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Fisher Investments: Trump Political Fears By Investing Globally

At the risk of stating the obvious, things have been rather eventful in Washington, D.C., the last couple months. While markets have largely shrugged, many fear the impact will arrive sooner or later. Now, we doubt that, as most of the actions -- including President Donald Trump's decision Thursday to yank the U.S. from the Paris Agreement combating climate change -- are far removed from markets, mostly symbolic or too small to affect markets much. However, if you're worried about the goings on, that isn't necessarily a reason to exit stocks. Rather, in our view, investing globally can help you overcome fear of leaks, innuendo and rumors in D.C.

Global investing's biggest benefit is diversification-including diversification against political risk in any one country. Case in point: While U.S. stocks dipped a bit recently, non-U.S. stocks rose. Non-U.S. stocks stocks are handily beating the U.S. year to date, and their lead widened as America's political theatrics heated up. As we type, their year-to-date return is nearly double the S&P 500's.

Exhibit 1: To Hedge Against US Political Risk, Invest Globally


Source: FactSet, as of 6/1/2017. S&P 500 Total Return Index and MSCI World Ex. USA Index with net dividends, 12/30/2016 - 5/31/2017.

The great thing about investing globally is not all countries are in the exact same situation, letting you capitalize on happier trends in other places. Political uncertainty might be rising a wee bit in the U.S. right now, but it is not up across the board in all of the MSCI World Index's 22 other countries. In much of Europe, for example, it's falling -- first with the Dutch election, then the French election, then some regional German elections, and most recently the Socialist Party leadership election in Spain. Germany's federal election in September looks likely to extend the status quo of a pro-euro coalition government. While chatter has picked up over an Italian election, nothing is on the docket as we type. This clearing fog has been great for eurozone stocks, whose year-to-date returns are almost triple the S&P 500's.

Exhibit 2: Eurozone Stocks Love Falling Political Uncertainty


Source: FactSet, as of 6/1/2017. S&P 500 Total Return Index and MSCI EMU Index with net dividends, 12/30/2016 - 5/31/2017.

While today's other widely hyped risks to U.S. stocks are similarly overstated, non-U.S. exposure is also a hedge against them. Worried about the Citigroup Economic Surprise index for the U.S. spending the last several months in negative territory? Own eurozone stocks: Citi's Economic Surprise Index for the eurozone is high and rising. Worried about America's flattening yield curve? Well, most curves in Europe have steepened. Worried S&P 500 valuations are inflated and show sentiment is getting too hot? P/E ratios are lower in Europe, where sentiment is only just starting to warm up after years of post-crisis blues. And if for some reason you think S&P 500 earnings growth is too low at 13.9% year-over-year in Q1, you can always take comfort in the MSCI EMU's 31.5% Q1 earnings growth.[i] That last one is a joke, but only sort of.

Again, we aren't saying any of what has transpired in U.S. politics over the last two weeks is inherently a risk for U.S. or world stocks. Not based on what information is out there already. Nor has anything fundamentally changed. We still think U.S. stocks will have a fine year, and we don't believe excluding them from a diversified global portfolio right now makes sense. But we think owning a large chunk of non-U.S. stocks alongside them is the best way not only to limit your risk, but to capitalize on opportunities the world over.

[i] Source: FactSet. Q1 2017 blended earnings growth estimates for the S&P 500 and MSCI EMU Indexes as of 5/26/2017.

Fisher Investments is an independent, fee-only investment adviser serving investors globally. To learn more about Fisher Investments, please visit www.fisherinvestments.com.

The content contained in this article represents only the opinions and viewpoints of Fisher Investments editorial staff. It should not be regarded as personalized financial advice and no assurances are made the firm will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.