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Should I Invest in International Markets?

Brent Schutte, CFA •  November 17, 2016 | Your Finances, Ask the Expert

Each month, we book time with some of our company’s top financial brain power to answer questions about investing and your finances. This month we’re talking about international markets.

Our financial experts:

Mark McLennon

Mark McLennon is vice president of Investment Products and Services (IPS) Business Development. He oversees the fee-based financial planning program and departmental growth initiatives.

Brent Schutte

Brent Schutte is chief investment strategist of Northwestern Mutual Wealth Management Company. He oversees the investment philosophy for individual retail investors and the investment strategy for more than $100 billion in assets under management as of February 2016.

Do you have a question for our financial experts? Email it to us at: AskTheExpert@northwesternmutual.com

The following is an excerpt from our Ask the Financial Expert podcast (listen to the entire podcast below):

Mark: There’s been a lot of talk about domestic issues, but today we’re going to talk about international—not where you’re going on your next vacation, but more along the lines of whether you see value in international markets.

Brent: Let’s take a step back and focus on the broader picture for a minute. One of the things that I worry about with investors is that sometimes they extrapolate trends out forever. And so, for the past five, six, seven years, international markets, emerging markets and developed markets have underperformed the U.S. And I think the temptation is for individual investors to bail out of those.

And if you think back to where we were in 2007, that’s the markets people wanted to be in at that time and bail out of the U.S.—and that was at the wrong time.

From an overall standpoint, focus on diversification, don’t fall prey to your emotions and stay the course. So for the basics you should still have international, emerging and developed markets in your portfolio.

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Mark: Your perspective really hasn’t changed. I know we’ve talked in the past that up until 2014 things seemed to be going very well, but since then, we’ve seen what you have referred to as the crash of both the dollar and the oil market.

Brent: We have a modestly positive outlook on the U.S. economy, and for that matter we think international markets are getting better. And when I mentioned international markets under-performing for so many years, that has created pockets of value in those markets.

So if we believe that global growth is going to stabilize—and that is something that we do believe—then one might expect the international markets would actually provide some performance given that they’re relatively cheaper than the U.S. markets.

Mark: So the expectation was that the Fed was going to raise rates. Can you comment on that and the impact it would have on your longer-term outlook for international?

Brent: Sure. The commentary right now is that the Fed may not raise rates because we had an election in the U.S., and the person who was expected to win didn’t. I don’t think that changes the Fed in their decision in December to actually go ahead and hike rates, which they kind of telegraphed last time they met that they were going to do so, all else being equal, unless something dramatically changed. And that’s our forecast moving forward.

And now you’re starting to see fiscal policy happening in the U.S. The president-elect has a big fiscal stimulus plan, which has caused the markets to move higher and bond yields to actually start moving higher. That is actually occurring overseas also. Society is tiring of slow growth, and monetary policy has been the only game in town; and now fiscal governments are coming to the rescue in many cases, ending their austerity and beginning to spend more money—and that does have an impact typically on future equity returns and bond returns.

Mark: Does that affect both here and internationally?

Brent: If you think back to Brexit, it was about protectionism and populism. So that was a shot across the bow, the first one, for those governments to begin spending more. And now you’re seeing the second shot being fired in the U.S. And so we do think going forward that it will be not just in the U.S. but around the globe.

Hear more from Brent and Mark in the “Ask the Financial Expert” podcast:

Do you have a question for our financial experts? Email it to us at: AskTheExpert@northwesternmutual.com


The opinions expressed are those of individual investment professionals as of the date stated on this article and are subject to change. This material does not constitute investment advice, is not intended as an endorsement of any specific investment or security and is not a prediction of what will happen in the markets.

Please remember that all investments carry some level of risk, including the potential loss of principal invested. With fixed income securities, such as bonds, interest rates and bond prices tend to move in opposite directions. When interest rates fall, bond prices typically rise; and conversely, when interest rates rise, bond prices typically fall. This also holds true for bond mutual funds. When interest rates are at low levels, there is risk that a sustained rise in interest rates may cause losses to the price of bonds or market value of bond funds that you own. At maturity, however, the issuer of the bond is obligated to return the principal to the investor. The longer the maturity of a bond or of bonds held in a bond fund, the greater the degree of a price or market value change resulting from a change in interest rates (also known as duration risk). Bond funds continuously replace the bonds they hold as they mature and thus do not usually have maturity dates and are not obligated to return the investor’s principal. Additionally, high-yield bonds and bond funds that invest in high-yield bonds present greater credit risk than investment grade bonds. Bond and bond fund investors should carefully consider risks such as interest rate risk, credit risk, liquidity risk and inflation risk before investing in a particular bond or bond fund.

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