Think global, invest globally

By Kevin Plumberg

NEW YORK (Reuters) - In terms of the U.S. economy's relationship with the rest of the world, the tail may now be wagging the dog.

And investors should sit up and take notice.

The United States' traditional role as the engine of the global economy is changing profoundly as developing countries like China and India become more of an influence on supply chains, resources and financial markets.

Industrialized economies outside of the United States, particularly in Europe, in the last few years have become more productive and financial markets more liquid.

While still the biggest in the world, the U.S. economy's influence is no longer the only one that counts and this will continue to affect capital flows, exchange rates and investment decisions, said analysts at the Reuters Investment Outlook Summit this week in New York.

Over the longer term, U.S. investors can earn better returns at lower risk by sending more of their savings overseas.

"We think U.S. investors are still very much underdiversified in their foreign exposure," said Brian Garvey, senior strategist with State Street Global Markets.

U.S. pension funds, which have long-term investment views based on economic themes, on average have 20 percent of their portfolios dedicated to foreign assets, but the optimal exposure is more like 65 percent, Garvey said.

Last year, U.S. investors bought a record $246 billion in foreign stocks and bonds, which was perhaps unsurprising given the relatively high rate of return on many overseas markets.

The Standard & Poor's 500 Index .SPX of U.S. stocks has risen 32.5 percent since 2001, while the Morgan Stanley Capital International global stock index grew almost twice as much, at 60 percent.

Further sweetening the deal, the dollar has declined around 30 percent over the same period against a basket of major currencies .DXY, massively inflating the returns to U.S.-based investors from buying foreign stocks.

A DOWNWARD SLOPING LINE

Louise Yamada, market technician at Louise Yamada Technical Research Advisors, pointed to a chart of the MSCI U.S. stocks index against the all-country world equities index, running her finger across a downward sloping line that began falling since 2004.

"The U.S. has underperformed the world ... we have never seen that before," she said.

Even skeptics of the theory on how the U.S. economic cycle of boom and bust is becoming unwound from the cycles of other major economies -- a phenomenon referred to as decoupling -- say the attraction of investing overseas has been unmistakable.  Continued...