Where to invest?
26th July 2021
A little while ago I wrote an article that tried to answer the imponderable question of what to invest in. A question akin to ‘how long’s a piece of string’ to some extent. As part of that answer, I suggested that understanding why you are investing is a vital question to ask yourself before contemplating that. The aim of investing for school fees leading to a very different solution compared to investing for your retirement, for example. Well, previously on the blog I also wrote about when to invest, so logically, well at least to me, it seems sensible to talk about where.
For those of us living in the UK the recent exit from the EU has opened up many potential opportunities, if the Government care to take them, and also opened up many risks that we were previously sheltered from as part of the bloc. Overlaying this, and perhaps of more short-term impact to financial markets, the ongoing pandemic does have some time to run and certain sectors & localities are suffering financially due to the speed, or not, of recovery, vaccination levels etc. As such when you’re considering where to invest there can be long, or short, term perspectives that should alter your thinking and subsequent allocations to assets and markets.
One thing I have noticed over my career is that many investors in the UK do tend to have a significant home bias, with large exposures to UK plc. This does have some advantages, there’s no currency risk if you’re predominantly UK centric, so a stumble for sterling against the dollar, for example, will not have too many adverse impacts. However, when you consider that the UK makes up 2-3% of global GDP perhaps that bias is, in the longer run, costing you returns? My view is that we are a small rock in the North Atlantic and diversification of risk & return is never a bad thing for any investor, so I’ve always felt that a more global approach is worth considering. You can of course ‘hedge’ your currency exposure & some funds do this for you. That said, the research suggests that in the longer term this is more expensive than the benefit you gain.
If we look to the share of global GDP as a starting point of to where we should have exposures you’d perhaps thing to start with the US, certainly the driver of global growth over the last few decades has been the US consumer, but in recent times they’ve started to lag China to some extent (18.34% vs 15.9% in 2020*). I think that this, however, does not tell the whole story with China having come out of Covid much quicker than the West, so the US may well continue to be the powerhouse for some years yet to come. Warren Buffet when asked what he would advise his wife to do when he was no longer around to manage the family finances responded that she should buy a passive S&P 500 tracker fund. Always worth considering what the sage has to say!
I would also mention that by many metrics China remains in the subset of economies we refer to as emerging markets. These tend to have the potential for higher levels of return, but the risks associated are correspondingly higher. Emerging markets are defined as having some of the characteristics of developed markets, such as US, UK, Europe, but ‘does not fully meet its standards’. Its that latter point that is well worth keeping in mind when looking at China & the like. You should have some exposures, in a balanced portfolio, but don’t jump in with both feet ignoring the more staid areas of the globe.
Longer term though the case for China, with a middle class of some 400m(!) does seem to be one it’s hard to argue against. So where else are we likely to find growth? There can be arguments made for many other economies that are growing & embracing technological changes coupled to young growing populations. India is often cited, but perhaps the one that will surprise most is Nigeria, projected to be the 3rd largest country by population by 2050. So for our children perhaps Africa will be the continent to keep a close eye on?
I’ve deliberately tried to avoid talking about specific assets, as in many cases the same types of holding can be found in differing geographical locations. There are developed market equities as well as emerging market equities for example and the same applies for bonds, property and the like. That said certain geographic areas do tend to have some impacts. Looking at the UK large cap versus the US for example we see that if you’re buying the UK you have a heavy exposure to older world businesses, Banks, Miners, Pharmaceuticals etc. Whereas the largest businesses in the US are dominated by the Facebooks, Teslas, Netflix & Amazons of the world. Clearly, having a one geographical approach not only has currency implications, but it can also lead to concentrations in market sectors. Certainly, over the last few years an underexposure to the US would have led to some significant relative underperformance.
So, having successfully managed to avoid answering the question where should you actually invest? In short, everywhere. Tailor your portfolio’s exposures depending on the risks & opportunities you see short term but have a longer-term strategy in mind that reflects your ultimate aims for investing. Even someone with a risk averse approach should not discount small exposures to ultimately more risky areas, it’s the overall balance that matters in the long term.
* Source: www.statisa.com
Jerry Sisk – Financial Planner