Equity Investing Abroad: Risks And Rewards

International equity investing has become increasingly popular, with investors seeking to capitalise on the growth of companies like Amazon, Apple, and Netflix. The benefits of investing in international equities are clear: diversification, a wider range of investment options, and currency diversification. However, there are also challenges to consider, such as higher transaction costs, currency volatility, and the economic and political instability of certain markets.

Diversification of investments and currencies

Diversification is the most obvious and significant benefit of international equity investing. By spreading investments across different geographies, portfolios can benefit from a source of stability during market volatility. This is because there is a low correlation between assets in different markets, meaning volatility in one market is unlikely to affect assets in another.

For example, an investor might choose the US market for technology stocks, Europe for engineering, and Australia for commodities. This allows investors to access investment opportunities that are not present in their domestic market. For instance, while the US is home to some of the world's largest tech companies, investing in India would not offer the same opportunities.

An international portfolio also allows investors to diversify their currency exposure. When investors buy stocks for an international portfolio, they are effectively buying the currencies in which the stocks are quoted. This can help to neutralise currency fluctuations. For example, if an investor buys a stock listed on the London Stock Exchange, the value of that stock may rise and fall with the British pound. If the US dollar falls, the investor's international portfolio can help to offset these fluctuations.

Currency diversification also exposes investors to currency appreciation. For example, the USD has been appreciating by 3-5% against the INR over the last few years. However, it is important to note that emerging markets' currencies tend to depreciate over the long term.

Wide range of investment options

International equity investing provides investors with a wide range of investment options. By investing globally, individuals can access opportunities that are not available in their domestic markets. For example, developed markets like the US are home to some of the world's largest tech companies, which cannot be accessed by investing in India.

Investors can choose to focus on a particular theme or a combination of multiple sectors. They may prefer the US market for technology, Europe for engineering, and Australia for commodities. For instance, investors interested in healthcare or pharmaceuticals can find several options in the US and Europe.

Investors can also access multiple geographies through exchange-traded funds (ETFs). For example, the US-listed EWG ETF provides exposure to German equities, while the EWZ ETF offers investment opportunities in the Brazilian market.

Additionally, international investing allows individuals to invest in specific companies and sectors that may not be available in their home countries. For instance, sectors such as e-commerce, search engines, payment infrastructure, cloud computing, electric mobility, and digital OTT platforms are showing strong global growth but may not have listed companies in certain countries like India.

The variety of investment options available through international equity investing provides investors with the ability to customize their portfolios according to their interests, preferences, and risk tolerances.

Investment protection

A key benefit of investing in international equities is the protection of investments against fraud and liquidations. Developed markets like the US and the UK have strong regulations that ensure sound corporate governance and severe penalties for market abuse, protecting retail investors from potential scams and insider trading losses. For example, in the US, the Securities Investor Protection Corporation (SIPC) protects investments up to $500,000 in the event of broker-dealer liquidation.

Many foreign financial institutions also offer protection from seizures and other threats. However, it is important to remember that capital is always at risk, and the level of protection may vary depending on the country and the specific institution. Due diligence is essential when investing internationally to understand the regulatory environment and the level of protection offered.

In addition to regulatory protection, international investing can also provide a level of diversification that helps protect investments. By spreading investments across multiple countries and sectors, investors can reduce their exposure to any single market or asset class. This diversification acts as a buffer during volatile market conditions and can help protect against potential losses in any one market.

For instance, an investor might choose to focus on the US market for technology stocks, Europe for engineering, and Australia for commodities. This way, a downturn in one market will not affect the entire portfolio. This type of diversification can be a powerful tool for managing risk and protecting investments.

Furthermore, investing in international equities can provide protection against currency depreciation. By investing in multiple currencies, investors can benefit from appreciation in some currencies, even if others depreciate. For example, investing in the US Dollar can provide a hedge against the Indian Rupee's depreciation.

However, it is important to note that currency fluctuations can also work against investors, and the value of investments can be affected by exchange rate movements. As such, currency diversification should be carefully considered as part of a broader investment strategy.

Overall, investment protection is a critical aspect of international equity investing, and investors should carefully evaluate the regulatory environment, market diversification opportunities, and currency fluctuations to make informed decisions that protect their capital.

Political, economic, and fiscal risks

Political risk can affect international equity investing in several ways. Political events can cause volatility in domestic markets, and in developing markets, government and policy decisions could hurt even the most prominent companies. For example, the Chinese government constantly updates its policies to align with its primary goals, creating a constant level of uncertainty that increases the risk of investing in China significantly. A political coup in a developing country may result in its stock market declining by 40%.

Economic risk is another factor that investors should consider. Many developing countries do not have the same level of economic stability as more industrialized nations, and this increases the risk for investors.

Fiscal risk is also a concern for investors. International investing is subject to higher transaction costs, including taxes, duties, and brokerage charges, which reduce overall returns. Currency volatility is another fiscal risk, as the exchange rate between two countries can fluctuate, leading to negative or reduced returns.

Higher transaction costs

The most significant barrier to investing in international equity is the higher transaction costs. These costs can vary depending on the foreign market being invested in, and they can add up quickly, eating into overall returns. For example, while US markets offer zero-commission brokerage through Winvesta, which is cheaper than domestic investing, many other markets are more expensive to access.

There are a number of additional costs that investors should be aware of, including FX conversion charges, transfer fees, and annual maintenance fees, which are on top of the standard brokerage commissions. Taxes, stamp duties, levies, and exchange fees may also need to be paid, further diluting gains.

One way to mitigate these higher transaction costs is to invest in international equities through ETFs or mutual funds. These investment vehicles can significantly reduce or even eliminate many of the extra costs associated with international investing.

However, it's important to note that even with these cost-saving measures, investing in international equities will generally incur higher transaction costs than domestic investing. These higher costs are a significant barrier to entry for investors considering global markets and should be carefully considered as part of a comprehensive investment strategy.

Additionally, it's worth mentioning that the higher transaction costs of international investing can be offset to some degree by the potential for higher returns. By diversifying their portfolios and gaining exposure to emerging and developed markets, investors can potentially increase their overall returns, even with the higher transaction costs.

In conclusion, while higher transaction costs are a notable challenge of international equity investing, they can be mitigated through careful investment strategies and may be outweighed by the potential benefits of global diversification and access to new markets.

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