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Why International? Global Investing in Post-Brexit Vote World

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RANDY FREDERICK: Hello and welcome to the Schwab Market Snapshot for June 30. I’m Randy Frederick.

Well, last week’s Brexit referendum caused a sharp 5% decline in the markets in just two trading sessions. But equally impressive, about 60% of that decline has come back in just the last two sessions.

So today I’m speaking with Schwab’s chief global investment strategist, Jeff Kleintop, to find out if the worst is really over, or if investors need to remain on high alert.

Welcome back, Jeff.

JEFF KLEINTOP: Thanks for having me, Randy.

RANDY: So, Jeff—not only have we seen high volatility in global equity markets—but interest rates have continued to drop, and we’re beginning to hear stories about other countries in the European Union starting to plan their own exit strategies. What are you expecting in global equities right now?

JEFF: Well, you know, the Brexit needs a solution by politicians and not central bankers. And that may worry some people. But politicians have a lot more flexible mandates than central banks do and can be a lot more reactive in terms of what they do, and they’re not as close to being out of ammo as the central banks are.

I think returning some powers back to some of the member states, maybe around the free movement of people, around immigration—which, frankly, seems a little bit more political than economic—can go a long way to addressing some of the concerns that led to the Brexit and avoid further exits, as you referred to.

But it’ll take some time to sort all this out, and that will foster some volatility in the markets. That remains our big theme for 2016. All year we’ve talked about this is a year of volatility. And that continues to be the case—the markets are moving both up and down.

RANDY: Well now, this Brexit issue is primarily a European problem. And so some investors may be wondering why it makes sense to be investing outside of the U.S. So what is Schwab’s guidance for those who might be thinking that a stay-at-home strategy makes the most sense right now?

JEFF: Well, despite the swings in the stock market in June over the Brexit, the performance of the MSCI All Country World Index of global stocks has been very close to that of the S&P 500—they’ve only differed by about half a percent, I think. And in fact, the emerging market stocks have actually outperformed the U.S. market so far this month. So fears of dramatically different performance inside or outside the U.S. are so far unfounded.

RANDY: Well now, global markets seem to be trading in line with each other at the moment, but there’s still a lot of economic divergence. And, in fact, most countries seem like they’re struggling to get their economies on track and central bankers are trying all sorts of different programs to kind of get things going again. But you usually recommend focusing on individual companies rather than individual economies, right?

JEFF: That’s right. I think it is important to focus on companies rather than countries when it comes to investing. Countries are facing a number of challenges, but companies have opportunities that can help offset some of those challenges.

For example, the aging population in Japan creates a lot of challenges for politicians to deal with. But Japanese companies—like say, Toyota or Sony, just to name two that everyone knows—have a rapidly growing base of middle-class consumers in the emerging markets that can help them offset the declines in domestic customers.

And in the U.K., where they’ve recently voted to leave behind a lot of EU regulations, especially on immigration, it’s not because U.K. companies are trapped in some mire of inefficient regulations.

In fact, the U.K. ranks 9th out of 144 countries on the global competitiveness index, and it’s risen to 10th—that’s ahead of the U.S., actually—on the Index of Economic Freedom. And the U.K. cut corporate tax rates back in 2010, from 28% down to 20, and they’re talking about lowering them to 17% by 2020. That will be half the rate in the U.S. So there are plenty of opportunities for non-U.S. companies, despite the challenges facing the countries where they’re headquartered.

RANDY: Well, that’s some fascinating data, Jeff. But let me step back just a minute to something you said earlier. You mentioned that near-term performance has been pretty similar between U.S. markets and international stocks. But I think some investors are also worried about the long term. And, of course, long term means that they have to consider not only all these changes that are taking place in Europe right now, but also changes in places like China. So how do you help investors see that a stay-at-home strategy is also probably not the best plan for their core holdings?

JEFF: Well, the U.S. certainly isn’t immune to risk, right? We certainly can easily remember the aftermath of the U.S. tech bubble and the U.S. housing bubble to see the fact that U.S. is certainly not a safe haven when it comes to global risks.

In fact, global diversification has paid off when investors needed it the most. I’m talking about long-term time horizons, like a 10-year outlook. If you think about the worst 10 years for the stock market in the last 50 years—it was the period from February of ’99 to February of ’09 —where U.S. stocks fell about 40%. International stocks, however, measured by the MSCI EAFE index, only fell about 10. That is an enormous difference and really speaks to the value of maintaining global diversified exposure even when times are difficult.

RANDY: Thank you, Jeff. I think the moral of the story is that global diversification makes sense in almost any environment.

Well, that’s about all the time we have. If you’ve got more questions please call, talk to a Schwab investing professional. If you want to read more from Jeff about what’s going on in the global markets, you can get that in the International Investing section of Schwab.com. And of course you can follow Jeff on Twitter @JeffreyKleintop, and you can always follow me on Twitter @RandyAFrederick.

We will 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. Supporting documentation for any claims or statistical information is available upon request.

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. Investing in emerging markets may accentuate these risks

Definitions
MSCI All Country World Index (ACWI) is a free float-adjusted market-capitalization-weighted index that is designed to measure the equity market performance of developed markets. As of August 2015, the MSCI countries include Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the U.K. and the U.S. 

MSCI EAFE is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. It is maintained by Morgan Stanley Capital International; the EAFE acronym stands for "Europe, Australasia, and Far East.

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