2018 Year-End Letter, Part 6: Global Investing

Other than updating the accompanying charts, and my closing comments, there’s really no improving on our 2017 letter’s section on global investing. Ironically, as I type here today, Brexit remains an issue (mentioned in the 2016 must watch video), and while Italian banks aren’t as forefront as they were then, the new populist Italian regime definitely is (although they did finally come to terms with the EU recently on what initially was an utterly ridiculous budget proposal).

If there’s been a common theme over all the years we’ve been blogging, and, for that matter, managing money, it’s that the world is a very big place, and the U.S., in terms of its share of the world’s human capital, is a very small place. While we can debate the causes of the miracle that makes the home of a mere 4% of the world’s population the far and away world’s largest economy, we can’t deny the fact that the human race is becoming more connected by the minute and, thus, the nations and institutions that embrace the interdependence that this global connectivity breeds — while successfully navigating the at times turbulent geopolitical waters — will prosper the most in the decades to come.

In mid 2016 we produced the following video on global investing. We believe it remains timely, instructive, and clearly illustrates the opportunities that abound beyond our borders. It essentially foretold of the out-performance we experienced in 2017 from our non-US exposure.

Please take a few minutes and watch. As you’ll gather from the video, and as you’ll see in the updated charts below, the longer-term prospects for global investing remain quite compelling.

Click the wheel to the left of “YouTube” to improve the clarity…

Now, bringing the charts forward:   click each to enlarge…

Here’s a look at the performance of the U.S. S&P 500 Index (white line), developed non-US markets (yellow) and emerging markets (blue) in 2018. As you can see, after strong out-performance in 2017, non U.S. equities were a tough place to invest last year; creating historically attractive relative valuations:

Here’s what I mean when I say “attractive valuations”; their respective forward price-to-earnings ratios:

And foreign stocks continue to pay notably higher dividends:

In terms of profit margins globally; the U.S. is still flirting with record margins, as the rest of the world, while now seeing margin growth, still has a ways to go (although developed markets in the aggregate are getting close):

As for central bank policies, at the start of last year futures traders were pricing in a 44% chance of a rate hike by October of this year by the European Central Bank. As you can see below those odds have been sliced by more than half; although odds are back above 40% for December:

As for the U.S. Central Bank (“the Fed”), the prospects for a rate hike discounted in the futures market have diminished dramatically just over the past few months.

Here were the odds as of a rate hike at future meetings as of October 1st of last year:

Here they sit today:

In a no-imminent-recession scenario, that’s a very bullish development for stocks, the world over!

Of course we can’t have a discussion on global investing without addressing the current state of affairs (read trade war); which of course we do ad nauseam on this blog. In that regard I’ll simply state (and close with) the following:

As I hope you’ve gathered from the above, if you needed any convincing, while there are China-related issues to be dealt with, erecting barriers to the flow of goods and services throughout the world stands, at the very best, to result in the most Pyrrhic of “victories”, at worst (and more likely) a devastating failure for the world economy (that includes us!!)!


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