Guide to managing your investments abroad
International Investment Highlights
- Stocks priced in foreign currencies can suddenly become “cheap” due to currency fluctuations.
- Diversifying beyond your home country can be a good long term investment strategy.
- Despite a populist mentality prevailing in many nations, the global economy is growing and companies are increasingly integrated into global trade and dependent on international relationships.
- Companies with large global supply chains and markets face larger risks if protectionist policies take hold.
- A breakdown of international cooperation could end up strengthening the U.S. dollar as investors seek a safe haven.
What is International Diversification?
International diversification is an investment strategy that aims to reduce the variability in returns by incorporating assets in international markets whose economic cycles are not correlated with the economic cycles in your home country. Essentially, investing overseas can be a strategic way to help reduce risk in the long term by providing more balanced returns. Most international investments are classified as being in either developed markets (more safe) or emerging markets (more growth). Keep in mind that the World Bank’s criteria for a high income economy in 2017 is a gross national income (GNI) per capita of $12,476.
Some examples of more developed countries [high per capita income economies] include:
Emerging [middle income] economies include countries such as:
Low income economies pose considerable risks for investors, and investments in countries without the infrastructure to support development could be ill-advised.
What is Foreign Direct Investment?
Foreign direct investment can be a valuable way to diversify your personal portfolio. If you’re looking for new growth opportunities in your investment portfolio, it’s wise to look beyond your home country. Investing overseas gives you access to the rapid growth found in emerging markets and can hedge the risks associated with having too many assets in one currency.
In general, governments tend to support foreign direct investment (FDI) as a way to stimulate job growth and minimise unemployment. Before choosing an investment it may be wise to consider where the company is headquartered and how the local taxes and labour laws can affect the bottom line. Sudden changes in corporate tax regimes may also influence investment decision making.
Advantages of an International Diversification Strategy
One of the major advantages of an internationally diversified portfolio is steady or increased growth potential for your investments. You may be able to invest in industries or categories that aren’t available in your home country, and global diversification can offset any slowdown in your domestic economy. Still, growth is often a primary driver for most investors seeking international opportunities.
A recent snapshot of economic activity, from February 2016 to February 2017, shows that annualised return has seen a dramatic increase abroad.2 During this time period, Russia alone swung massively from an average -15% return to an average 56% return with a reduction in volatility of 10 points. Other major movers include Canada, Hong Kong and Singapore, and Eastern European countries including Czech Republic, Hungary and Poland. China and India outperformed the U.S. on the whole.
As many economies have largely recovered from the aftermath of the GFC in 2008, we’re entering a new era of economic synergy, which has produced a global rally. So if you’re only investing in your home market, you could be missing out on some of today’s most profitable opportunities.
According to Jurrien Timmer of Fidelity Investments, “We are in a different regime [now], one in which earnings in many global markets are recovering as much as (if not more than) U.S. earnings. When you combine this with the more compelling valuations for international stocks and a potentially peaking dollar, it makes for the strongest argument in years for “going global.” As such, now may be a good time to re-evaluate one’s equity allocation and bring its geographic diversification into balance.”2
How to Invest Overseas
When investing overseas, the major asset classes include:
- Foreign currency holdings (cash)
- Fixed interest securities
- Company shares
Before investing, you’ll want to take into account the political environment, trade relationships, the economic policies and interest rates, which provide the context for your overseas investment.
Take Advantage of all The World Has to Offer With a Global Portfolio
At OFX, one of the primary reasons customers use our money transfer service is for foreign investments. That’s because OFX gives you better exchange rates and better service than most banks. You can use our online platform to transfer your funds to 190 countries in 55 different currencies day or night. We’re open 24/7 on weekends and holidays, so you can move your money when you want to. Ultimately, OFX gives you more control over your money, which is how it should be.