You Can't Afford to Ignore These Markets

Many investors believe it isn't necessary to invest internationally, because the United States is so large that it presents all the opportunity an investor could need.

For a long time, you couldn't really argue with that statement. There were better-performing markets abroad, but as long as growth stayed strong at home, there wasn't an incentive to take on the additional work required to research foreign markets.

The world has changed
The Internet and affordable travel have made the world much smaller, but that's not the biggest change investors face. That distinction belongs to the repercussions of the banking and financial crisis still rippling through the economy. Research from McKinsey Group shows that a full recovery from a financial crisis takes anywhere from eight to nine years -- or, as Japan has shown, sometimes more.

In this light, the old advice about ignoring the rest of the world for opportunities at home has lost its luster. Unemployment and a focus on paying down debt are crimping the spending that would otherwise go toward growth. Bank of America (NYSE: BAC  ) and other big banks are tightening their lending standards. Right now, government spending on stimulus and mortgage programs are primarily boosting the U.S. economy, along with exports.

Pockets of growth
All hope isn't lost for the United States, though. In Fable of the Keiretsu, Yoshiro Miwa and J. Mark Ramseyer note that after the peak of Japan's financial crisis, certain sectors of the Japanese economy continued to grow -- and share prices did, too. The industries that did best were the furthest removed from real estate and banking. Companies that could fund their own expansion and earn healthy returns did much better. A quick look at the long-term charts of Honda (NYSE: HMC  ) and Aeon show that some companies did very well in Japan's post-bubble '90s. For this reason, global players such as Coca-Cola (NYSE: KO  ) and Nike (NYSE: NKE  ) should continue growing, but the universe of attractive domestic growth investments is nonetheless smaller.

It's possible to do better
There's a good reason that investors look for companies with growth potential of five years or more. Growth helps make up for not paying a bargain-basement price up front. Paying 29 times earnings for Intel (Nasdaq: INTC  ) doesn't hurt as much if you can count on having the stock grow earnings per share at a 12% clip for a few years, but anything less means there's a good chance of underperformance. And an economy more focused on paying for previous excesses than expansion makes growth more difficult to sustain.

That's why leaving the less leveraged and faster-growing international investments out of your portfolio is a mistake. A recent article in The Economist highlights that China, Russia, Brazil, and India have accounted for 45% of the world's economic growth since 2007, and there are signs that India and Brazil are gathering steam.

When you consider how the U.S. stacks up against international markets on a valuation basis -- and not just emerging economies -- this disparity becomes even more important.

Country/Index

P/E Ratio

Australia (ASX 200)

28.6

Canada (TSX Composite)

26.4

India (Sensex)

23.0

U.S. (S&P 500)

22.1

Brazil (Bovespa)

16.7

Data from Capital IQ, a division of Standard & Poor's.

Ideas you can work with
Not only are the valuation metrics better or similar, but it's also easy for U.S. investors to build a balanced portfolio representing these markets. An excellent starting point might include pharma Dr. Reddy's Laboratories (NYSE: RDY  ) to provide exposure to the high-growth markets of India and Russia, as well as Tim Hortons (NYSE: THI  ) and Westpac Banking for access to the more predictable and resource-rich developed economies helping to fuel the emerging world's growth.

If you're looking for help filling out the international portion of your portfolio, consider a free trial to Motley Fool Global Gains. You'll get access to our past recommendations; notes from our research trips to China, India, and Latin America; and access to our discussion boards, where like-minded investors share their favorite ideas and talk about how they're gaining access to international markets. Simply click here for more information.

Nathan Parmelee is co-advisor of Motley Fool Global Gains. He's shopped in Aeon stores more times than he can count and owns shares in Coca-Cola. He doesn't own shares of any of the other companies mentioned. Tim Hortons and Dr. Reddy's Labs are active Global Gains recommendations. Coca-Cola and Intel are Inside Value recommendations. Coke is also an Income Investor pick. Motley Fool Options has recommended buying calls on Intel. The Fool owns a covered strangle position on Intel and has a disclosure policy.


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  • Report this Comment On March 31, 2010, at 9:27 PM, SUPERMANSTOCKS wrote:

    Westpac Banking has always been a smooth running company/bank!. WBK is well worth the investment.

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