Global Stocks: Look Beyond Home Base to Find Growth

Inflation, interest rates and growth challenges are evolving differently around the world. But country-specific macroeconomic conditions shouldn’t determine global equity allocations. Investors should look beyond a company’s domicile to find the most promising sources of long-term growth.

In this year’s global economic crisis, no two regions are having identical experiences. While inflation rages across much of the world, price rises have been more moderate in some countries than others. Similarly, the scale of rate hikes and the degree of recession fears aren’t uniform.

The US is enduring rate-cycle pain earlier and faster than elsewhere because of the Federal Reserve’s aggressive monetary tightening. In Europe, where inflation is even higher than the US, the energy crisis is complicating central bank action and amplifying recession risks. Japan, in contrast, has low inflation, loose monetary policy and a weak yen. China, meanwhile, is trying to stimulate growth, while managing a zero-COVID policy and coping with housing-sector risks.

Top-Down Regional Allocations Are Flawed

In this environment, investors in global equity portfolios might be tempted to seek regional exposures that reflect regional macro conditions. We think this type of top-down approach is flawed for three reasons. First, it is notoriously difficult to predict macro trends. Second, macro trends don’t always translate into equity market returns. And third, even as deglobalization accelerates, many companies don’t rely on domestic markets for revenue.

European companies generate 58% of their revenue from outside the region (Display, left). Japanese and US companies also sell significant volumes to customers abroad. As a result, in many cases, revenue and earnings growth potential will be determined more by global industry dynamics than inflation and GDP at home. What’s more, in a year when the US dollar has appreciated sharply, business performance has been acutely affected by currency exposures.