Investing Overseas: A World Awaits
Posted by Richard on April 17, 2013
As global economic barriers diminish, investing internationally has become increasingly popular.1 Global markets can offer increased potential investment opportunities as well as potential risk reduction by providing additional diversification.2
Investing internationally has grown rapidly in recent years. The bias for investing only within our national borders is diminishing, as an increasing number of individual and institutional investors boost their international exposure to pursue their investment goals. Behind the trend toward international investing are the realizations that the global market can offer attractive opportunities for investment and that diversification abroad can help reduce risk.
In 2012, foreign markets represented 55% of the world’s investment opportunities. It is estimated that by 2030 the U.S. stock market will represent just 38% of the world market.3
Diversification, Returns Are Key Drivers
The quest for diversification and higher returns are driving forces behind the internationalization process. When U.S. investors began to invest in foreign equities, a key reason for the move was increased diversification. Because international markets do not always move in sync — some may zig while the others zag — diversification on a global scale may help offset the effect of a downturn in the U.S. market. Investors in international securities may face additional risks, such as higher taxation, less liquidity, political problems, and currency fluctuations. But despite these risks, the potential for higher returns and diversification makes these markets attractive to many investors.
As investors around the world become more sophisticated and aggressively explore potential investment opportunities, they find that the global arena can offer competitive returns. The MSCI Europe, Australasia, Far East (EAFE) index, which tracks 21 major world markets, posted a 9.91% annualized rate of return for the 30 years ended December 31, 2012, compared with the 10.81% annualized return of the S&P 500.4 This difference in returns is due in part to differences in economic and market environments in countries around the world.
International investing does present unique risks and considerations. A U.S. investor’s foreign-investment return depends on both the local currency’s exchange value against the U.S. dollar and the stock price in the local currency. For U.S. investors, currency losses could also stem from a rise in the dollar’s value against the currency of the foreign country they are investing in. In the past, currency fluctuations have tended to balance out overextended periods of time, although there are no guarantees this will always be the case. Maintaining a long-term perspective and diversifying international investments can help minimize these risks.
1Foreign investments involve greater risks than U.S. investments, including political and economic risks and the risk of currency fluctuations, and may not be suitable for all investors.
2Diversification does not ensure a profit or protect against a loss.
3Sources: Morgan Stanley Capital International (1970); Standard & Poor’s/Citigroup (2012). 1970 (estimated) market cap shares are based on weights in the MSCI World Index. 2012 market cap shares are based on weights in the S&P/Citigroup World Equity Index. 2030 estimate based on the relative growth rates of the weights since 1970. Index performance is not indicative of the performance of a particular investment, and past performance does not guarantee future results. Individuals cannot invest directly in any index.
4Sources: Standard & Poor’s; Morgan Stanley Capital International. Based on total returns of the MSCI EAFE and S&P 500 indexes in U.S. dollars. The S&P 500 is an unmanaged index generally considered representative of the U.S. stock market. The EAFE is an unmanaged index generally considered representative of the international market. Index performance is not indicative of the performance of a particular investment, and past performance does not guarantee future results. Individuals cannot invest directly in any index.
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