Updated: Feb 26, 2021
How should you play international markets?
As growth in the US appears to be slowing down I've been pondering over the best way to look at international markets for growth.
It's been a period of fairly steady economic growth in the US for pretty much the last 10 years. However as the stretch of uninterrupted growth continues it's crossed my mind how long this spell will last and how one should look at accessing growth opportunities in overseas markets.
At some point or the other the Federal Reserve is going to be inclined to start reducing the amount of easy money that's on offer by increasing interest-rates. Admittedly this is going to be a fairly slow and steady pullback of easy monetary policy but at some stage it will happen. My greatest fear is that the economic growth that has persisted over this last period of time will slowly start to reduce to the point that it's going to be more difficult for mature companies to continue the dramatic share price appreciation that they have showed for this last period of time.
The question then becomes is there a need to do anything about it? One option is just to continue to sit in large US stocks. Various commentators whose opinions I respect have pointed out the likely slowdown that will hit the share prices of large US companies once easy monetary policy goes away. Of course secular growth stocks are certainly one way to beat this trend. These are businesses with tailwinds that are growing significantly faster that GDP.
Another equally promising option is to consider looking at international stocks. Emerging market economies are riding waves of growth.
They're seeing increasing per user GDP, all of which all augers well for consumer spending and the consumption of new services. Of course many large US economies have significant revenue coming from their overseas operations so they themselves will benefit from international growth.
However given they also have fairly large operations in mature markets, the growth profile of large US multinationals will be weighed down by this exposure even though they have exposure to fast-growing international markets. Thus having some pure play emerging market exposure can actually be a very good thing.
The question arises if you do make the decision to go after emerging markets is what's the best way to do this. Investing directly in stocks and these economies can be fraught with danger. Varying accounting practices and different ways of doing business can make for investing minefield.
Investing in China illustrates these risks particularly well. Even large Chinese corporations such as Alibaba haven't escaped the reaches of regulators concerned about accounting practices and related party transactions. My personal approach with emerging market economies is to pick 1 or 2 key emerging market stocks that are large cap and have a US listing and dominant market positions that entrench these businesses in their respective economies. Basically I'm looking for too big to fail here as a criteria, even though that's really a misnomer.
For emerging markets, I'm placing my capital with Alibaba, Tencent and Mercadolibre. All 3 businesses are in the tech sector. Alibaba represents the predominant e-commerce portal in China, Tencent offers the dominant digital social network and commerce platform, while Mercadolibre is the dominant e-commerce and financial payments portal in Latin America.
All 3 of these businesses have a significant number of users and are building robust network effects into their platforms. As time progresses, these platforms will only get stronger and users on these platforms will only increase their engagement with the platform. Its my belief that each of these businesses will survive and thrive over the long haul.