If you want to improve your equity returns this year, resist the temptation to repatriate money in global stocks to put it to work in the "safety" of U.S. stocks.
Milton Ezrati, chief economist at Lord Abbett & Co, said a study he recently completed showed that non-U.S. equity markets perform better in times of global instability than in times of global stability.
"We discovered in our talks with clients a concern about going overseas," Mr. Ezrati explained. "That's why we first looked at this issue. We discovered that when you're frightened is when you should invest overseas."
His study of returns over the past 80 years found that major non-U.S. markets — the FTSE in the United Kingdom, the Nikkei for Japan and the DAX for Germany — outperformed the Standard & Poor's 500 during times of global instability, if not upheaval.
"When there's global instability, there's movement away from international markets," Mr. Ezrati said. "The U.S. is a haven even for foreigners. But anyone who has the guts to go out and invest (in non-U.S. markets) will find handsome returns."
Mr. Ezrati analyzed seven time periods beginning with 1926 to 1929, when the global environment was stable. During this period, the U.S. stock market outperformed the other three. The other six periods he analyzed were 1929-1939, 1944-1950, 1940-1962, 1962-1971, 1971-1989 and 1989-2001. He used major world events such as the establishment of the Bretton Woods currency system, the Cuban missile crisis, the fall of the Berlin Wall and the Sept. 11 terrorist attacks to mark the time frames he analyzed.
Today, he said the global environment appears to be unstable, but based on the equity performance pattern he found, it is a good time to invest in non-U.S. stock markets.
Mr. Ezrati is quick to point out, however, that this "indicator" holds no greater prominence than other factors that suggest global investing makes sense.
He said several "ongoing" macroeconomic factors suggest a global equity exposure makes sense: diversification, a greater pool of securities from which to choose and greater global economic integration. In addition, some overseas stocks have more attractive valuations than their U.S. counterparts, while the dollar remains under pressure, two more reasons to be invested globally.
