“Sounds familiar” may not always be a good idea

I was invited to participate in two conferences in the last couple of weeks. One was in Hong Kong and the other in Shanghai.

Despite all the concerns relating to US$ assets, most attendees that I spoke to thought that they won’t move away from investing in US stocks. First, they thought that countries will make deals with Trump and the tariffs won’t happen. Secondly, they continued to think that US companies had competitive advantages in artificial intelligence and related themes.

But during the panel I moderated in Hong Kong , other investment themes were mentioned, including European defence and cybersecurity. An attendee raised a question on whether anyone in the conference room knew about European defence companies.

Only two hands were raised: me and the person who asked the question. He told me afterwards that he only knew because he worked for an index provider.

Familiarity is a ‘feature’ in constructing portfolios for private investors. They all prefer familiar names and markets. In the UK, the allocation to UK stocks is usually higher than what is implied by its market capitalization in the world. Same applies to Hong Kong, though over the last 12 months the focus was on US companies, especially with the magnificent seven.

Note that I use quotation marks when I mention feature. I always consider this in a less neutral way. In fact I say that it is a risk.

The first obvious reason, which has been stated in many finance textbooks, is about over concentration rather than diversification. Familiarity means missing out possible opportunities in non-local or less familiar markets, sectors or themes. It also may mean chasing for expensive stocks when there are better quality and cheaper companies.

The other risk, which fixed income managers are familiar with, is about exchange rates. Whilst investors may not think that US companies earnings will suffer as badly as some people think under Trump, any depreciation of US$ versus the investor’s own local currencies will create a drag on the portfolio performance.

For many investors in Asia, US$ is their main currency (in Hong Kong, the HK dollar is pegged to US$). And US$ has been strong over the last few years. But the currency market behaves differently from stock markets. Currency traders and specialists will focus more on the loss of trust in US as a country.

The table below shows how a HK$ based investor is affected by familiarity with US stocks. We used S&P 500 as the base case. The price return (excluding dividends) since the start of the year was 1.69% in US$, up to Friday 20 June 2025. FTSE 100 had a higher % price return of 4.54% in £, whereas Topix (Japanese stocks) performed poorer at -2.23% in Yen.

But that is not the whole story. For this year, diversifying to UK stocks will bring an additional gain of 10.34% in HK$ vs that in S&P 500. And even putting some money into Japan helps. The stronger yen gave an additional 8.75% gain in HK$ terms.

Obviously, one can say that I am picking a period where US$ was suffering. That is true. But what if this trend continues, and that the stronger US$ times is ending? We always say “currency matters!” at Tricio. Many advisers and individual investors do not think that is an issue. But we strongly believe that it’s time to include currency effects when you consider stock allocation. And staying with your familiar stock markets or companies may hurt you more due to currency trends.

(Feel free to contact us if you want to see the latest copy of Currency Matters. We can talk to you more on how to include that in your stock market allocations, including use of equity funds that are currency hedged.)

James Chu CFA

Head of Investment Solutions