Going Global — Investing in an International Landscape
As the world has become more interconnected, the global markets have as well. In this article, we will take a look at how investors can develop a global view towards the global financial markets, and look for international opportunities for their investment portfolios.
Planning Your Trip — What is Global Investing?
Global investing involves investing through a “global lens”, by selecting international investments as part of a geographically-diversified portfolio. Investors invest internationally to enhance their portfolio’s diversification, and spread investment risk among a variety of foreign markets, companies, and assets.
Global investing provides investors with a vast investment environment for selecting investments and trades. It can help broaden an investor’s perspective, by helping them shed their “home bias”, giving them investment ideas outside of their home country. In some instances, it can even help investors mitigate some idiosyncratic risks associated with their home country’s economies, and even provide investors with new sources of income.
Global investing expands the variety of eligible investment instruments available for an investment portfolio beyond just those of domestic investments. In fact, global investing essentially provides an investor with the same types of investment options on an international basis that they have on a domestic one. By investing through a global lens, the global financial markets offer investors various international opportunities across asset classes such as equities, fixed income, currencies, commodities, mutual funds, options, futures, exchange-traded funds (“ETFs”), and real estate.
Get Your Passport Ready — International Opportunities
Investors looking to go global can find a variety of investment options available to them in the global financial markets. Looking to international equities, foreign currencies, and global bonds, helps to provide investors with a solid foundation for global investing.
International Equities
In the international equity markets, there are a vast amount of international equity options for investors to get equity exposure to a region, country, market, industry, or sector anywhere around the world.
For a comprehensive look at global equity exposure, investors and traders can look to international equity indices. These indices consists of stocks from countries around the world, which are then aggregated into mutual funds and ETFs. In fact, some of the largest global equity indices include the Vanguard Total World Stock Index Fund, FTSE Global All Cap Index, MSCI Frontier Markets Index, MSCI All Country World Index, and MSCI Emerging Markets Index.
Further, Developed, Emerging, and Frontier market indices also help to categorize the global equity markets into three major groups. Developed Market equities generally offer the lowest risk since their capital markets, economic, and political institutions are the most advanced. This category generally includes countries such as the US, Canada, Australia, Western Europe, Japan, and the UK. Emerging and Frontier Markets generally have greater risks than their Developed Market counterparts. This is due to the fact that the political, economic, and capital market institutions of Emerging and Frontier Markets are not as mature as their Developed Market peers. Despite these inherent risks, Emerging and Frontier Markets do offer a lot of investment opportunities for global investors, as their emerging growth and economic development offer greater returns than the Developed Markets.
Foreign Exchange
When it comes to global investing, it does not get any more global than the trading of currencies. The foreign exchange (“FX”) markets are the largest, most liquid markets in the world, with over US$5 trillion dollars being traded on a daily basis. FX provides the most “direct” opportunities for global investors to take advantage of global economic themes, as the FX markets allow investors and traders to invest directly into nations’ currencies, in an effort to capitalize on a particular country theme.
Similar to their equity counterparts, the FX markets can also be broken down into Developed, Emerging, Frontier Market categories. Developed Market currencies are the most liquid currencies in the marketplace, as the capital markets of Developed countries tend to be much more stable and liquid than those of the Emerging and Frontier Markets. The most popular Developed Market currencies that investors and traders focus on are the US Dollar, the Japanese Yen, the British Pound, and the European Union Euro. Secondary Developed Market currencies include the Canadian Dollar, the Australian Dollar, and the New Zealand Dollar.
Emerging and Frontier market currencies tend to be riskier than Developed Market currencies, as the capital markets and economic institutions of these countries are not as advanced as those of the Developed Markets. Nonetheless, investors and traders still focus on these currencies, because though they are riskier than Developed Market currencies, they do offer higher investment returns. Some of the most popular Emerging Market and Frontier Market currencies include the Chinese Yuan, the South Korean Won, the South African Rand, the Mexican Peso, and the Brazilian Real.
When it comes to the global FX markets, investors tend to take advantage of FX opportunities either through trading a currency pair (e.x. USD/CAD), investing in an ETF that tracks a particular currency (e.x. Invesco CurrencyShares Japanese Yen Trust), or in an ETF that tracks a particular basket of currencies (e.x. WisdomTree Emerging Currency Fund).
International Bonds
The global fixed income markets also provide global investors with the ability to invest in international corporate and government bonds to generate capital appreciation, but also income as well. Similar to domestic bond issuers, global bond issuers, such as companies and governments around the world, issue bonds in the global capital markets to help fund their financial budgets and/or generate funds for new projects. Issued international bonds tend to be money market securities, notes, and bonds with varying interest rates and maturities, often derived from the underlying bond and the issuer‘s corporate health.
Globally, both corporate and government debt can also be classified as Developed, Emerging, or Frontier Market, dependant on their geographic location and country risks. Corporate and government bonds from Developed Markets tend to be from the world’s most advanced nations, and are more so for conservative investors. In contrast, Emerging and Frontier markets offer greater opportunity to investors as their economic and political development tends to occur over time. Also the corporate and government bonds of Emerging and Frontier Market issuers tend to be more risky due to the geographic or issuer-specific economic and/or financial risks. However, investors are compensated for this additional risk, by being rewarded with higher yields on these types of bonds, when compared to those of the Developed Markets.
To help sift through the noise in the global fixed income markets, global investors can look to the credit ratings of international companies and countries to help get a better understanding of a bond’s investment risk. Both companies and countries receive credit ratings from credit rating agencies that help to determine their level of risk to potential investors.
Travel With Caution — International Investing Risks
As with domestic investing, global investing is not without its risks. In fact, global investing presents some of its own specific risks, which include some of the following:
- Foreign Exchange risk — Fluctuations in a currency’s exchange rate;
- Interest Rate Risk — Changes in foreign interest rates;
- Geopolitical Risk — Chaotic economic, political, and social events;
- Liquidity Risk — Trades significantly impacting the market price;
- Lack of Information — Little information available for investment decisions;
- Jurisdiction Risk — Differing market operations and procedures across regions; and,
- Price Risk — Large, unprecedented fluctuations in market value.
Despite these risks, professional investors and traders can mitigate some of these risks using various derivatives such as options or swaps.
Enjoy Your Flight — Global Investing Overview
Overall, investing in the international markets can provide investors with investment opportunities that they would not be privy to if focused solely on domestic investments.
By going international, global investing can help investors diversify portfolio risk by spreading it geographically, but also help them take advantage of international trends to help them maximize their portfolio returns in a saavy way.
© 2020 Economics Global Inc.
Content Disclaimer
Any views expressed here are those of Economics Global Inc. as of the date of this publication, are based on available information, and are subject to change without notice. This document does not constitute investment advice.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.
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