in price. But even after the tech bubble popped, sector correlations were
lower than before. One reason for the decreased correlation between sec-
tors is the moderation of the business cycle, which means that shifts in
sector demands, rather than changes in the overall economy, become the
primary sources of changes in firm profitability. What does it mean that
sector returns are not as correlated as in the past?
I believe that a sector approach to international investing may sup-
plant a country approach in coming years. It is true that government reg-
ulations and legal structures will still matter, even when most of the
firm’s sales, earnings, and production come from abroad. But these
home-country influences will very likely diminish as globalization ad-
vances. In fact, I envision a future of international incorporations, where
firms choose to be governed by a set of international rules agreed upon
among nations. This will be similar to the growing popularity of the ac-
counting standards adopted by the International Accounting Standards
Board (IASB) over country-based standards. If international incorpora-
tion gained prominence, there would be no meaning to “headquartered
country,” and investment allocations would have to be made on the
174 PART 2 Valuation, Style Investing, and Global Markets
FIGURE10–4
Correlations of International Sectors and World Stock Returns-0.20
1995 1996 1997 1998 1999 2000
0.000.200.400.600.801.00Consumer Discretionary
Industrials
Info Tech
Telecom
Financials
Materials
Energy
Utilities
Healthcare
Consumer Staples