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They say there’s no place like home, and for most American
investors, our domestic markets have created handsome returns over
the years. But the tides are turning and foreign markets are
presenting great opportunities. The average annual return over the
last 5 years for foreign developed countries (EFA) was 18% versus
10.5% in the U.S. (SPY). The 3-year average annual return of
emerging-market countries (EEM) was over 36% per year.
Investors are obviously eager to participate in these returns. In
fact, for the week ending May 16th, 2007, only 10% of the money
flowing into equity mutual funds went to those that invest primarily
in the U.S. Over 90% of the money invested that week went into
equity mutual funds focused outside the U.S.
After looking at the facts above, some might conclude that they need
to increase their exposure to overseas markets. But how should you
do it? Should you find an equity fund that invests in a number of
foreign markets, or find one that caters to just a single country,
or niche within a country? Or are there better ways to capitalize on
foreign growth that have a greater chance of providing superior
returns?
Understanding world trends in population, domestic product and
annual incomes will go a long way to answering these questions. It’s
estimated that there are around 6 billion people in the world.
Roughly 300 million people live in the United States. So only 5% of
the world’s population lives in the U.S.! 95% of people live in
foreign countries. There are 1.3 billion people in China and 1.1
billion in India alone.
America still leads the world as measured by the goods and services
it produces (GDP) each year. We produce $13 trillion. Still, we only
produce about one quarter of the world’s GDP and that percentage is
only going to decline. China’s GDP is $10 trillion, India’s is $4
trillion.
We are also near the top (#3) based on annual income. The average
American brings in $42,000 a year. China is ranked 105th at $6790
per person. India is ranked 146th at only $3420 per person. These
are considerable gaps!
We don’t just want to know where things are today; we want to know
where they’re expected to go in the future. From an investment
perspective, we will have a better chance increasing our wealth by
investing where the growth is.
The population growth rate in America is declining, and has been
since 1950. It’s estimated that it will decline 32% between 1950 and
2050. That means that the rest of the world’s population is growing
faster.
It’s likely what foreign countries produce will grow faster as well
because they are starting from a much lower base. It is going to be
easier for China to increase their GDP by 50% than it will be for
the U.S.
The population ‘bulges’ in China and India represent 350 million
people with about 2/3rds of them under the age of 21 and 1/3 between
the ages of 37-41. Talk about Boomers! We see dramatic affects in
our economy as a result of the 44 million Baby Boomers. Multiply
that by 7 times and you can imagine the impact it will have in those
countries.
Life expectancies will increase. Education will improve; poverty
will decline. The list can go on and on. I’ve mainly used China and
India as examples, but there are many, many other countries that
have similar growth trends. Larger populations mean more demand for
electricity, fuel and infrastructure like bridges and roads. Many
will need automobiles, homes, furniture, cell phones, etc.
So how should this affect how you invest? First, recognize the
global trends underway. It’s my opinion that an investor can improve
their return by focusing on specific opportunities as opposed to
large international mutual funds or ETFs. Take the major trends I’ve
mentioned and determine their impact at a micro level. What are the
companies best poised to take advantage of that trend?
Major trends or themes can help you know how to position your
portfolio. But you can’t base your decisions on one isolated theme.
This global-growth trend is just one of the major investment themes
that I use when investing my client’s portfolios. There are many
others. We’ll look at another one next week.
Nationally-syndicated financial columnist and Certified Financial
Planner® Jeffrey Voudrie provides personal, in-depth money
management services and advice to select private clients throughout
the USA. He’ll answer your financial question – FREE at
www.guardingyourwealth.com. |
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