This is a good time to make your portfolio more diversified globally. The United States has led the global economy and markets since about 2013 and especially since 2016, notes Bob Carlson, editor of Retirement Watch.
The global economy slowed and many markets around the world tumbled while U.S. markets marched higher. But in late 2018, the U.S. economy slowed noticeably in response to the Federal Reserve’s tighter monetary policy, and U.S. stocks finally had a correction.
After the Fed paused its tightening policy, U.S. stocks began climbing back toward their all-time highs. The Fed’s tightening affected other countries, especially emerging markets, before the United States.
Many of those economies had recessions or severe slowdowns and bear markets in stocks, bonds and currencies. A number of these overseas markets and economies began to form bottoms in 2018 as growth was stalling in the United States.
The U.S. economy is likely to slow for a few more months before it stabilizes at a lower rate than in 2017 and 2018. My best estimate is that a recession isn’t likely if the Fed maintains its neutral policy.
U.S. markets are priced with an expectation that the Fed will begin easing policy in 2019. If the Fed doesn’t follow through, there’s likely to be an adverse reaction in the markets.
I like a margin of safety. I see it in some international markets now where there are lower valuations and expectations are modest. There’s far less of a margin and far more uncertainty in U.S. markets.
WCM Focused International Growth (WCMRX) is highly selective, owning only 32 stocks, and holds most of its positions for years. The 10 largest positions make up almost 40% of the fund.
The fund seeks companies with high growth that it believes are sustainable. It wants companies with little or no debt and high returns on capital. Those companies should benefit from key global trends and benefit from one or more barriers to competition.
Management at those companies should foster a growth culture. The system works well. The fund returned 5.13% in the last four weeks and 15.89% for the year to date.
Top holdings recently were CSL, Canadian Pacific Railway, Tencent Holdings, Accenture and Shopify. The largest sectors in the portfolio are technology, health care and consumer cyclical.
We are adding a position in DoubleLine Emerging Markets Fixed Income (DBLEX). The fund doesn’t try to mimic an index. The fund’s analysts determine the outlook for each emerging market country and decide the countries where they do not want to have exposure.
The fund doesn’t own a country or a security simply because it’s in an index. The fund buys primarily bonds that are denominated in U.S. dollars. It largely avoids the currency risk so many emerging market bond funds take.
Finally, the fund emphasizes preserving capital ahead of earning high yields. The fund rose 1.59% in the last four weeks and 5.51% for the year to date. The yield is 5.31%.
The largest country exposures are Brazil, India, Mexico, Chile and Argentina. The largest industry exposures are banking, oil & gas, telecommunications, utilities and transportation. Almost 70% of the fund is in corporate bonds with the rest in quasi-sovereign bonds and sovereign bonds.
I also recommend exposure to Asian emerging market stocks through T. Rowe Price New Asia (PRASX). This is a long-time top-performing fund in the region that we’ve owned before. The fund doesn’t try to follow an index.
It focuses on the stocks and countries management likes. It recently owned 75 stocks and had 41% of the fund in the 10 largest positions. The fund follows T. Rowe Price’s process of buying stocks of well-managed growth companies selling at reasonable prices.
Top holdings recently were Tencent Holdings, Samsung Electronics, AIA Group, Alibaba Group and Taiwan Semiconductor Manufacturing. About 32% of the fund is in technology stocks and 22% in financial services. The fund returned 4.60% in the last four weeks and 17.50% so far in 2019.
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