Investing Globally Can Provide Better Opportunities than Domestic Myopia, According to BNY Mellon Asset Management

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Global View Can Aid Investors to Spread Risks and Achieve Better Returns

Investing globally has the potential for providing better returns and greater diversity of risk exposure than limiting capital allocations to home markets, according to a new white paper by BNY Mellon Asset Management.

“Investing globally can help investors spread their risks and position themselves to achieve better returns across a range of economic scenarios,” says Curtis Arledge, vice chairman of BNY Mellon responsible for asset and wealth management. “It seems that many investors in developed countries may have not fully appreciated this approach, as studies referenced in the white paper demonstrate an over reliance to home equities.”

Among the trends driving a global investing approach are the rise of emerging countries as growth engines for the world economy, the growing share of global market capitalization outside traditional investment centers such as the United States, and the trend toward truly global companies that derive sizeable portions of their earnings from countries and markets far from their home headquarters.

As well as arguing the rationale for global investing, the white paper addresses the range of perceived risks associated with investing beyond one’s domestic market; including the increased complexity of managing currency translation risk and liquidity concerns, as well as fiscal and political uncertainty in some countries.

An important factor underlying the trend for global investing is the divergence in economic growth between emerging economies and the traditional developed market countries.  “While many emerging market economies were not as severely affected by the financial crisis, the growth in developed economies has been constrained by a deleveraging process that is shrinking the amount of available credit,” says Mitchell Harris, interim head of asset management at BNY Mellon.

This deleveraging has caused sharp performance divergence between asset classes and currencies around the world, as well as heightened volatility, which can be exploited for returns, according to Newton*, one of the BNY Mellon boutiques that contributed to the white paper.

“As individual country risks have changed, every company, sector, and investment opportunity should be considered within a global context to identify long-term winners,” comments Helena Morrissey, chief executive officer of Newton.

Investors who fail to take a global approach could be hurt by the divergence between economic conditions in their home countries compared with those of foreign markets.

“Active global equity managers with deep knowledge of local conditions and future trends, who are able to accurately select companies and countries with the greatest potential for outperforming returns, have been rewarded after and even during protracted bear markets,” adds Kirk Henry, portfolio manager at The Boston Company Asset Management LLC.

Attractiveness of Emerging Markets

The rise of emerging markets has created opportunities for both equities and fixed income investors, according to the white paper. The paper notes that faster GDP growth and better opportunities for increasing productivity are expected to help emerging markets equities out-perform those in developed markets.

Many of the prior barriers that impeded the progress of emerging markets countries have disappeared as the governments of these countries have taken steps to bring inflation under control, liberalize their currency regimes, develop local currency bond markets, amass reserves, and reduce their dependence on external capital, according to the report.

For bonds, BNY Mellon’s fixed income specialist Standish Mellon Asset Management Company LLC says that more effective monetary policy in many emerging countries has helped contain inflation and better fiscal policy has kept indebtedness low, improving sovereign credit quality.  David Leduc, Standish’s chief investment officer, points to the resilience of local currency emerging market debt through the financial crisis. “They were the local equivalent of U.S. Treasuries, a final safe haven during times of stress. Emerging market local currency bonds have the potential to provide investors with good diversification, attractive returns and a type of risk that is not closely tied to the cyclical nature of credit,” he adds.

Alternatives

Real estate and private equity investors can also benefit from taking a global approach.  In real estate, investors can take advantage of widely different valuations across regional markets.  The report notes that many of the most dynamic sectors of the global economy and a number of the fastest-growing emerging market companies are not yet available in the public markets and can be accessed only through private equity.

As the proportion of foreign investment in investment portfolios increases, investors will also need to guard against currency fluctuations that can have a large negative impact on returns, according to Michael Shilling, chief executive officer of Pareto Investment Management Limited, the BNY Mellon currency hedging specialist.

The white paper concludes that with multiple asset classes and investment strategies to choose from, it is clear that there is no one-size fits all approach to global investing but the advantages of an investment philosophy which seeks to leverage global trends and investment opportunities outside domestic markets is difficult to refute.

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