If you have been paying attention to market news this past year, you probably noticed that while the big players of the U.S. stock markets have been on a roll, non-U.S. based investments have been suffering. It may not feel like it now, but this is a good thing.
The premise behind all of that asset allocation investing is that when one type of asset is going down, another should be performing better. As the world markets become more and more integrated, concerns naturally arise amongst professionals about how much difference there will be in the performance of say, a stock traded in U.S. markets and one traded in an European Union country. After all, the big EU companies are very likely to be relying heavily on the same U.S. consumers to buy their goods.
Partially in response to this concern, the past few decades have seen U.S. investors putting an increasing amount of their money in emerging markets (including the “BRIC” countries of Brazil, Russia, India and China) and even in so-called Frontier Markets (less established stock markets in countries likely to be politically and economically stable). Investments in these less developed stock markets can thrive when a bit of political stability and a growing middle class leads to more spending at home and more exports (as has been the case in China). But of course, this sort of progress can easily be undone in a moment of political disruption.
What the divergence between U.S. market performance and non-U.S. markets in 2014 showed us is that the world’s economies are not yet as integrated as we had begun to think. And if this spells trouble for EU countries right now, it is probably a good thing that the difficulties of one or two powerful markets do not yet mean trouble for everyone.