Truepoint ViewpointDecember 2007The Role of Foreign Investment
A quick examination of the historical returns for foreign large-cap stocks shows them to be largely indistinguishable from those of U.S. large-cap stocks. In fact, in dollar denominated terms, the returns are less than 0.1% apart between the years 1970 and 2005. When measured in local currencies over the same time period, the foreign equity markets lag the U.S. markets. This begs the question of how much of the recent strong performance in the foreign equity markets is due to the weak dollar. It also begs the question of whether the foreign equity markets can continue to outperform the U.S. markets if the dollar stabilizes against other currencies. While currency has clearly played a role in the strength of the foreign markets, so has the growth of many of these markets. Emerging market countries such as India and China are experiencing strong economic growth as they increasingly supply products and labor to many developed nations. However, while these developing countries are likely to continue to grow at a much faster rate than the U.S., this does not necessarily mean that developing market stocks will perform better than U.S. stocks. Growth should not be confused with investor return; growth provides superior investment returns only when a reasonable price is paid for growth. It is also important to remember that returns from the emerging market asset class, which has recently performed exceptionally well, should be higher than both foreign developed markets and the U.S. market since these markets carry a significantly higher level of risk. Consider the performance of an investment in the stock index of the Philippines during the Southeast Asian financial crisis: a $100 investment at the beginning of 1997 was worth only $13 by the end of 2002. We welcome the opportunity to share more about Truepoint Capital’s thoughts on foreign investments. To schedule a complimentary consultation, please contact Lisa Reynolds at (513) 792-6648 or l.reynolds@truepointcapital.com View Truepoint Viewpoint ArchivesView This Month's Truepoint Viewpoint
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Bradley A. Reed, MBA, CFA