Amy & Dan Smith's Planning for Life: Looking Beyond U.S. Borders

Even though U.S. equities still represent the single largest portion of the world stock markets, more than half of the world's total stock market capitalization lies outside the United States, and economic growth rates outside the United States have in some cases exceeded that of the United States.  Investors are beginning to consider diversifying their holdings beyond U.S. borders as a result.  In the past, I have often recommended allocating no more than 10-20 percent of an investor's overall portfolio to international funds.  However, with the growth of global markets and the European Central Bank's recent initiation of quantitative easing, many experts now suggest an even higher percentage can be appropriate given the right circumstances.

The following article "Thoughts on Europe" is from Chris Bailey, Raymond James European Strategist.  The complete article can be found on my website under "Market View" then "Investment Strategy Quarterly."

Thoughts on Europe

From the perspective of American investors, this year's rise of the U.S. dollar pushed most international markets into losses although the history books show that, in local currencies, many European and international equity markets made gains during 2014.  However, any losses are modest compared to those apparent in mid-October when most international equity markets hit their lows for the year.  By contrast, fixed income markets in Europe and Asia have been very strong with generally material yield compression to levels not seen in modern financial history.

To understand the reasons for the above, it's necessary to review the policy actions of the European Central Bank (ECB) and Bank of Japan (BOJ) and the People's Bank of China (PBOC).  Throughout 2014, the ECB loosened policy that included interest rate cuts and the announcement of asset buying support mechanisms.  Meanwhile, the BOJ announced a material expansion of the quantitative easing program and the PBOC also cut interest rates for the first time in two years.

Unifying reasons for these actions was a fear that these economies would slip into a slower growth zone, such as outright recession in Europe and Japan and below recent-trend-growth rates in China.  In the last few months of 2014, the anticipated expansion of these pro-growth policies into 2015 has provided a strong boost since the mid-October lows.  In late December, market fears about the euro zone resurfaced amid political crisis in Greece, stoking concerns about a renegotiation of it's bailout.

Europe's outlook for 2015 rests on the credibility of policy-makers.  Further stimulus measures to help boost growth seem very likely in the euro zone; however these are unlikely to be sufficient on their own to sustainably boost the local economies and retain investor confidence.  This role rests with the speed of structural reforms around taxation, labor markets and other company productivity initiatives.  If legislation movement in Europe can be successfully accomplished, the investment outlook for the euro zone in particular is bright.

From "Amy & Dan Smith's Planning for Life" column appearing monthly in the Blue Ridge Leader, Loudoun County, VA.

The foregoing article contains general legal information only and is not intended to convey legal advice.  For legal advice regarding estate planning, the reader should contact his/her lawyer.

Daniel D. Smith is a partner in the law firm of Smith & Pugh, PLC, 161 Fort Evans Road, NE, Suite 345, Leesburg, VA 20176. (Tel: 703-777-6084, He has practiced law in Loudoun County since 1980.