Owning companies based in other countries that are exposed to different economic cycles and interest-rate environments can provide you with greater diversification benefits. Partly because of those differences, international equities have generally tended to rise and fall at different times from U.S. stocks.
But buying foreign investments directly can be a risky proposition. A great way to benefit from global diversification is by investing in American companies with broad geographic exposure, particularly in emerging markets. We'll discuss some specific companies later, but let's first take a closer look at why this is so important.
Wins and woes of investing overseas
International stocks are classified as developed or emerging markets. Developed markets, like the U.K. and Canada, are mature, established, and regulated. They have higher per capita income than emerging markets, which are younger with less mature economies and less regulated capital markets. Emerging-market countries -- like Brazil, China, and India -- have lower relative per capita income.
Emerging-market economies are growing faster than developed markets. This doesn't always translate into better investment results, but investments with emerging-market exposure can help diversify your portfolio. Historically, when U.S. stocks perform poorly, they may have been balanced out by solidly returning international stocks. However, 2008 proved this isn't always the case.
In 2005, the developed world represented 15% of the global population yet was a dominant 79% of the global economy. Emerging markets represented 85% of global population and a mere 21% of the global economy. And from 1970 through 2009, China's economy grew 146 times larger and India's economy grew nearly 140 times, while the U.S. grew just 13.5 times larger.
Put plainly, emerging-market growth holds enormous potential for investors.
Get the whole world in your portfolio
McDonald's (NYSE: MCD ) is one incredible stock with a massive global footprint. As of year-end 2011, there existed 33,000 worldwide Golden Arches locations employing more than 1.7 million people. McDonald's serves 68 million hungry patrons around the globe every day.
McDonald's derives 40% of its revenues from Europe, 32% from the U.S., and 22% from its Asia/Pacific, Middle East, and Africa segment (APMEA), collectively. In this APMEA segment, McDonald's saw its income contribution double over the past six years. And within this high growth segment, 55% of revenues are from China, Australia, and Japan. The Golden Arches plans to ramp up its emerging-markets presence -- it's slated to open 225 to 250 restaurants in China this year, with the goal of reaching 2000 restaurants in the country by the end of 2013.
The company's diversification has contributed to its growth and its superb performance. McDonald's enjoyed its ninth consecutive year of same-store sales growth last year. And during the hard-hitting Great Recession, McDonald's total revenues grew 18.5%, from nearly $23 billion in 2007 to $27 billion in 2011. In fact, Mickey D's secured the top spot as the best-performing company in the Dow for 2011.
McDonald's shareholders have been rewarded significantly over the past five years, while the S&P 500 lost 10% in that same time period. Shares in Yum! Brands (NYSE: YUM ) are up a similar amount. Meanwhile, Jack in the Box (Nasdaq: JACK ) has seen its share price lose nearly 32% of its value. And Darden Restaurants (NYSE: DRI ) is up nearly 25% total over the five years. The key link between McDonald's and Yum! that Darden and Jack on the Box lack? You guessed it: big international exposure.
But investing in McDonald's carries its risks. If emerging-market growth slows, then the company instead must rely on expansion in developed markets and price increases. In addition, McDonald's and other quick-serve restaurants face continued pressure regarding their offerings' nutritional content -- this will always be a risk with owning fast-food stocks.
The stock currently trades closer to its 52-week low than to its high after an overreaction to recent same-store sales declines, and that presents a sizable opportunity for savvy investors to take a closer look at this formidable fast-food giant. McDonald's is a great way to get global exposure all in one.
If youre on the hunt for a more focused emerging-market play, take a look to Arcos Dorados Holdings (NYSE: ARCO ) . It carries more risk, more potential reward, and the same great brand. Considered the McDonald's of Latin America, Arcos Dorados is the world's largest McDonald's franchisee. And the company has huge growth potential -- there exist only 1,840 Mickey D's restaurants spanning Latin America's 570 million people, compared with 14,000 locations feeding the United States' 312 million.
During the past three months, the stock plummeted 24%, while the Brazilian stock exchange lost 17% during the same period. But company revenues are expected to grow 24% annually during the next five years. And one Foolish analyst feels so strongly about the company's growth prospects and attractive valuation that he recently increased his position.
Developed and emerging markets are not perfectly correlated in their movements, and that's something that can potentially help reduce portfolio risk over time. So when foreign headlines look ugly, instead of shunning investments with exposure abroad, realize that they may present an opportunity to buy at attractive prices.
If you're interested in finding more stocks with emerging-market exposure, check out our free report about three U.S.-based companies set to dominate in global markets. The report profiles a company that enjoys 50% more revenue in China than it does in the U.S. yet also has huge potential in Russia and India, where it currently obtains less than 1% of its sales. This free report won't be around forever, so get your copy today.