What’s a home country bias?
In general, home country bias leads investors to focus on assets with which they are familiar due to geography rather than what may be attractive and appropriate for their portfolios. This bias doesn’t just stop at countries – investors often tend toward investments closer to home. The classic examples are investors who primarily invest in hometown companies, companies where their friends work or that create the products they use every day, and so on.
There is nothing inherently wrong with investing in what you know, but this should only be a starting point. For investors whose primary purpose is to achieve long-term financial goals, it’s important to minimize this bias by understanding where opportunities lie regardless of geography.
Understanding broad themes overseas does not require investors to be economic or political experts. Instead, it’s about building awareness around the drivers of international markets to feel more comfortable investing globally.
Let’s Talk About Europe
Europe has been hit hard by the global shocks of the past few years, primarily due to the war in Ukraine. While Germany and France continue to face challenges, Europe as a whole has been resilient.
Inflation improved to 5.5% in June, mainly driven by declining energy prices. A milder-than-expected winter helped Europe maintain natural gas reserves, which boosted consumers and businesses across the continent. Perhaps more positive is that unemployment fell to exceptionally low levels: 5.9% across the European Union. Employment rates are at their highest recorded levels and well above pre-pandemic peaks.
Next Up: China
China has struggled for different reasons over the past few years. The most recent major shock resulted from zero-COVID policies enforced throughout 2022, which hampered economic activity and industrial output. Furthermore, demographics are not in the country’s favor as the population ages and declines. Also, crackdowns on tech and education could hamper innovation and foreign investment.
On the other hand, the economy’s rebound from COVID lockdowns has been meaningful, as shown in its recent PMIs. Various factors drove the yuan lower earlier this year; a weaker currency is a tailwind since it boosts exports and foreign sales. If there is a reversal of the yuan’s depreciation, it could boost returns on yuan-denominated investments.
Due to its command-and-control economy, investing in China has always been tricky and subject to changing sentiment.
Key Takeaway
This is not about all-or-nothing investments in Europe or China – it’s about adding diversification opportunities to portfolios as the global economy stabilizes.
What ultimately matters for investors is the balance of risks and opportunities across regions and how they are valued. Even countries with mediocre growth prospects can make for sound investments if their prices are attractive enough or their correlations to the rest of a portfolio are low enough. Developed and emerging markets have historically experienced periods of significant outperformance while providing diversification benefits to U.S. investments.
The bottom line?
Investors should minimize home country bias by having a broader perspective on global growth. Doing so can improve portfolio diversification as investors work toward achieving their long-term financial goals.
Connect with us if you want to review the presence of home bias in your portfolio.
All views, expressions, and opinions in this communication are subject to change. This communication is not an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services.