"Kee" Points with Jim Kee, Ph.D.

  • Quick Reflection on the Global Investing Landscape
  • How to Invest

  

Quick Reflection on the Global Investing Landscape

In this week’s Kee Points, I thought I would share my own mental narrative of the global investing landscape over the past 10 years. A fitting title might be, “It’s All Priced In.” That gives me great comfort (!), and I hope it does you as well:


Since the Great Recession (2007-09), China’s economic growth rate has fallen by half, as have the prices of global commodities (Federal Reserve Bank of St. Louis). This describes the climate for emerging markets over the last 10 years, as they are often thought of as either “commodity plays” or as countries that are linked to China through trade and supply-chains. It has not been a great environment for either. Over this same period, Europe has experienced a dramatic debt crisis, populist uprisings against European Union membership, and an outright vote to exit (Brexit). And despite numerous initiatives, Japan remains stuck in the same 0%-1% growth range that it has been in for almost 3 decades. Perhaps least affected by major disruption has been the US. And impacting everything – every single industry across the globe– has been the transformational upheavals of information technology. That pretty much describes what has happened to the global economy. None of this was knowable in advance.


Looking at how markets have performed over this 10 year period, that is exactly what they reflect! The big story, the theme over all others in stock market performance since the Great Recession, has been the dominance of US stocks over international stocks. Yes, growth stocks have dramatically outperformed value stocks, as you would expect given the information technology revolution mentioned above. But US value stocks have even dramatically outperformed international stocks. And within international stocks, those from developed countries have outperformed those in emerging markets. In other words, as these unpredictable events unfolded, market prices adjusted to reflect them. This is an important insight, and it should help inform investors as to how to invest going forward.

 

How to Invest

All-or-nothing advice was common going into the previous decade, such as “buy value,” “buy international,” or “buy emerging markets.” That seemed like great advice based upon the previous ten years, but it was poor advice for the subsequent ten years. They didn’t know which asset classes would outperform going forward - nobody does - which is why you diversify. A properly diversified portfolio is intended for how the world is, which is unpredictable.


And don’t forget that one of the best, low-cost hedges to an equity portfolio is to lift one’s gaze. Extend your horizon. Think about how stocks will do over the next 5, 10, 15 years, not the next 6 months.