Investors are creatures of habit. They do the same thing over and over again without a thought of approaching the market differently. Whether they invest in stocks, bonds, commodities or even currencies, everyone has their own entrenched way of choosing investments.
However, the best investors think outside of the box when searching for ways to deploy their capital. They adapt their portfolios to capture opportunities in the market, wherever they might arise.
For the average investor, the best way to do this, especially right now, is to look at international stocks. Even with international stocks outperforming the U.S. markets over the last quarter-century, many domestic investors still shun global equities. The reasons are many, but for most investors they boil down to fear of the unknown and loss aversion.
But the history shows us that these fears are unreasonable. Here's why every investors should try their hand in the international markets.
Believe it or not, the U.S. stock market has not been the world's top performing market over the last 25 years. Even in 2017, with the Dow soaring 25%, the S&P 500 adding 19% and the tech-heavy Nasdaq booking 28% gains, the United States took fifth place in the global performance ranking.
In 2017, Argentina's stock market exploded 77%, hitting a record high in the final week of the year. These gains came on the back of a 45% surge in 2016, driven by President's Mauricio Macri's sweeping pro-business economic reforms.
Make no mistake, the Argentinian economy suffers from high inflation and a struggling currency, but it is quickly morphing into a haven for South American business.
Turkey and Nigeria ended the year in second and third place, with 48% and 42% gains respectively. Hong Kong's widely followed Hang Seng index earned forth place in the global rankings with a 36% advance.
Of course, not every international stock market posted stellar gains. Qatar, for one, led the losers lower with an 18% drop.
But given the outperformance of the U.S. stock market last year, it's extremely likely that the developed world, and even second- and third-tier economies will trend upward for the next decade or longer.
Despite the growing correlation between domestic and foreign equities, seeking diversification internationally still makes investing sense, primarily as a way to access lower market valuations. While U.S. stocks trade for roughly 20-times trailing earnings on average, international developed markets average in the 15-times trailing earnings area and emerging markets trade near 13 times. These numbers seem to suggest greater growth potential in international and emerging markets than in the United States.
3. Global Growth
The United States is a mature market, meaning relative growth is not as rapid as other economies. Growth is cyclical, and investing internationally enables you to capture profits from shifting economic cycles. The global economy is in a growth phase, making now the ideal time to diversify internationally.
Furthering the growth case, The International Monetary Fund (IMF) is forecasting global growth to continue at a steady rate. An overall expansion of nearly 4% is forecasted in 2018. For developing economies, the expected rate improves to 5%.
Specifically, the IMF projects 7% GDP growth in India and over 6% in China in 2018, building a compelling case for international diversification in these nations.
4. Greater Choice
Investing outside of the United States provides a much greater choice of companies and opportunities. While information may be harder to come by and companies more challenging to assess, the potential reward can be much greater.
5. Currency Fluctuations
Often viewed as a negative, currency volatility works both ways. If the exchange rate moves in your favor, you could end up earning a little premium on your investment.
Risks To Consider: Despite all the benefits of investing internationally, substantial risks exist. Political risk is something we really don't have to be worried about in the United States. However, particularly in emerging markets, political risk can be very high. A change of regime or economic philosophy can send stocks plummeting. However, the flip-side to political risk is that a more pro-business regime may come into power, sending stocks soaring.
Some of the other benefits are:
- More options to invest: Investing in global markets will open a plethora of different stocks to invest in. With proper research, one can shortlist the stocks. Currently, many equity investment opportunities are in sectors that are not available on Indian stock exchanges. These sectors include Consumer Internet such as Facebook, E-commerce giants such as Amazon, Consumer brands such as Nike, and Payments such as Visa and MasterCard.
- More ways to invest: There are also many ways by which you can invest globally. These are direct stock investments, ETFs, and mutual funds. On one hand, mutual funds are the easiest way for investors to have international exposure. On the other hand, it takes a little more advanced knowledge to invest in ETFs.
- Mutual Fund route: One of the compelling reasons to invest globally is “It is very simple”. It is convenient to do so easily through mutual funds. You can opt for this route if you are a comparatively conservative investor. Fund houses offer international funds where you can leverage the expertise of global fund managers. Many Indian fund houses have schemes like fund of funds that invest in overseas equities. You can invest in these funds like any other mutual fund. You can also invest via the SIP route, with a minimum of Rs. 500 per month.
- Protection/Insurance – No need to worry about the safety of your money invested in international markets. When investing abroad, many financial institutions are able to protect your investments. For example, if you are looking to invest in US markets, Securities Investor Protection Corporation provides insurance to your account up to $5,00,000. Please note that it is not applicable to general losses in the stock market.
- Confidentiality– Global investments come with confidentiality concerns about your finances. International financial institutions are not legally required to divulge your monetary details to anyone. So you can consider your information to be safe at all times.
- More Growth – It is expected that your portfolio will show better growth when exposed to international stocks. The combination of Indian and international stocks will work best in your favor. There is an increased return potential in overseas investments.
- Currency Risk – Another reason is to take advantage of the depreciating currency. It is a good idea to have a globally diversified portfolio. As it is suggested to diversify your portfolio among different economies, internationally diversified portfolios will also be exposed to different currencies from country to country.
- Tax-efficient – Attractive tax incentives are offered by many countries across the world to foreign investors. These incentives are subject to strengthening other countries’ investing environments as well as attracting outside wealth. These incentives or benefits differ from country to country.
- Lower and better-managed Risk – Another crucial argument in favor of global investing is that different markets have different risk levels. Developed markets tend to have a lower risk. Also, one should be aware that different markets behave differently. Thus, it offers the scope of returning better risk-adjusted returns.
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