Investing in international markets is a multi-dimensional effort aided by having a rather unique perspective, especially during a global health pandemic and economic crisis. For some, it may require looking past the current negative headlines, uncertainty and confusion and having a very practical lens focused on the business activity on the ground. For investors, applying a different point of view or mindset can become a paramount advantage for successful long-term wealth creation.
During this pandemic, to better understand the current risks and investment opportunities in international investing today, we reached out to Institute members Robert Scharar, President; Wesley Yuhnke, Chief Investment Officer; and Derick Van Wyk, Investment Consultant of Houston-based FCA Corp. They are an independent investment adviser with decades of international business development experience and the manager of the Commonwealth Funds – an eclectic mix of international funds separately focused on Africa, Australia/New Zealand, and Japan, as well as, a real estate fund and diversified global fund.
Based on decades of direct investments and participatory business consulting expertise in these economies, the firm has developed local knowledge and practical business experience with access to ongoing on-the-ground insights and has been offering investment opportunities not easily accessible to most U.S. investors that offer increased portfolio diversity. We’re particularly interested in learning from their experiences and their unique perspectives on these international markets in the wake of the coronavirus pandemic and what they believe investors should be focusing on. ]
What asset allocation decisions should investors be considering for international investing during this COVID-19 pandemic environment? Any major points to consider?
Diversifying across multiple countries has become increasingly important especially given the varying impacts of COVID-19 on different economies. Changes in trade patterns and access will also create winners and losers within the countries. Combine that with the strength of the U.S. dollar that has made many foreign assets cheaper on top of the indiscriminate reduction experienced in equity values. Some weakening of the U.S. dollar offers an upside to foreign investments. Also, given the fact that many foreign markets may have not been in the position to recover as rapidly as the U.S. market, now may be a good opportunity for geographical diversification of one’s portfolio.
We believe this all leads to opportunities for U.S. investors who should aim for globally diversified portfolios, rather than one filled with only U.S. stocks – a mistake many investors make. In the absence of a crystal ball, investors should ensure that they are exposed to a range of markets around the world. In doing so, over time, they are positioned to capture any outperformance and minimize the risk of being overexposed to only those markets that lag or be further impacted by worsening coronavirus infection rates.
Can you take us on a brief tour of what COVID-19 impacts you are seeing in your key investment areas of Africa, Australia/New Zealand, Japan and global real estate?
There’s been a major impact on cross border travel and lack of tourism leading to the potential to force through positive changes in government and business freedoms. It’s important to point out that international travel to South Africa was low around the time that the pandemic began. As a result, the initial rate of infection was lower than most other affected countries as emergency measures were put into place. A full lockdown started, and only essential personnel could work or travel between different provinces for the following six weeks. Since then, the lockdown measures have decreased but masks and social distancing are still mandatory. Retail and service-related businesses seemed to bear the brunt of the economic slowdown caused by the lockdown, although there has been a solid recovery in these areas since the economy has opened more. Currently, gold and platinum mining companies are set to take advantage of the high prices of the two metals and are gearing up for a large-scale reopening. These markets are really cheap on a U.S. to local currency basis.
Being COVID-19 free is still a strong focus in New Zealand, and only a little less so in Australia. The combined country trade and their mutual “travel bubble” project bodes well for commerce. This is good news for investors who are looking to expose themselves to a range of global markets, as they look to avoid investing too heavily in countries whose poor responses to the pandemic have sent their economies spiraling. Our latest blog post on Australia and New Zealand’s comeback from the virus sheds more light on this.
Cases of COVID-19 are low in Japan compared to other countries. Anecdotal evidence suggests that the virus that has spread in Japan is less deadly, and many Japanese people seem to have some immunity – the average death rate in Japan is around 1/100th the average in Europe and the U.S. Although the Japanese government has lifted restrictions, the government is asking people to follow a “new lifestyle,” but we do not think these new norms of social distancing, wearing masks, washing hands frequently and work-from-home will unrecognizably alter society or the economy. Teleworking will change the way people work, but actually drive demand for investment to make work-from-home more efficient. Either way, new behavioral norms should not affect creation of added value (GDP) in our view.
Global Real Estate
Changes in the outlook for different types of real estate, with storage and industrial looking positive and second-tier real estate markets benefiting from the flight from crowded cities and lower interest rates, should help housing (especially single or lower-density properties).
Does your practical, ground-up business environment experience provide a different perspective versus what most competitors see who are primarily using top-down models and economic screens? Can you give us a few examples?
Dialoging with our private company and government contacts, we are getting feedback on what sectors seem to be recovering, local attitudes on potential government activities that will have an impact on their country’s economy, and the local population optimism. For example, in discussions on tourism, we learned that operators believe there is significant local business to be obtained from residents who formerly would have traveled elsewhere, which could bolster airlines with strong local routes and certain types of hospitality properties.
In another situation, discussions on the impact of the currency devaluation have identified public companies who can use their reduced cost on a comparative basis to access new business.
Our focus tends to be more on companies that provide not only value to the investor but also add long-term value to the country and region that the company operates in. Following this narrative, as well as, having a more “boots-on-the-ground” approach – either visiting the countries in question or having a strategic contacts/team members in said country – we believe we get a clearer sense of what drives market sentiment and business activity in the countries we invest in.
What other investment opportunities are opening up or gaining steam that you see developing?
Technology usage is growing exponentially. People are having to duplicate their offices at home. They can’t run the business on only a tablet – they often need more bandwidth, multiple screens, robust printers, easy access to courier services, better security (both electronic and physical) and a true dedicated office in the home space (no longer working off the kitchen table). All of these translate to products. Local production of goods will require warehousing and production facilities. Many countries that have relied heavily on imported items are seeing new local manufacturing opportunities.
The increased use of products such as Zoom and Microsoft Teams for collaboration and meetings are opening multinational opportunities for service companies (suppressed only by local licensing requirements) such as engineering, financial services, construction management, HR resources, information technology, educational/training services and marketing. There are also opportunities to take advantage of the cost impact of various currency exchange rates and local labor costs.
Something else that should be taken into consideration is the possible shortening of the international supply chain. The pandemic exposed how fragile the international supply chain is, which could result in geopolitical risk (think China/Australia relations) and an increase in isolationist policies. Opportunities in modern agricultural practices, like hydroponics and vertical farming, as well as oil and gas exploration, should be considered. Another possible opportunity for investors is securities that increase in value as market volatility increases. South African gold mining companies, for example, are in the process of capitalizing on the current higher levels of market volatility by expanding their gold mining operations.
How best can you position yourself as an investor to benefit from the specific pathways that each foreign market is on right now?
Exchange-traded funds focusing on a specific country or region are a practical way to invest in foreign markets. While exchange-traded funds can give a U.S. investor easy access to foreign markets, these usually are broader-based and often offer only larger companies and over-concentration in sectors that may not be the ones to be investing in now. Opportunities at this stage seem more stock selection driven. To achieve this, the investor can use ADR’s which, while there are a large number, are still fairly limited and often sector-focused like banks. Buying foreign shares is a more difficult issue for most investors, bringing with it income tax compliance issues, foreign currency exchange cost, time zone trading issues and lack of access to some securities. We manage our funds to offer a non-index weighted portfolio in foreign markets. We simplify the US tax compliance in a simple annual form 1099.
From your unique experiences over decades of direct investment, business consulting and active investment partnerships in these markets, what do you want to share with advisors and investors about why they should be investing and allocating more to these international opportunities?
The U.S. has benefitted disproportionately in recent years as far as investment returns. From a fundamental basis and relative growth opportunity, several international markets and stocks provide upside opportunities and diversification for a U.S. investor. There are also currency exchange rate movements that have been a drag on many international stocks performance for some time. The exchange rate movements against the dollar could swing in the investor’s favor, adding to the return potential. We would advise that investors allocate a limited portion of their portfolio to international equity. Investing in foreign markets should be a deliberate effort that focuses on a particular country, region or possible sector that holds long-term growth potential. That is what our funds are designed to do for you and they offer your clients another layer of diversification for their portfolios.