Thundering Herd of Sheep

I have been a global investor since many of the traders in this market were in short pants. As an institutional investor I bought the ECU (you might have to look that up).  So my perspective is different.  International isn’t exciting or new to me and I hope after this rout, it’s not to you either.  It’s a market. An asset allocation opportunity.  That’s it.

So what does this mean for your portfolio? Are you an international investor? You are if you own Target Date funds in your 401k, and it might be time to confirm that’s really the strategy you want to pursue.  If you read the research published by the commission-generating Wall Street sales firms, you are a global investor and you should be invested in US, European, Asian, Latin American stocks including what is known as the BRICs – Brazil, Russia, India and China.  And if you believe them, you should be perfectly comfortable accepting the currency risks of each of those countries, all in the name of diversification.  I beg to differ, but I’m a fiduciary who makes recommendations based on your best interests, not mine.

But even if you buy only US stocks, are you exposed to the risks of international economies and markets, especially emerging markets like China? The good news is, you are less so than the Henny Penny media and bloggers would have you believe.  It’s not easy finding the data, and it appears to be occasionally calculated by random researchers, so someone out there who interprets BEA and other reliable statistics please correct me if I’m wrong.

Data I found was sourced from:  BEA (the Bureau of Economic Analysis), S&P Dow Jones indices data, WSJ, FT, Bain & Co, GS, BoA ML, & FactSet, but there is not much definitive research beyond the commonly quoted facts such as, companies in the S&P 500 generate 40-50% of their sales from overseas markets, and about a third, or under 15%, of those derive from emerging countries, which translates to under 7% of profits attributable to emerging countries.  Factoring in that large cap stocks such as those in the S&P 500 are about 72% of the US stock market, that information technology & consumer staples companies are the largest generators of international revenue, that midcap companies have less exposure to international sales, and small cap companies less than midcaps, the overall impact on the broad US stock market as measured by an index like the Russell 3000 is likely below 5%.   So is this another tempest in a teapot? Yes those companies all geared up hoping for revenue growth to come from emerging countries like China, but is the outlook so bleak if that doesn’t materialize now, or soon?

There is a plethora of anecdotal evidence that US companies will be hurt by the China rout but my week researching has not unearthed the actual number in the aggregate, so just how exposed is the US stock market to the vagaries of China’s markets and economies?  According to the WSJ (  “China remains a relatively small part of operations at most big U.S. companies: Just 16 companies in the S&P 500 index say they collected 10% or more of their sales there, with most of those in the technology sector, according to data from Wells Fargo Securities.”  And Market Watch reported  (  that of the top 10 S&P 500 companies with the most exposure to China, #6 derives 40% of its sales from China and #s 7-10 derive 30-32%.

One begins to wonder, and can likely conclude that emerging markets are just another market, and occasionally another market opportunity.  Until they aren’t.  Except for the people who sold them to you – for whom they are a beach house, private schools and a private plane.   For a U.S. Based investor, I’m just not convinced.  But you do feel savvy at that cocktail party swaggering about your BRIC fund.

Have you have been convinced, by the media, and your salesperson “ Financial Advisor,” that you have to Go Global or Go Home?  And has your corporate HR department convinced you it is ok to be in emerging markets and other international markets by offering you Target Date Retirement funds?  Do you know those funds are global allocation funds whose equity allocations are up to 38% out of the U.S. including up to 8% in emerging markets?  So if you learn anything from this rout may it be that, after these very risky markets reverse themselves and you get back to zero, you will have a good think before you buy the diversification story and Go Global.  You are a USD based investor and should only go there if you see an opportunity.  And I don’t mean the opportunity your salesperson “Financial Advisor” seized by selling you very expensive global funds that make a whole lot more money for the sellers than the buyers.

There are plenty of opinions out there, so take mine for what it is worth. The most ridiculous I have read this round is that of a poster on a major market website who said we are all Chinese investors because we own US multinational stocks.  Sorry, not so much.   This is an emerging markets crisis, and one of many over time, this time caused by a cooling in China.   If we permit the emerging markets experts to call the shots on this crisis du jour, of course they will sound the alarms.  Their market is tanking.  If we take a strategic approach, this is no panic, and it’s actually de rigueur in emerging markets investing.

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