If domestic stocks are performing ably, why invest elsewhere? When the S&P 500 is returning double digits, it may seem unnecessary to include shares from foreign companies in your portfolio. While it may not be necessary, it could be a savvy move.
Markets go through different cycles. Foreign equity markets have lagged ours recently. The U.S. has looked like the proverbial “best house in a bad neighborhood.” When the emerging markets are hot, however, they can outperform the S&P 500 dramatically. During those periods, investments offering exposure to those markets carry the potential to yield more than investments merely tracking the S&P. Even when the U.S. stock market is flat or down, overseas markets may be up.
Outside of America, there are some companies with great potential. We hardly have a monopoly on innovations and fresh ideas, and sometimes overseas firms rise to set the pace for a particular industry. Or, a foreign firm may be able to adapt and market an idea from our shores with amazing success in Asia or Europe.
Emerging markets are still capable of rapid growth. As examples, consider the BRICS: Brazil, Russia, India, China and South Africa. The economies of all five of these countries expanded by 40% or more from 2003-13. China’s annual gross domestic product grew 164% over that period and India’s annual GDP roughly doubled. Growth from China alone now represents 15% of the world’s GDP.1
At some point, this kind of growth has to moderate. In Russia and Brazil, it definitely has – but the International Monetary Fund still projects China’s 2016 GDP at 6.3% and India’s 2016 GDP at 6.5%. That is more than twice our present pace of economic expansion. China’s economy has grown by at least 6% annually since 1983 – a run unequaled in modern economic history.1,2
International investing affords opportunities for diversification. Just as a portfolio can be too concentrated in one or two asset classes or sectors, investing entirely in domestic companies may be limiting when the U.S. stock market cools. During those times, exposure to overseas markets may help to improve an investor’s return.
Make no mistake, there are significant risks to investing internationally. Many emerging markets are far less stable than ours and wild swings may occur. Not only that, what happens in one stock market now tends to affect many others – there is much more of a “ripple effect” today than in decades past. Along those lines, a major market shock from a geopolitical event may affect overseas markets more profoundly than our own.3
Liquidity is another issue. Some foreign stock markets look a little “Mom and Pop” compared to Wall Street, having thinner volume, shorter trading days and a much lower number of listed firms. Investors can also be left wanting for information. While American corporations disclose many facts, foreign firms may be less compelled to do so by a particular country’s laws.3
Exchange rates come into play. A strong dollar eats into the return from international investing; a weak one can help boost the return. Also, keep in mind that foreign firms trade and issue dividends in the currencies of their respective nations or economic zones, not the dollar. This means that an investor has to exchange investment dividends (and proceeds) into dollars.3
Fees for overseas investing may be higher, too, as it may cost a little more for a U.S.-based brokerage firm to do business on other continents. Some investors may even encounter withholding taxes on dividends, or premiums for buying certain types of shares.3
You may already be invested internationally. As larger firms based in America do significant business abroad, a portfolio that only encompasses “domestic” shares may actually have a degree of exposure to overseas markets. The “headwinds” (and “tailwinds”) from foreign markets can affect these share prices, and certainly the overseas business operations of these American-based companies.
Weigh both the opportunity & the risks of international investing before you proceed. Talk with your financial professional about the possible merits and demerits of this approach.
John Dombroski, Jr. may be reached at 480-991-1055 or firstname.lastname@example.org
Securities and Advisory Services Offered Through Client One Securities, LLC Member FINRA/SIPC and an Investment Advisor. Grand Canyon Planning Associates, LLC and Client One Securities, LLC are not affiliated.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
- 1 – bloomberg.com/bw/articles/2014-07-21/brics-summit-a-show-of-economic-might-is-nothing-to-fear [7/21/14]
- 2 – bloomberg.com/news/articles/2015-02-09/bric-becomes-i-with-india-set-to-outperform-first-time-since-99 [2/9/15]
- 3 – sec.gov/investor/pubs/ininvest.htm [3/6/15]