Global Trader: Time To Tear Down The “Emerging Market” Mystique

I hope it doesn’t come as a shock to those of you who have watched me pound the table for foreign stocks over the years . . . but maybe it’s time to stop dividing an increasingly integrated global economy into “us” and “them.”

For decades, artificial categories helped investors see at a glance where any given country was on the economic development cycle.

There was a clear gap between the U.S. economy driven by innovation and consumers, the “mature” markets scattered around Europe and the Pacific Rim . . . and “emerging” markets that were still early in the process of finding their role in an industrial landscape.

Now, however, I don’t see much of a difference. Yes, Japan and Europe aren’t growing as fast because there isn’t much left to build. They’re resting on their economic laurels, drifting into a long and hopefully quiet future.

And yes, China and other “emerging” markets are still growing relatively fast. But at this stage, the parts of the emerging world that U.S. investors can access have already been established for decades.

Think of it in terms of Main Street and Wall Street here in the United States. When we access emerging market companies, our choices are largely limited to those that have already figured out how to work with the global equivalent of Wall Street.

These are big companies with global reach and global reputation. Beyond their origins and current base of operations, they look just like any other member of the S&P 500.

Meanwhile, the real action in their economies happens on the local equivalent of Main Street. China is a lot more than Shanghai. India is a lot more than Mumbai and so on.

If you’re looking to invest in that kind of environment, you really need to work directly with people on the ground. Otherwise, the companies that trade on the NYSE and NASDAQ are remarkably well integrated with the global economy already.

Want proof? Just compare the sector exposure on three exchange-traded funds that each claim to track one of these global segments.

One way or another, the consumer accounts for 21% of the  “mature” global market . . . all the developed countries minus the United States. These are the food companies, retailers and other companies that provide the necessities and luxuries we buy.

The S&P 500 is also 21% weighted to consumer stocks. Many operate in multiple markets, across national borders, so there’s a lot of overlap when it comes to “Main Street” reach.

Coca-Cola operates in Switzerland. Nestle operates in the United States. One way or another, deciding between these stocks boils down to personal taste and market circumstances . . . national origin barely factors into the math.

But then pivot to emerging markets, where about 18% of all capital is circulating through consumer stocks. That’s a slightly lower weight than what we’d get on the S&P 500, but if you were expecting a huge gap, it’s time to rethink your assumptions.

We’re a long way from the days when vast populations were limited to basic sustenance activities and primary resource extraction. That’s the world a lot of emerging markets investors grew up in.

That world hasn’t completely vanished. Including energy, commodity stocks still account for 13% of emerging markets funds.

Compare that to 12% in developed markets and there isn’t a huge difference. If you’re looking for exposure to these inflation-resistant industries (and I do not blame you), you’d be well served by opening your screens to encompass most of the planet.

Ironically, I wouldn’t focus on the United States. Our tech stocks have become so dominant in our economy that commodities have shrunk to barely 6% of the domestic market.

My point, however, is that if you want oil, for example, you’re just as likely to find it in London where Shell (SHEL) and BP (BP) are based . . . or Paris where Total (TTL) is . . . as Saudi Arabia, Brazil or India.

These are all mature, world-class companies. The choice of which to own is a matter of personal preference and market opportunity. Again, national origin really doesn’t factor into it so much any more.

A barrel is a barrel. And the barrel in developed countries is roughly as big as the barrel in the “emerging” world. Chase the barrels across all the borders.

Commodities are a similar story. The ore may be in Chile or New Guinea, but the companies that dig it up are just as likely to be based in Australia or France as Brazil or Mexico . . . and the secondary processing plants are in Germany as well as South Korea.

On the flip side, you’ll find technology stocks in every country. In some markets, one or two high-tech names are the linchpin of their reputation with global investors. In others, there’s a thriving ecosystem of names to chose from.

You can buy a phone made by a company based in Finland, South Korea or here in the United States. It’s a phone. They change the language settings in the factory and send it out.

Where’s the diversification benefit? First, you still want to have exposure to areas of the world that aren’t dominated by the dollar.

While the dollar is dominant right now, you’re already subject to its native currency impacts every day. If the situation changes, you’ll be thankful to have cash coming in denominated in euros or yen or anything else.

But beyond that, believe it or not, the real benefit of stretching to incorporate foreign stocks into a U.S. portfolio is scale. Their most mature corporations are big companies . . . but by our standards, they’re mid-caps at best.

The biggest foreign stocks traded on Wall Street are Taiwan Semi (TSM) and Toyota (TM). They’re the size of Johnson & Johnson (JNJ) and Coca-Cola (KO), respectively.

The two of them put together aren’t even the size of Berkshire Hathaway. And 85% of all foreign stocks traded here (by which I mean, the biggest foreign stocks) are worth less than $10 billion today.

They have room to grow, if that’s what their management teams want to do. From that perspective, U.S. companies are the “mature” ones . . . and just about everything else is ready to emerge.

Come to Wall Street for safety. Go anywhere else for adventure and high-impact opportunities.