Investing without boundaries
Federated Hermes international investing professionals weigh in on opportunities ahead.
Despite an uneven recovery that has China and many Asia-Pacific economies outpacing more pandemic-impacted emerging and developed markets, we expect a broader catch-up in 2021’s second half as vaccinations progress and economies reopen. With that said, we are keeping an eye on the Covid-19 variants and the ability to mitigate their impacts—as much a concern in the U.S. as it is abroad.
After pulling back most of last year, this year’s rebound in the U.S. dollar has been an unexpected headwind for international markets—it acts as an implicit form of monetary tightening for non-U.S. equities, particularly in emerging markets. Nonetheless, we think sizeable U.S. debts and deficits are likely to emerge as a drag on the dollar for some time to come. Also, as a counter-cyclical currency, the dollar tends to depreciate as risk appetite increases with stronger and broadening output growth.
Innovation abroad is thriving
As is so often the case, innovation rises out of big challenges. A major driver of innovation overseas continues to be the combination of climate change and tough regulations that mandate a more aggressive move away from fossil fuels. Overall, we see strong growth opportunities in companies that are focused on fighting climate change and investing in new technologies to do so—it’s estimated the economic impact of efforts to combat climate change could reach $69 trillion this century.
In general, foreign companies are more aggressive in adopting “net-zero” pledges and international investors are more drawn to socially responsible investing. Europe is already a leader in climate policy, with many of its companies focused on advanced green regulations, giving them a significant head-start on decarbonization.
The Covid pandemic also has shined a light on the breadth and capabilities of biotech and other future-focused enterprises. From companies that provide virus testing equipment to pharmaceutical firms that develop vaccines and treatments to companies that create the equipment that make everything possible, there’s an abundance of opportunity. Perhaps as importantly, the tremendous amount of research and development and deep product pipelines signal arising from the pandemic is almost certain to pay dividends well after the Covid crisis fades.
A robust IPO market overseas
One way to invest in tomorrow’s leading international companies is through an initial public offering market that’s expansive and growing. Researcher Renaissance Capital valued the international IPO market at $145 billion last year, up 15% from 2019 and more than double North America’s 2020 IPO market of $75 billion. The Asia-Pacific region dominates international IPO activity, accounting for 60% to 80% of the market over the last three years. Europe is a distant second, with more than $20 billion in deals in each of the last three years. At only 5%, Latin America trails but is starting to see an uptick in activity.
International IPO activity has continued its robust pace of growth so far this year. In the year’s first three months, total funds raised in the Mainland China and Hong Kong IPO markets more than tripled compared with the year-ago quarter, according to financial advisory firm KPMG. Meanwhile, Nasdaq recently announced that its European markets executed a record 32 IPO listings in the first quarter, the most during the period in its history.
Explore more about international innovation, investing and opportunity in a recent roundtable discussion.