US Invest Internationally

With the emergence of capitalism in China and explosive economic expansion in Latin America (to name just a few growing markets), if you only invest within the United States, you will limit your investment portfolio to only a small percentage of the global asset class of equities. However, international investing is for neither the faint of heart nor the inexperienced investor.

When it comes to global equity plays, there are several things that must be understood before making your first trade.Please note: The following is based on several years of equities work in Tokyo, Hong Kong and London, followed by ten years at Merrill Lynch managing the company’s equity swap business.

1. Local knowledge matters: To best understand the culture, customs, current events, fads and politics of a nation, you need to physically be in the country. Being local will provide the ultimate environment for research and better timing for investing.2. No two markets are alike: Different countries’ markets command different multiples, and investor demand varies. Here are some reasons for this:

  • Monetary and fiscal policy will vary from country to country.
  • Yield curves vary as well.
  • Investment activity is influenced by different groups. For example, in some countries, pension plans play a far greater role in the markets. In other countries, individual investors are a more prominent force.
  • The stage of economic growth (whether the economy is emerging, expanding, mature or contracting) affects the country’s growth and risk outlook. (See”Emerging Markets Are Not a Monolith”.)

2. Companies vary even within the same industry: An American retailer may be quite different from, say, a Japanese retailer. If you don’t believe that, then compare the shopping experience at Macy’s ( M) with that at Mitsukoshi.4. The impact of foreign exchange (FOREX): When you invest overseas you are investing in two assets: the underlying asset stock or bond and the country’s currency. The changing relationship between countries’ currencies will have an impact on direct investing in a foreign security. I will discuss this in greater detail a little later in this article.

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