FIVE REASONS TO GO GLOBAL
We all know that stock markets have seen some ups and downs over the last 18 months and in such rocky times it is understandable that investors might be inclined to keep their money close to home. But while keeping investments in the UK may feel like the safe thing to do, it is actually likely to limit your portfolio.
Casting the net further afield adds variety and offers access to growth from companies, which could be faring better than those on home shores. Here are five reasons to get out of the UK.
1. The diversification story
Plain and simple portfolio diversification is a key reason to buy foreign shares. In the same way that a good portfolio has a variety of UK investments, it should have variety in geographic exposure.
A balanced portfolio, in my opinion, will typically contain around 30% in non-UK equities to benefit from overseas markets’ potentially better performance if the UK market is down. And you can tailor your foreign exposure according to your level of risk – continental European shares, like their UK counterparts, are generally less risky than emerging market shares.
The easiest way to get access to these markets is through funds and exchange-traded funds (ETFs) – and by doing so, you automatically get exposure to a range of companies, giving you in-built, automatic diversification.
2. Get some growth
So far this year, funds looking at India, China, Russia and Australia have been among the top ten growers. And while the FTSE 100 index of British companies has grown by 4% in 2009 (to the end of July), over the same period, Hong Kong’s Hang Seng has seen a 42% rise.
Paul Inkster, Vice President, Head of Product for Barclays Stockbrokers, has seen interest in these markets increase. “We have a clear focus on emerging markets,” he says. “But risk can vary. Going more ‘off the beaten track’ with emerging markets, you have to give due consideration to a variety of additional factors that could increase your risk.”
Six ETFs to check out iShares FTSE 100 (ISF) iShares Corporate Bond (SLXX) iShares FTSE UK All Stock Gilt (IGLT) iShares MSCI Emerging Markets (IEEM) iShares FTSE/Xinhua China 25 (FXC) |
These factors include exchange rate risk, local regulations, and liquidity issues – meaning the amount of stock freely available and how this can affect your ability to liquidate your holdings.
If you pick the right fund, however, the returns can be stellar. Last year’s best performing unit trust, for example, the Neptune Japan fund, grew 84% in 12 months. Other funds in the top ten performers so far this year include Jupiter’s China fund and First State’s Indian Subcontinent. They have grown 54% and 52% respectively to the end of July. Of course, there are no guarantees that this performance will continue.
In the ETF world, trackers for Brazil, Turkey, China and Taiwan have been top-performing ETFs so far this year (to end July).
3. International names
There are many companies worldwide that remain out of reach if you only invest on home shores. Many of the largest technology companies in the world, for example, are in the US. Think Google, eBay, Apple and Microsoft. What about car companies? Germany has Porsche and Volkswagen, popular trades at the moment.
Individual stocks like Google and Volkswagen are a little easier to buy than direct equities in say China, but funds and ETFs can again provide a route to market.
Active traders can use CFDs. These contracts to exchange the difference between the purchase and sale price of a derivative based upon a stock or index are often used to profit from a short-term price movement, without the need to actually buy and sell the underlying asset, be that a Chinese share, a currency or an index.
4. An economic upturn
Predictions on how long the UK market is going to be in recession vary, but we have already seen some other economies move out of recession already and more are likely to follow.
The performance of the funds and ETFs in Brazil, China, India, Japan, Russia and Turkey this year are already illustrating this fact. So having a little something abroad could see your portfolio get a boost before UK assets start to recover.
How much exposure do you have in non-UK markets? In a recent Smart Investor poll, we asked ‘How much exposure do you have in non-UK markets?” 71% of respondants had 25% or more of their investments outside of the UK. |
“There is a strong argument that the US led us into recession and therefore it is logical that they will lead us out – they certainly appear to be addressing the problem the most head-on,” says Inkster. “However, we do see clients thinking of emerging markets leading the way, and China is such an increasing driver of economic activity that it may well be the country people are looking to lead rather than follow.”
Read our Investment ViewPoint on Emerging Markets – ready for recovery?
5. Foreign exchange
One consideration that is absolutely key when investing directly in overseas stocks is exchange rate risk.
A currency going against you could mean that returns on your stock are diminished once you convert back into Sterling. On the other hand, if you had bought into the US market when the dollar was two to the pound and sold out when Sterling was at $1.50 you would have made a 25% return purely on the exchange rate movement.
More active traders have been using currency movement as a way of making money during disappointing markets. “You can speculate on currency without investing in overseas markets through financial spread trading or through margin FX,” says Inkster. There are risks associated with FX trading, however, and it should only be undertaken by those who understand and accept those risks.
That said, for those looking to invest outside of the UK, there are plenty of options that cater to all levels of expertise and appetite for risk.
By Jo Tura, who writes for Investor’s Chronicle and MoneyAM.
There are short and leveraged ETF products available from some providers within the full range of ETFs available to UK retail investors. Potential investors should be aware of the nature of these products and the risks involved. Find out more about short and leveraged ETFs.
None of the above constitutes investment advice and stocks can fall as well as rise in value.? The price and value of investments and their income fluctuates: you may get back less than the amount you invested. Remember that how an investment performed in the past is not a guide to how it will perform in the future. If you are in any doubt about these types of investments, you should consult a financial adviser.
