A world of opportunity - investing in overseas markets. (Personal Financial Planning)by Littman, Mickey J.
While the U.S. stock market contains approximately 7,000 companies representing 33% of the world's capitalization, there are an additional 20,000 entities listed on overseas exchanges, representing 67% of the world's capitalization. Furthermore, many overseas equity markets have continuously outperformed U.S. markets. For example, while the U.S. stock market advanced 165% for the ten-yea period ending June 10, 1993, many other countries did better: Hong Kong posted 606% return and France climbed 446%. Exhibit 1 shows relative results in the world's financial markets from 1983 through 1992 based on earnings percentages.
Diversification Offers Rewards
In addition, diversifying overseas can reduce volatility; as such markets often rise when U.S. markets fall and vice versa. Exhibit 2 shows a graph of risk and return of investing in U.S. S&P 500 stocks and Morgan Stanley International EAF Index stocks for the ten-year period ended 1992. The best mix in balancing risk and return was a combination of each.
Just as most of the world's stock market opportunities can be found outside our borders, more than half the world's fixed income investments come from foreign issuers.
What's more, non-U.S. bonds have provided better returns over the long term: fo the 30-year period ended December 31, 1991, foreign bonds have returned an average of 10.2% compared with 7.3% for U.S. bonds. Even when viewed over five- 10-, and 20-year periods, non-U.S. bonds provided higher returns. In fact, the U.S. bond market has been the world's total return leader only twice in the 26-year period that concluded at the end of 1992.
Risks Should Be Understood
While global investing provides more opportunities and greater diversification than investing in the U.S. alone, you should be aware of special risks. Fluctuating currency prices can increase or decrease your return. In addition, some overseas exchanges are less regulated than the exchanges in the U.S. Corporate financial reporting standards are not as extensive as in our country, making it more difficult to research companies. Also, some foreign securities may be less liquid than U.S. issues, and overseas markets may be affected by social or political instability.
How to Invest Globally
There are several ways to invest abroad, each with its own distinctive set of risks, conveniences, and potential rewards.
U.S. Multinational Corporations. In today's global economy, many of America's largest companies do a substantial amount of business overseas. From McDonald's in Moscow to Coca-Cola in Beijing, American companies are selling a wide range of goods and services to foreign consumers and businesses. Owning the stocks an bonds of U.S. companies that earn a large percentage of their profits overseas is an excellent way to participate in international markets.
American Depository Receipts. American depository receipts (ADRs) are financial instruments representing shares of foreign corporations that trade like stocks on U.S. exchanges such as the New York Stock Exchange, American Stock Exchange, and NASDAQ. Technically, ADRs are not shares of stock but are certificates representing foreign shares held in trust by a custodial bank.
ADRs are possibly the most convenient way to invest directly in the stocks of corporations based outside the U.S. ADRs are quoted in U.S. dollars and pay dividends on the underlying shares in U.S. dollars. More than 235 ADRs now trad in the U.S., up from approximately 150 in 1961. Companies that list ADRs on an American stock exchange must issue financial reports based on SEC rules.
Foreign-Dominated Equity and Debt Securities. Many equity securities are listed on numerous exchanges throughout the world. The international debt markets are extensively diverse in issuers, maturities and available interest rates.
International Mutual Funds. Perhaps the easiest way to participate in overseas investments is through the hundreds of open-end and closed-end stock and bond professionally managed mutual funds.
Considering that the recovery of overseas economies is lagging that in the U.S. this is a propitious time for investing in overseas markets.
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