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Is it time to increase the international exposure of your portfolio?

28 April 2021 by National Bank Investments
Monthly NBI May 2021

While the last decade has seemed as if it belonged to U.S. stocks, the future may be more nuanced and more international. Here’s why it may be time to look elsewhere and reposition your portfolio.

Growth drivers…

Over the past 10 years, few stock markets have outperformed the U.S., where several sectors have experienced double- or even triple-digit growth.

For example, an initial amount of Can$100 invested in the S&P 500 Index at the beginning of 2011 was worth around Can$470 a decade later, as the graph below shows. This is an enviable total return of approximately 370% or an annualized average of 37%.
 

Graphic Can$100 growth over 10 years

 

Elsewhere in the world, several key indices have not performed as well over this period. For example, an investment in the MSCI Emerging Markets Index (Can$), which includes China’s dynamic economy, underperformed in the S&P 500 between 2011 and 2020.

… may change!

In the short to medium term, the world’s largest economy is likely to enjoy a sharp rebound once the pandemic is under control, thanks to an ambitious US$2 trillion stimulus package and consumers eager to start spending and travelling again. A similar recovery appears to be emerging for Canada.
 

Table Global economic outlook

 

However, will U.S. stock markets continue to drive returns? As the table above shows, the future looks more nuanced. Important points worth thinking about:

  • United States: Many large-cap U.S. stocks, particularly in the technology sector, are trading at all-time highs.
  • Eurozone: Like the United States, Europe is home to several large, well-established companies with global revenues that are trading at better prices.
  • China: China’s giant market is expected to continue to drive global growth this year, supported by strong foreign demand for its products. There are a growing number of new-economy companies, joining the likes of Alibaba, Tencent and TikTok.

In the longer term, a number of demographic and economic indicators favour emerging markets: a young, increasingly educated and urbanized population, which is swelling the ranks of a middle class hungry for goods and services.

Time for diversification

It’s a well-known fact that sound portfolio diversification helps to improve performance while mitigating risk. And over the next few years, that diversification seems to include greater international exposure:

  • Several developed international markets offer lower P/E ratios.
  • In addition, “emerging and developing economies will continue to see the highest rate of growth,” according to the Long-Term Market Expectations 2020–2025 from NBI’s CIO Office.

Mutual funds and ETFs are the best way to harness their potential. By definition, these solutions are much more diversified and less subject to market moods than individual stocks. The ability to increase international exposure provides investors with one more tool to help them achieve their financial goals.

 

 

Legal notes

The information and the data supplied in the present document, including those supplied by third parties, are considered accurate at the time of their printing and were obtained from sourceswhich we considered reliable. We reserve the right to modify them without advance notice. This information and data are supplied as informative content only. No representation or guarantee,explicit or implicit, is made as for the exactness, the quality and the complete character of this information and these data. The opinions expressed are not to be construed as solicitation oroffer to buy or sell shares mentioned herein and should not be considered as recommendations.

NBI Funds (the “Funds”) are offered by National Bank Investments Inc., a wholly owned subsidiary of National Bank of Canada. Commissions, trailing commissions, management fees andexpenses all may be associated with mutual fund investments (the “Funds”). Please read the prospectus of the Funds before investing. The Funds’ securities are not insured by the CanadaDeposit Insurance Corporation or by any other government deposit insurer. The Funds are not guaranteed, their values change frequently and past performance may not be repeated.

NBI ETFs are offered by National Bank Investments Inc., a wholly owned subsidiary of National Bank of Canada. Commissions, management fees and expenses all may be associated withinvestments in exchange-traded funds (ETFs). Please read the prospectus or ETF Fund Facts document(s) before investing. ETFs are not guaranteed, their values change frequently and pastperformance may not be repeated. ETF units are bought and sold at market price on a stock exchange and brokerage commissions will reduce returns. NBI ETFs do not seek to return anypredetermined amount at maturity.

National Bank Investments is a member of Canada’s Responsible Investment Association and a signatory of the United Nations-supported Principles for Responsible Investment.

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