Global Equities: Invest Or Avoid?

Investing in global equities can be a great way to diversify your portfolio and gain exposure to growth opportunities in overseas markets. By investing in international stocks, you can access some of the world's fastest-growing regions, such as China and India, and target well-known brands such as Amazon, Google, and Apple. Additionally, global equities can offer attractive rewards for risk and help to dampen volatility and improve returns. There are several ways to invest in global equities, including through mutual funds, exchange-traded funds (ETFs), and American Depository Receipts (ADRs). However, it's important to consider the risks associated with international investing, such as volatility, political risk, and currency risk.

Diversification

One of the primary benefits of investing in global equities is the diversification it offers. Investing in international stocks allows investors to spread their risk across multiple markets and industries, reducing the impact of any single market downturn or industry-specific shock. This is especially relevant given the "lost decade" for US equities between 1999 and 2009, when the US stock market posted a meagre compound annual growth rate of 1.7%. During this period, international developed markets yielded a more robust 4.1% annualised return, while emerging markets delivered an impressive 13.7%.

Additionally, global equities provide investors with access to companies and sectors that may not be present in their domestic market. For example, the Australian market is heavily concentrated in banking and materials sectors. By investing in global equities, Australian investors can access leading technology companies such as Nvidia, Amazon, Microsoft, Apple, and Meta.

Furthermore, global economic growth is expected to be driven by emerging markets in the coming years. By investing in international stocks, investors can take advantage of the projected growth in these markets, particularly in the internet and technology sectors.

However, it is important to note that international investing also carries additional risks. These include higher volatility, political risk, less regulatory oversight, and currency risk. As such, financial advisors typically recommend a 5% to 10% allocation of global equities for conservative investors, with up to a 25% allocation for aggressive investors.

In conclusion, investing in global equities offers valuable diversification benefits by reducing exposure to domestic market risks and providing access to a wider range of growth opportunities. However, investors should carefully consider the additional risks associated with international investing and ensure that their portfolio allocation aligns with their risk tolerance and investment goals.

Foreign markets

Many investors prefer to pay more for domestic stocks because business growth in international markets is considered less reliable than growth in the US. Another factor is that most investors are not as familiar with opportunities in international markets because they have limited personal experience with foreign companies, and these businesses tend to receive less coverage from US analysts and media outlets.

However, with the vast majority of global population growth in the coming decades projected to occur outside of the US, the associated demographic factors and the industrialization of relatively underdeveloped areas suggest that this century's biggest economic growth will also happen outside the country.

As the world's largest economy, the US is likely to grow more slowly than countries with smaller, less-developed economies. While the US has a population of roughly 338 million, India and China each have populations of roughly 1.4 billion people, and rising per-capita productivity could allow the economies of both countries to post dramatic growth over the next decade.

Even countries such as Poland, which has a population of roughly 38.5 million people and has seen its population shrink in recent years, could expand its gross domestic product (GDP) at rates that significantly exceed the GDP growth rate in the US. Poland is benefiting from industrialization initiatives and a fast-growing tech sector that are boosting most Polish companies.

Of course, domestic companies are working to expand their presence in international markets and should profit from global growth. Investing in foreign stocks is a way to have a direct stake in growth outside the US and benefit from a broader range of market trends and opportunities.

Political instability is a risk to weigh when investing internationally. For example, Russia's invasion of Ukraine disrupted the outlook for Yandex, sometimes referred to as "the Google of Russia".

Investors who own stakes in China-based companies have also faced a challenging backdrop amid rising tensions with the US. In response to this increasingly adversarial relationship, many large US-based institutional investors have reduced their exposure to the Chinese market. The withdrawal of support from institutional investors can lead to poor stock performance, even if the underlying company is financially healthy and has continued to post strong sales and earnings results.

In addition to political instability, international markets often see outsized impacts when economic conditions worsen. High levels of inflation, rising interest rates, Russia's invasion of Ukraine, worsening relations between the US and China, and other factors have combined to weaken the global growth outlook, and some regions are facing intense headwinds.

Foreign companies are also more likely to fail to meet most US investors' communications and reliability expectations. Even foreign companies approved by the US Securities and Exchange Commission (SEC) to list American Depositary Receipts (ADRs) on US exchanges sometimes fail to meet reporting expectations. So, it's vital to understand how well and by what means an international company communicates with investors.

Before investing in international stocks, consider how much risk you're comfortable with. While emerging markets grow faster, they also tend to be more volatile, so you may prefer to focus on developed economies. By establishing a clear strategy for your non-domestic portfolio, you are better positioned to endure market turbulence and pursue long-term gains.

International ETFs

When choosing an international ETF, it's important to consider the fund's mandate, which might focus on a specific country, sector, market cap, or theme. You can also choose between broadly diversified ETFs and those with a narrower focus. Additionally, some international ETFs offer currency hedging, which can be beneficial when investing in foreign markets.

• Vanguard FTSE Developed Markets ETF
• IShares Core MSCI EAFE ETF
• IShares MSCI EAFE ETF
• Schwab International Equity ETF
• SPDR Portfolio Developed World ex-US ETF
• IShares MSCI EAFE Value ETF
• IShares MSCI EAFE Growth ETF
• IShares Core MSCI International Developed Markets ETF
• Opal International Dividend Income ETF (actively managed, focusing on dividend-paying companies)

Risk

Investing in global equities can be risky, and there are several factors to consider before allocating funds.

Firstly, there is the risk of volatility, especially in emerging markets. These markets can experience dramatic changes in value, and political risk can also impact a nation's economy. For example, the Russian invasion of Ukraine disrupted the outlook for Yandex, a company referred to as "the Google of Russia".

Secondly, foreign markets may be less regulated than those in the US, increasing the risk of fraud or manipulation. This lack of regulation, combined with the distance from the market, can make it challenging to interpret or understand events and their potential impact on investments.

Thirdly, currency risk is a significant factor. Changes in exchange rates can affect the value of investments, and this can work both ways, either positively or negatively impacting returns.

Additionally, there are costs and tax implications associated with investing in global equities. Remitting money abroad can be costly, and there may be additional fees and taxes when opening a global brokerage account.

It is also important to consider the level of knowledge about the companies and markets being invested in. Many investors are less familiar with international markets and companies, and these businesses tend to receive less coverage from US analysts and media outlets. This lack of familiarity and information can impact investment decisions.

Finally, there is the risk of inadequate portfolio diversification. Over-concentration in any one market or company can increase risk, and it is important to consider the weightings of different regions and sectors when investing globally.

In conclusion, while investing in global equities can provide access to growth opportunities, it is essential to carefully consider and manage the associated risks.

Returns

Firstly, it's important to note that the world's most dramatic economic growth is expected to occur outside the United States over the next century. This is due to expanding international economies, increasing productivity, and improving living standards, which are creating a new global middle class. As a result, many investors should consider allocating a portion of their portfolios to stocks in international markets.

One of the main benefits of investing in global equities is the potential for higher returns. By targeting the fastest-growing regions, such as China and India, investors can achieve better returns than they might find in their local markets. Additionally, investing in global equities allows investors to access some of the world's most well-known and successful companies, such as Amazon, Google, and Apple. These companies are often seen as blue-chip investments that can provide stable and reliable returns.

Another advantage of investing in global equities is the potential for diversification. By investing in a variety of international markets, investors can reduce their risk by not putting all their eggs in one basket, so to speak. This can help to dampen volatility and improve overall returns, as the performance of international markets may not always be correlated with the US market.

It's also worth noting that international stocks are often undervalued compared to their US counterparts when looking at metrics like price-to-earnings and price-to-book ratios. This means that investors can potentially buy stocks in international companies at a lower price and benefit from future growth.

However, there are also risks associated with investing in global equities. One of the main risks is political instability, which can devalue an investment. Additionally, the values of currencies fluctuate, and changes in exchange rates can impact returns. There may also be less regulatory oversight in some international markets, increasing the risk of manipulation or fraud. Furthermore, it can be more difficult to obtain reliable information about international companies, and cultural and language barriers can make it challenging to interpret news and events that may impact investments.

In conclusion, investing in global equities can provide access to higher returns and diversification, but it also comes with additional risks that investors need to carefully consider.

Frequently asked questions