Globalization is under a cloud with the election of Donald Trump. Question is, what does his election mean for investors who own equities overseas or are thinking about placing bets on international markets?
The story of globalization for much of the past half-century has been two steps forward and one step back. Investing legend Warren Buffett wrote in 2012 that too many people are focusing on the uncertainties and not enough on the opportunities. His remarks were about America, but Buffet’s insight still holds when it comes to the global economy.
The American economy is increasingly integrated with other nations. Trade accounted for 28 percent of our gross domestic product in 2015, up from about 9 percent in 1960, according to the World Bank. Global trade has been subdued since the Great Recession. Despite populist pressures, most countries will continue to embrace greater international economic integration for the basic reason that access to larger markets spurs innovation, while heated competition for revenue and profits benefits consumers.
The real political debate in the U.S. over the next several years will focus on how best to preserve the returns of international trade in goods, services and digital commerce while improving the livelihoods of those unemployed and underemployed by the gale winds of globalization and rapid technological change.
Major emerging markets will be volatile but still worthwhile for investors with patience and the financial ability to ride out periodic squalls.
The standard textbook advice for U.S. investors comfortable with the idea of investing abroad is to put somewhere between 10 percent and 30 percent of their portfolio into international equities. If the idea of owning a stake in overseas stocks is unsettling, you can still participate in the global economy with blue-chip U.S. multinational corporations. Among the companies that make up the Standard & Poor’s 500, 44 percent of products and services were produced or sold outside the U.S. in 2015.
The benefits of international diversification have shrunk somewhat with greater market integration. Equity markets seem to march in lockstep more than before. The equity markets also face a number of potential headwinds, including the likely prospect of higher U.S. interest rates and rising inflation pressures.
Still, in a global economy the sensible investment strategy remains global.
Chris Farrell is senior economics contributor, “Marketplace,” commentator, Minnesota Public Radio.