Why Global Investing?

With Global or International investing the choices offered are tremendous. Every country is contributing in some way to the global economy which means every country has its local superstars.  By opening up your portfolio to accommodate international stocks, the diversification can lead to great returns. We will look at the why global investing is fast becoming ‘The’ option.

Diversification

This is the most important aspect of global investments. Diversification not only leads to great returns it makes the portfolio future-proof.  When one market is showing signs of prolonged volatility, it’s your investment in other markets which acts the savior. All markets are different and unlikely to be volatile at the same time.

Take for example the US market. The famous companies from USA are globally known and have global revenues too.  American companies that form the S&P500 have over 40% of revenues coming from outside the USA.

As far as Diversification is concerned, investing in American companies will automatically make it a global portfolio.

Investment Options

Going Global with your investments gives you unprecedented options / opportunities which are not present in the home market. Each country has a specialty which can be targeted like Japan for auto sector, Europe for engineering and US for technology. USA has some of the most well-known tech behemoths which we don’t have in India.

ETF or Exchange Traded Funds allows you to invest foreign equities while being listed in the US market. Choose a theme or a combination of sectors, options are plenty.

Investment is protected

The regulations in developed markets are stringent as the top companies are global players. These companies set the standard for technology, best practices, products and even work environment. To maintain the status quo these companies have to follow strict regulations that ensure best corporate governance practices and are severely penalized for failing to do so.

This is great for investors as it keeps their investment protected against scams. Many foreign financial institutions protect investors from such threats like liquidation of broker-dealer.

Currency Diversification

This is another significant benefit of global investing.  You are exposed to currency appreciation eg, USD has been growing at an average of 3-5% versus the INR since some time now. In 2011 USD/INR was at Rs.46 now it’s at Rs. 75.

Economic Moat

This is a famous word coined by Warren Buffet for companies which have a sustainable advantage over their competitors. The top companies in the world stay in that position because they have a distinct advantage which their competitors find it difficult to emulate. Apple is a great example.

Global investing can get you the require exposure to stocks with strong ‘Economic Moat’.

Global Investment Risks

Any investment carries inherent risk.  We need to be aware about the risks involved with global investing too, here are they,

Transaction Costs

This is understandable and hardly a risk so to speak. Costs vary depending on the country you’re investing in. Entering some markets like the US may even prove cheaper than investing in the domestic market with many options too, however this may not be the case with other markets.

Added costs may include FX conversion charges, transfer fees, and annual maintenance fees over and above the brokerage to be paid

Cross – Currency Variations

To invest one needs to convert domestic currency into the foreign currency and back when the stock is sold.  Cumulative profit that you’ll see will be how the Indian currency has performed in the interim. If the rupee grew stronger returns will be less.

Political Risk

Developed markets this is less of a problem than developing markets. One needs to be abreast with the political environment of the country before investing.

To Summarize

• Stocks of different countries will move differently than Domestic stocks
• Diversification is key
• Multitude of investment options
• Markets also have different operational timings so pairing it that way is a good way to reduce risk
• Investors get to invest in famous FAANG or Tesla stocks
• Exposure to stocks with significant economic moat

So there you have it! Going global is a great way to gain alpha.  The pros definitely outdo the cons so start working on diversifying that portfolio by owing global companies.