Should you look to invest abroad for lower risk opportunities?

Should you invest abroad for lower risk? What a difference a year makes. The S&P 500 price-to-earnings ratio, for an estimated 12 month earning, was 22.18 as of the end of June 2020 – the highest it had been in almost 20 years at the time of publication back then. This, along with some other measurement techniques, told us that American companies were profoundly overvalued a year ago. But how do things look today?

What are the numbers in 2021? According to one source, the following applied on April 7 2021:

Current S&P 500 PE Ratio: 41.54 +0.06 (0.15%)

4:00 PM EDT, Wed Apr 7
Mean: 15.92
Median: 14.85
Min: 5.31 (1917)
Max: 123.73 (2009)

An Untrustworthy Bull in 2020?

The volatility that COVID-19 has caused raised many eyebrows and has created many unprecedented situations for investors, borrowers, and market watchers. Who was ready to witness a bull market in a time where many service businesses were closed entirely, offices have to work from home and shopping streets and market squares deserted.

Last year some 3 out of 4 fund managers felt the market to be overpriced–that according to a Bank of America survey, with more than half claiming that the Bull market since the March crash is in fact merely a bear market rally.

These survey results are something we haven’t seen since 1998. Only 18% of the fund managers believed at the time that there might be a V-shaped recovery in the economy ahead, with W or V being more likely.

A  year later, the numbers are different, and not as high. But there are many unanswered questions even with vaccines, a potential return to something approaching normal is something we can’t quite take for granted yet.

Invest Abroad? Or Active investing in the US?

Is it safe to invest in the U.S.? That’s not the tricky question it was only six months ago. The U.S. elections, a return to active governing after four years of passive, reactionary leadership, and other factors have dramatically changed the outlook for many sectors economically speaking.

Long-term, passive investors will claim they want to ride out uncertainty and continue investing where there are bargains to be had. Active traders might claim there’s either still some growth left to be gained, or the elevator it takes down can be captured if timed right. But things are in a state of flux at presstime in 2021, and finance-oriented publications like Forbes.com are encouraging their readers to look at bonds, preferred stocks, and real estate as safe haven investments.

Last year, people seemed more inclined to take risks. 2020 was the year for market records it seems, and in March the 10-year Treasury fell to a new all-time low. It slumped to 0.318% as investors opted for stocks instead of the safety of bonds. This could somewhat be explained by the huge spike in retail investors in the US during the pandemic. 

More and more retail investors have joined the market due to broker apps becoming free and more accessible, along with the extended leisure time and high market volatility. In a self-perpetuating nightmare, volatility has been like moths to a flame, which only furthers the overpricing of household-name stocks. 

The US stock market has been proved to poorly reflect what’s actually going on in the economy, but really, the US bond market has continuously given us warning signs about what’s going on. It wasn’t long after this record low that the US officially entered a recession.

The Case For Investing Abroad For Lower Risk

Even now there may be good arguments for looking overseas to find investment opportunities.

If the weak USD puts you off investing abroad and purchasing another currency, then there’s also markets and countries that still use USD. Admittedly, these aren’t very strong markets, but some are popular for saving money there for tax purposes. Alternatively, finding countries whose currency correlates with the USD will mean that you’ll be less exposed to the USD fluctuations.

Or, you can simply invest in US-based foreign ETFs, so you only deal in USD with your US broker. This may pose some currency risk, but it may be deemed less risky than the US market itself.

If we take Japan as an example. Japanese equities have been undervalued in the past according to many experts  Japan is politically stable, has great corporate governance, and has experienced some streamlining of companies since the 2008 crisis and are now holding large cash reserves.

Some of the US-based Japanese ETFs are:

  • iShares MSCI Japan ETF
  • WisdomTree Japan Hedged Equity Fund
  • iShares Currency Hedged MSCI Japan ETF
  • JPMorgan BetaBuilders Japan ETF

Final Word

Ultimately, investing abroad can help US investors spread their investment risk among foreign companies and markets, thus improvising diversification. There is a feeling that it’s unlikely to be a global existential collapse that questions our capitalist system in the same way. It’s mostly a supply issue, where the US, UK and some other countries’ businesses are struggling to offer their services during a pandemic — as well as apprehensive consumer spending of course.

US investors could take advantage of overseas markets that are undervalued, all whilst diversifying their portfolio during what seems to be the most absurd and irrational US market in recent history. 

Share this post:

Leave a Comment