• 목요일, 02월 25일
목요일, 02월 25일

Opinion: Avoid home country bias at all cost

Opinion: Avoid home country bias at all cost

Picture=Wikipedia

[Newsphopick=Kingsley Lim] The road to recovery is uncertain according to Federal Reserve Chairman Jerome Powell. And I share that same sentiment. While stock markets around the world have rallied, consumer spending and business investment are nowhere near pre-pandemic levels across the globe.

For many companies, revenues have fallen by dramatic levels – sometimes as much as 80%, especially for the retailers. Even manufacturing businesses have been hard hit as the pandemic numbers surge. Sectors such as tourism and air travel have also been so badly affected that there is now excess capacity for airline seats. Therefore, it is not uncommon to see many airlines ground their planes and leave them in storage yards for as long as the pandemic ravages on. 

The market observers, there seems to be no end in sight. Indeed, the future is uncertain but it is also a puzzling phenomenon to live through. As the momentum stocks of our era edge up to record highs, the other companies have disappeared entirely off the radars of investors. At present, all eyes are locked on the usual suspects – Tesla, Apple, Netflix, Amazon, Alphabet and Microsoft. But few investors seem to want to look at smaller companies. 

But there are opportunities available if one were to open their eyes to a broader horizon. Investors typically focus on stocks within their home market. This is often called ‘home country bias’. The reason it is bias is because investing involves opportunity costs which is a tangible and measurable cost. 

When one invests in Company A, he takes away the resources to invest in Company B with a more attractive yield and valuation. Imagine for a moment that Company gains 12% in returns over the next twelve months while Company B gains 25% in returns over the same period. There is a 13% difference in returns, and when it comes to compounding money, that is a drastic difference. Hence to professional investors, opportunity cost is a real cost and it is as real as the brokerage commissions that investors pays to execute their trades. 

International investing 

The stock market in the US has been a phenomenal performer when one compares it to other markets across the globe. As such, indices have gone beyond ‘reasonable’ to bubble territory. No one knows how long this phenomenon will continue but it would not be wise for investors to assume this to be the status quo over the long term. One of my favourite mantras is ‘nothing is permanent’ and the performance of the US markets relative to other markets may be one such example.

While the price-to-earnings (P/E) ratio is not the optimal metric for valuations, the S&P 500 P/E ratio stands at around 25 while the P/E ratio for Japan and Hong Kong is 24 and 10.5 respectively. This means that for every dollar of earnings in S&P 500, one pays around 25 dollars for that earnings stream in the recent twelve month. By contrast, for every dollar of earnings in the Japanese and Hong Kong markets, one pays $24 and $10.50 respectively. This means that the Hong Kong and Japanese markets offer more ‘value for money’. 

But investors may argue that the growth projections of all three countries are unequal. While that is true, Hong Kong is an example of a country with a larger GDP growth than US, with lower valuations, possibly due to the promulgation of the recent national security laws and the unrest within the country. However, nothing is permanent and these things will come to pass. That is a certainty. 

While Hong Kong has been receiving a lot of negative press lately, businesses are not about to remove themselves entirely from the country. According to some reports, 20% of foreign businesses with a presence in Hong Kong would like to relocate. But this does not mean the ‘end of the world’ for Hong Kong and its stakeholders. 

This is just a transition. At the same time, Hong Kong will not isolate itself from the rest of the world just because it is in China’s grasp. China still needs Hong Kong to interact with the rest of the world. What is particularly interesting is that Hong Kong’s capital markets are still considered one of the top destinations to list a public company despite all of this. 

Hence, investors who have the patience and ability to withstand volatility may consider investing in relatively undervalued markets such as Hong Kong where projected growth rates are expected to exceed that of the US. 

My point in all of this is that investors really should avoid home country bias. There are opportunities to be found if one were to expand his investing geography. Doing so would allow one to find the best opportunities while minimising opportunity costs in the long run. And in my opinion, that is a good thing.

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