Monday, June 10, 2024

The big head fake - global diversification


It has often been said that diversification is the only free lunch in finance, yet the free lunch has not paid off with international investors. Forget about global investing and emerging markets, just put your equity investments and you can do no wrong.  In this case, the home bias for US investors has been justified.  The US market has grown at a 13.3% annual rate since 2009 while the MSCI EAFA only gained 5.9% and the MSCI EM grew 3.2%.  Earnings in the US have grown since 2010 under world of easy money. Valuations have declined since the GFC, but the contraction has been greater outside the US.  The US has been on significant expansion except for the COVID shock, but the rest of the world has not suffered from any severe contraction. 

Is this all about the magnificent seven and the tech?  They are a key contributor to the US performance. There are no comparable companies in other parts of the world, so going forward, less diversification is based on the view that there will be no reversal in the magnificent seven, the rest of the world will not catch-up to the US and the higher valuations in the US will continue. 

No comments: