A new study in the Financial Analysis Journal finds that investors can slightly improve risk and return by shopping for stocks abroad not on the basis where they are headquartered but, rather, on where they do most of their business. That research is based on 10 countries, mostly in Europe, and covers a relatively short period, from 1998 to 2012.
Decades ago, more companies did the bulk of their business within their own national boundaries. But globalization has de-territorialized a lot of companies. Being listed or head-quartered in a particular country doesn’t mean they give you exposure to that country’s economy.
Many traders sold British stocks in the wake of last year’s surprise Brexit vote, thinking that companies in the U.K. would be hurt by its intent to leave the European Union. But the top 100 British companies derive roughly 72% of their revenues overseas and even small stocks in the U.K. get about 45% of their sales from abroad.
So the correct decision is to buy, not to sell, the British stocks. Between the vote to exit the E.U. in late June 2016 and the end of the year, domestic-oriented British companies gained 1% on average and those with greatest overseas exposure gained an average of 30%.
