Weekly Buzz: đ Where to diversify outside the US
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Itâs been a dazzling decade for US stocks, but even with the US marketâs reputation and the fundamental reasons for being the investing worldâs darling, the fact is that todayâs winners may not be tomorrowâs. So, where should you look to diversify?
Whoâs top of the list?
Diversifying away from the US is no easy task: Americaâs economic dominance and its role as a major importer and capital provider tend to shape global market trends. That makes it tough to find investments that dance to an entirely different beat.
This study might give you some ideas, however. Bridgewater calculated a âdiversificationâ score for different economies, taking into account their correlation to US assets and economic conditions for the past quarter-century. It found that China, Japan, Brazil, and India are the best at doing their own thing â that is, not just mirroring the USâs ups and downs.
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Another takeaway is that while market size is important for investability, it doesn't necessarily correlate with diversification potential. For instance, while Europe and the UK represent large, liquid markets, they're not highly diversifying due to their close economic ties with the US.
As an investor, what does this mean for me?
True diversification goes beyond simply selecting multiple countries â their economies may be more correlated than you think. It's about finding markets that march to their own beat, potentially offsetting losses when the US stumbles.
Given the complexities of global macroeconomics, itâs often better to simply invest in the world at large, via a well-diversified portfolio like our General Investing portfolios. And if youâre looking for a more hands-on approach, build your own investment mix with our Flexible portfolios.
đĄInvestorsâ Corner: For the first time in two decades, bonds are âcheaperâ than stocks
Investors are often faced with a difficult decision when deciding where to invest: should they go for the stable cash flows of bonds, or for potentially higher returns through stocks?
Comparing which asset class offers the better value (or, which is âcheaperâ) is an important part of the decision. But itâs not as straightforward as it sounds: they come with different risk profiles and theyâre pushed around by different economic forces.
The âFed Modelâ compares the earnings yield of the S&P 500 against 10-year US Treasuries. Itâs not a perfect device, but it can give you a rough idea. For the past 20 years or so, the Fed Model would have pointed you toward stocks. But now the script has flipped â Treasury bonds are yielding more than stocks.
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While bonds are looking more attractive, keep in mind that stocks have historically provided better growth prospects over the long term â the Fed model only gauges in terms of current yields. In practice, a balanced portfolio of stocks and bonds offers better risk mitigation and higher upside potential.
If you are looking to capitalise on the higher bond yield environment, our USD Cash Plus portfolio, which invests in ultra-low-risk short-duration US Treasury bills, might be worth considering. Alternatively, if you want more control over your bond exposure, our Flexible portfolios let you choose from a range of bond ETFs.
These articles were written in collaboration with Finimize.
đ A Little Context: TINA and TARA
Since the early 2000s, stocks have outpaced bonds in yields. This began with interest rate cuts following the dot-com bubble and intensified with the 2008 financial crisis â when central banks slashed rates to near-zero â leading to the "There Is No Alternative" (TINA) mindset favouring equities.
Only recently has this trend reversed: with soaring inflation and monetary tightening, bonds are becoming more attractive, giving rise to the notion that "There Are Real Alternatives" (TARA).