Why De-Synchronization of World Markets is Good News For Investors
The 1970s through the late 1990s were a period of great change for the world's
economies and financial markets marked by milestones such as a shift in the energy
landscape, the rise of emerging markets, and several distinct boom and bust
economic cycles. Through it all, a pattern of divergent economic growth trajectories
of different countries around the world prevailed.
This de-synchronization meant that the world's stock markets often did not move in
tandem, or even in the same direction. By diversifying internationally, investors
could position themselves to take advantage of the distinct cyclical upswings and
downturns of economies and markets, and reduce risk by spreading their bets
among countries whose markets and economic cycles marched to different
Then, a sweeping change crept in. From the late 1990s until a few years ago global
markets and economies became more synchronized than they had been in the past.
Global diversification, while still a useful investment tool, lost some of its shine.
Experts cite a variety of reasons for the shift. In the late 1990s and again in 2008
and 2009, the tech bubble and financial crisis sent world markets down in tandem
at dizzying speed. Investors may have perceived systemic risk globally, rather than
country-specific. And trade policies were a coordinated effort that created a new
inter-connection between world markets that benefited countries across borders.
Similar monetary policies around the world also played a key role. "The Federal
Reserve, European Central Banks, and other central banks were on the same page
when it came to monetary policy," says Josh Duitz, who manages the Aberdeen Total
Dynamic Dividend Fund (AOD). "All of them were stimulating their economies
though quantitative easing and lower interest rates."
Lower correlations create new diversification and investment opportunities
After a long hiatus lower market correlations and greater de-synchronization
between countries and regions have made a comeback. The trend has picked up
speed since 2016 and today, more divergent market correlations bear a close
resemblance to those that prevailed when energy shortages and big hair dominated
the scene. While markets around the world continue to move in a positive direction,
they are taking more divergent paths to doing so than they have in nearly 20 years.
The reasons for this shift toward decoupling markets aren't entirely clear. Duitz
thinks a contributing factor may be that central banks are no longer raising or
lowering rates in unison. Instead, they're tailoring such changes to their unique
economic cycles. In the United States, which is in a later economic growth stage than
other countries, the Fed is well into the process of raising interest rates. In other
areas where growth has been slower to take hold, such as Europe and Japan,
monetary authorities are putting off any rate increases for at least a year or two. He
adds that increased trade tension from tariff disputes, massive corporate tax cuts in
the U.S., and a stronger dollar are all contributing to the increasingly divergent stock
Whatever the reasons lower correlations between world markets is, in many ways,
good news for international investors. For those seeking to reduce risk exposures, it
provides a tailwind for the traditional benefits of geographic diversification to kick
in without sacrificing the potential to generate returns.
Reducing risk exposures through international diversification is always a good idea,
but it is a particularly timely one now. Many think the "Goldilocks environment" for
risk assets that prevailed over the last decade may shift into lower gear going
forward. This year has already seen a spike in equity market volatility as investors
price in the risk of higher inflation, the winding down of low interest rate
environment, and withdrawal of fiscal stimuli. International diversification is a good
way to navigate these undercurrents and avoid "betting the ranch" on a single
De-synchronization has also opened up better opportunities for international
investors to shop the world for attractively priced stocks and take advantage of
differences in country valuations. Stimulated by tax cuts and increasing corporate
revenues, the U.S. market is experiencing its highest level of stock valuations since
2008. Recently, for example, the price/earnings ratio of the S&P 500 Index was 20.6,
compared to 17.3 for the STOXX Europe 600 Index and 14.6 for the MSCI ACWI ex-
U.S. The price/book ratio for the U.S. index was 3.4, compared to 1.9 for the
European index and 1.6 for the global benchmark.
These less expensive markets offer a plethora of attractive buying opportunities for
astute investors. Many stocks from emerging markets, Europe, and elsewhere are
high quality, global leaders trading at a discount to comparable U.S. stocks, says
Duitz. "These companies have similar business models, earnings profiles, and other
attributes that are similar to those of comparable U.S. companies," he says. "They
just aren't as expensive."
Leaving the U.S. comfort zone
For much of the past decade U.S. equities have outperformed their international
peers, thanks largely to unprecedented accommodative monetary policy
implemented during the financial crisis that paved the way for a head start towards
economic recovery. U.S. companies have also cut costs and pared their debt during
the recovery have been rewarded with improved earnings and more efficient
operations. With all this good news on the home front, many U.S. investors continue
to own portfolios that include few international holdings.
That could be a mistake. "Investors that have most or all of their money invested in
the U.S. could be becoming too complacent," Duitz observes. "While the U.S. markets
have outperformed others for most of the last few years, there is no guarantee that
will be the case going forward."
The return of markets that move independently of each other amplifies the benefits
of international diversification at a time when some signs point to the possibility of
a shift in market leadership from the U.S. to elsewhere. U.S. equity market
valuations are relatively expensive compared to other parts of the world,
particularly for larger companies. The unwinding of accommodative monetary
policies may come with its own risks, including the potential for higher market
volatility and the possibility of a downturn in the equity markets. At some point,
protectionist U.S. trade policies could short circuit earnings at some companies.
Beyond these short-term considerations, there are longer-term reasons to invest
internationally. "While the U.S. is still a powerful force on the world economic scene,
its dominance in terms of growth is clearly waning, " he says. "In 1960 the U.S.
economy accounted for 40 percent of global GDP. Today, that number is less than 25
Venturing abroad also opens up new opportunities for income seekers. On average,
dividend yields in Europe and other regions are at least twice as high as they are in
the U.S. In Aberdeen funds, these high yields get a boost through dividend capture
strategies, as well as a focus on stocks that are poised to declare special dividends as
a result of unique, one-time events.
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