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Global Diversification: The Remedy for Home Bias Investing

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RANDY FREDERICK: A wave of populism has emerged not just in the U.S. but in developed economies around the world. And no country understands this more than the United Kingdom whose recent Brexit referendum will ultimately result in a complete separation from the European Union. Kully Samra, managing director of Schwab’s branch office in London, joins me for the October 25, Schwab Market Snapshot to discuss some of the causes of this protectionist movement, and why it may or may not be justified. Welcome, Kully.

KULLY SAMRA: Hi, Randy. Thanks for having me on today.

RANDY: So, Kully, as someone who works in the heart of the Financial District in downtown London, you’ve witnessed this historical Brexit referendum firsthand. From your perspective, what were some of the actual drivers that led to this vote, and were they legitimate concerns?

KULLY: So, Randy, if had to summarize the drivers into one sentence, I would say it was concerns about displacement of opportunity. And by that I mean that people in the U.K. felt that their opportunity to find meaningful work was being displaced by migrants—especially from Eastern Europe. Whether these were legitimate concerns or not, I wouldn’t want to question the concerns of the electorate. But what I would say is that there are a lot of things bubbling beneath the surface, and I’d say one of the biggest one is this North-South divide we have. The North, which is like your Rust Belt—has been deindustrialized over a period of time because of technology, because of demographics, because of change of taste—and then the South, which is very focused on the service sector. And you did see that the vote was very split across the North-South, as well. So while there might have been some legitimate concerns, I don’t think this is just about immigration.

RANDY: You know, Kully, it’s a bit puzzling to some people, I think, why there is so much dissatisfaction in the international trade treaties, immigration patterns and capital movement. And yet the economies in both the U.K. and the U.S. are actually doing quite well. So why do you think this movement has gained so much momentum and where do you think it’s ultimately heading?

KULLY: So you’re absolutely right, Randy, insomuch as the economies are doing very well. In fact, the U.S. and the U.K. have the strongest GDP growth out of the G7 countries. And Thursday we’re due to report the U.K.’s GDP read, which is expected to surprise on the upside. And then, of course, Friday we’ve got the U.S. GDP, as well. As to the reasons that globalization has fallen out of favor, I fundamentally believe it’s about it becoming a political football. And as to where it will end, you know, I’ll rely on something that clients have been talking about a lot. You know, I’ve had the luxury of speaking to clients who have been investing for 30, 40, or even 50 years, and they talk about cycles. They talk about cycles not just in economies and markets, but also political cycles, as well. And I think this is very important because it reminds us all about making sure that we don’t allow short-term cycles to really dictate how we invest for the long-term. Which I think is one of the core tenets we tell all of our clients about.

RANDY: Yeah, that’s true. And, you know, even though you run our London office your clients invest not just in Europe but also in the U.S. And, as you just said, we know that politics and economics, they tend to be cyclical in nature. Now, if that’s true, then how do you convince clients that global diversification still makes sense, especially for long-term investors?

KULLY: Yeah, I have a very similar job to Jeff Kleintop in a lot of different ways, but in the reverse. So Jeff talks a lot about home bias, and for a lot of the listeners here who may be bias—who may be living in the states—it’s the home bias to their local U.S. stock market. For us here in the U.K., we’re talking about U.K. clients looking beyond their home bias to investing in the U.K. And the U.S. is a great place to invest. In fact, over the 20-year career I’ve had in the U.S.—covering the U.S. from the U.K.—U.S. has outperformed 15 of those. But who’s to say that may change. Which is why global diversification is very important and very key.

RANDY: Yeah, and, of course, at Schwab, we always advocate that investors should be diversified, not only among market sectors, but also among different asset classes and global markets. Now, with equity valuations pretty well stretched and a hike in interest rates almost certain to come in December of this year, do you have any concerns about investors in the U.S. markets?

KULLY: Randy, those two concerns you mentioned there are two of the key concerns I hear directly from clients, and also from other investors that we speak to, as well. And taken each individually, firstly, with valuations, on a forward basis, the U.S. stock market is very slightly overvalued in our belief at Schwab. And, in fact, as you pointed out, Randy, yourself, markets can, the value—valuations can be stretched for a period of time in bull markets. So I don’t think there’s a huge concern in valuations. When it comes to the decision for the Fed to hike rates—which is obviously in November and December—it seems that December is the likely time to move. But I think this is a good signal because it shows that the U.S. economy is in a place where not only can it sustain a rate hike, but it warrants it, as well. So I think, overall, there may be some short-term concerns, but the long-term horizon looks pretty decent for the U.S.

RANDY: Thank you so much, Kully, for your unique perspective. Unfortunately, we’re about out of time, so, listen, if you have any questions, please call and talk to a Schwab financial professional. You can read more about these topics in the Investing Insights section of Schwab.com, and you can follow me on Twitter @RandyAFrederick. We’ll be back again. Until next time, invest wisely. Own your tomorrow.

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. Please note that this content was created as of the specific date indicated and reflects the author’s views as of that date. It will be kept solely for historical purposes, and the author’s opinions may change, without notice, in reaction to shifting economic, business, and other conditions.

Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

International investments are subject to additional risks such as currency fluctuation, geopolitical risk and the potential for illiquid markets.
Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

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