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International Economic Outlook

Wells Fargo Investment Institute - October 2017

Wells Fargo Investment Institute (WFII) sees many portfolios with international equity and fixed income exposures below the levels it recommends for long-term investors. Paul Christopher, Head Global Market Strategist, discusses WFII’s international economic outlook—and what it may mean for investors.

Transcript: Monthly Investment Outlook: International Economic Outlook

The international economic outlook features recovering global economic growth and a steadily improving U.S. economy. This synchronized growth around the world—for the first time since 2007—first caught investor attention beginning in mid-2016. Globally, investors have responded by allocating more to international markets—despite the rising political risks around the world. 

In fact, bond yields are now low and equity values remain above their 20-year median values, meaning that most international asset classes look expensive. Now, we want to recognize expensive markets but believe also that the global trends should run further. In addition, we see many portfolios with international equity and fixed income exposures below the levels we recommend for long-term investors.

What does this mean for investors today? First, we recommend that investors consider taking profits on U.S. investments and use the proceeds to allocate to other investments on a systematic and regular basis over the coming year or two. This averaging into markets can be a good way to slowly take exposure to markets that, although expensive today, may not be so at every point of the next two years. 

A second point is that international allocations can help diversify a portfolio that is mostly based in U.S. markets. Diversification can potentially benefit portfolios as it seeks to provide outperformance from different parts of the world at different times. The economies are growing together right now but if the U.S. rolls into recession in the coming two or three years, other markets may still enjoy positive economic and earnings growth, and possibly more attractive bond yields. At that point, other currencies may be stronger than the U.S. dollar, a scenario that should further benefit U.S. investors who take overseas positions.

Investors often voice concerns over what to buy and whether international markets are trustworthy. In our opinion, these concerns can be overcome. Our investment professionals have selected managers that we believe can take advantage of international opportunities. Active management can help take the guesswork out of overseas investing. 

What’s more, our recent visits to India and East Asia show that these economies are becoming more technologically competitive and are improving their corporate accountability to investors. It’s worth noting as a risk that corporate reforms are in an early stage still and could move slowly, but we expect that global competition in the coming years will push these trends further, to the benefit of investors.  

Risk Considerations

Stock markets, especially foreign markets, are volatile.  Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors.  Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. Bonds are subject to market, interest rate, price, credit/default, call, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates.

Diversification does not guarantee profit or protect against loss in declining markets.

General Disclosures

The opinions expressed reflect the judgment of the speaker as of the recording date and are subject to change without notice. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results. Additional information is available upon request.

Wells Fargo Investment Institute, Inc. is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company. 

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