, and this just might prove to be a once-in-a-generation buying opportunity."
Global diversification right now may not only pay off in good returns, but also in helping to balance the overall risk in a portfolio, Mr. DeGoey says.
He notes that financial markets have long exhibited a phenomenon known as reversion to the mean. Simply stated, they tend to eventually return to their average performance or valuation level. Financial instruments that are doing stellar today may be setting themselves up for a fall tomorrow. Or expressed another way, those regions that have recently sold off the most could have the best future prospects, all other things being equal.
"The more the stock market in a particular nation state has dropped, the more you should feel compelled to buy stocks from that nation state," Mr. DeGoey says.
Data compiled by Franklin Templeton Investments illustrates the point. An emerging markets subgroup known as BRIC - made up of equities from Brazil, Russia, India and China - was the top asset class performer in 2005 through 2007, with gains ranging from 32 per cent to 52 per cent. Last year, it was dead last of the 13 asset classes listed, posting a loss of 50 per cent.
Although the losses in BRIC equities in 2008 didn't offset all the gains accumulated in prior years, Mr. DeGoey thinks the asset class is poised for some good returns. He sees BRIC countries outperforming the OECD economies because they are still in a "hyper-growth stage" resulting from increased urbanization and considerable new investments in infrastructure. "It's going to have those economies growing at a significant multiple to what we see in North America."
There are dangers, however, of rushing too quickly into global equities, which are known for their volatility.
A better approach would be to gradually allocate more dollars to the sector over the next 24 to 30 months, says Teresa Black Hughes, senior financial planning and investment adviser at Solguard Financial Ltd./PEAK Securities Inc. in Vancouver.
She likes investments in large multinational firms, so that risk is spread around, and recommends that equity holdings total as much as 35 per cent in overseas markets.
When it comes to Asia, Ms. Black Hughes prefers companies that pay out reliable dividends. "Look for companies that are producing cash flow and giving something back to the investor in a marketplace of the world that is truly attracting attention," she says. "I'm cautious about it, but if we're going to be there, I think we need to look for companies like that."
Justin Nightingale, portfolio manager for international equities with Natcan Investment Management in Montreal, says it's particularly important in this investment climate to target individual stocks when hunting for the best returns, rather than focusing on geography or asset class.
Most companies had a free ride over the past decade, securing easy access to capital and benefiting from a generally rosy economy. "Those things are no longer true and unlikely to become true again in the near term," says Mr. Nightingale, who manages the Altamira Asia Pacific Fund, among others. "The main differentiator for performance will be the underlying quality of the business."
The phase in which panicked investors punish stocks across the board is over, he says. "I think we're now in phase two, where you start to realize that there are fundamental differences between the types of businesses that each company runs, even within the context of the same industry," Mr. Nightingale says.
He also expects rough times over the next two years in BRIC countries - China and India, in particular, given that U.S. demand for their products and services has waned.
Bob Gorman, chief portfolio strategist with TD Waterhouse in Toronto, agrees it may be a little early to start expecting good returns from emerging markets, but he believes they present the next "really big" investing opportunity.
He likes China in particular, and suggests that a patient investor who gradually puts money into that market over the next year or so won't be disappointed in several years time. "I think they are still purging themselves of some of the excesses of the last cycle, and I remain a little cautious in the short term, but I can tell you they will be a great play."
Mr. Gorman is much less upbeat on Europe: The continent is trailing North America in the economic cycle and "still has some tough sledding to go."