Time flies! It’s been a fascinating 10 years in which our RS Global team has been managing capital for clients and investing in intriguing companies around the world. Over the past decade we’ve encountered—and successfully navigated—an array of challenges that no pundits could have entirely predicted.

Yet rather than discouraging us, this has merely strengthened our passion for global investing. Looking at the next decade and beyond, we continue to believe that global stocks can play a prominent role in many investment portfolios. In our view, geographic diversification of equities matters, and we see the growth potential of a great many companies around the world.

The Past Ten

First, consider some of the challenges we’ve faced over the past decade, starting with the aftermath of the Global Financial Crisis and the European Debt Crisis. Brexit—which wasn’t even a word 10 years ago—certainly impacted investor sentiment and continues to shape (some may say “slow”) economic growth in the U.K. The Covid pandemic was a phenomenon that impacted the world’s regional economies unevenly and with different peaks and valleys. Russia’s invasion of Ukraine has had ramifications far beyond Eastern Europe, especially regarding food and fuel prices. Rising inflation, aggressive monetary policy tightening, and ever-changing currency valuations continue to impact valuations. In particular, the rapid rise of interest rates has impacted the financial health and profit margins of many businesses. It’s never dull for global investors.

The challenges of the past decade were not limited to underlying macro factors. As fundamental active investors (stock pickers with a little help from our proprietary quantitative models), we also need to understand how other trends—industry, regional or more nuanced—might manifest in stock performance.

For example, we have we seen how some managers are forced to respond to shifts within some of the major global equity indices, which have changed in terms of both sector and geographic composition. In addition, we’ve witnessed subtle but vitally important accounting and management trends. One example we’ve written about has been the rise of intangible assets—those on and/or off-balance sheet items that have no physical presence, such as goodwill, patents, R&D, and brand value. Our research has shown that intangible assets as a percentage of total assets has increased significantly over the past decade, causing some to question the usefulness of traditional book-value measures. Accounting standards have lagged regarding the treatment of intangible assets even as these have become larger drivers of economic value. This is important to know as we analyze international companies and, ultimately, structure portfolios.

The Next Ten

Looking ahead, there are exciting developments and an ever-changing landscape facing global investors. For example, we see potential disruptions from artificial intelligence, as well as digital currencies and growing non-financial data sources. We have also seen environmental, social, and corporate governance (ESG) frameworks take on roles of significant importance within the investment community. Yet a key question for investors is whether ESG is a sustainable source of alpha (excess returns over a benchmark) or a means to mitigate risk? It’s an interesting question, and the answer will surely help shape the next decade for global investors.

We don’t deny that monitoring the global investment landscape is a tall task. And when we are on the road discussing global strategies with investors and financial advisors, some may even ask: Why bother investing globally?

When it comes right down to it, we believe the answer is quite simple:

1. Diversification Potential: We believe that global equities offer investors important diversification benefits. Large domestic equities may have performed well over the past decade (2022 notwithstanding), but there are periods when global developed markets and emerging markets outperform U.S. markets. Moreover, all economies don’t rise and fall at the same time, so including them in a broader equities portfolio may help even out volatility.
   
   
2. Return Potential: The opportunity set for global investors is robust. Consider that the total market capitalization of all publicly traded companies within the MSCI All Country World Index (ACWI) was approximately $79 trillion as of March 31, 2023. Yet, 52% of this value is domiciled outside the United States. Disregarding the potential of industry-leading companies outside the U.S. would seem to be short-sighted. 

Will the next decade have as many tectonic shifts in the investing landscape as the previous one? Will emerging markets stocks or developed international stocks lead, or lag, domestic stocks? Nobody knows for certain. What does seem obvious, however, is that there are many quality companies across many industries in locations around the world. We intend to find those with best return potential for the next decade, and beyond.