Leading up to Friday’s pronounced sell-off, a growing number of equity strategists have been recommending raising equity weightings in Europe, China and the other three BRIC nations: Russia, Brazil and India. While the urge to diversify outside of the United States is quite tempting based on pure valuation comparisons, it doesn’t take much of a hiccup in sentiment to jolt those markets in a way that can bring real damage to one’s portfolio.
Global markets retreated hard on news of the rising risk of a Greek default. The country is $353 billion in debt, with Germany on the hook for $60 billion, France for $45 billion, Italy for $40 billion, other euro-zone nations for $36 billion, the International Monetary Fund for $35 billion, Spain for $27 billion and the European Central Bank, oddly enough, with the least skin in the game at $21 billion. Although the situation is being downplayed to some extent by government officials, a Greece financing fire could be in the making that may or may not be well contained.
It is definitely not in the best interests of these creditors to let Greece drop out of the 19-nation euro zone. Despite firmly opposed and entrenched positions between Greece’s Syriza-led government and euro creditors, the ability to reach concessions from previous points of crisis is the desired outcome for all parties. Expect them to do whatever it takes to make it work.
In China, the rip-roaring rally of late within that stock market hit the wall last night after regulators clamped down on the use of shadow financing for equity purchases and increased the supply of shares available for short sellers. Stock futures for China’s A50 Index sank 6% after that market closed, making for a long weekend in Asia.
While there may be an appetite for investing in foreign markets when it appears that there is value and opportunity, there is a certain level of comfort in maintaining a strong portfolio presence in domestic dividend-paying assets and letting U.S.-based multinational big-cap companies do the investing in foreign and emerging markets on one’s behalf.
If I need exposure to industrial markets outside the United States, then owning United Technologies (UTX), Boeing (BA) or Honeywell (HON) will get the job done and I get reliable and timely information from these companies. If I need global banking exposure, then taking a position in JPMorgan (JPM), Visa (V) or Goldman Sachs (GS) makes a lot of sense. For exposure in consumer staples in emerging markets, I’d probably go with Procter & Gamble (PG) or Johnson & Johnson (JNJ).
Over the course of time, these companies have returned terrific shareholder value while mitigating risk when the rug gets pulled out. The same would be true for seeking to buy the dip in global energy markets. Leaning into Chevron (CVX) and ExxonMobil (XOM) is very likely the best move an investor can take in terms of risk/reward for the long term.
When it comes to high-yield investing models like that of my Cash Machine newsletter, there is nothing that can replace good information during uncertain times. And owning a high degree of domestic assets provides some comfort against unforeseen downside catalysts. Being invested in stocks, funds, real estate investment trusts (REITs), master limited partnerships (MLPs) and business development companies (BDCs) that are transparent helps greatly to reduce fear from the unknown quantities that are present when investing in foreign markets.
This is not to say that being long in U.S. markets won’t bring some angst when volatility is extreme in China or Europe. To some extent, global markets are joined at the hip and computer-generated trading by hedge funds, mutual funds, exchange-traded funds (ETFs) and momentum pools weigh heavily on the short-term direction of our market. That reality means it is simply too hard to be completely protected from foreign financial crises. But at the same time, there won’t be a similar level of panic if the situation across the pond goes from bad to worse.
If yield is the primary investment objective, as is the case for so many of today’s equity-income-oriented investors, then looking beyond our borders is not as necessary as it otherwise might seem. The opportunities here at home are abundant, almost like a buffet table of asset classes and financial instruments that can deliver reliable yields of 5%-10% month after month, year after year. Until that backdrop for income investing changes, traveling outside of these parameters can be harmful to your financial health.
In case you missed it, I encourage you to read my e-letter column from last week about recent market uncertainty and how investors can alleviate risks. I also invite you to comment in the space provided below my commentary.
Upcoming Appearance
I invite you to join me at the MoneyShow Las Vegas, May 12-14, 2015. With stock picking taking on renewed importance as the market shows signs of volatility, this event offers an opportunity to hear from a number of experts, including my Eagle Financial Publications colleagues Mark Skousen, Doug Fabian and Chris Versace.
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