Investing in the Global Economy

Look around at the electronics, appliances and other items you use every day. Some of the biggest companies in the world operate both in and out of the U.S. stock market and represent a large portion of the global economy. An increasing interdependency of the world’s financial systems has presented more opportunities for investors. There may be benefits to consider when looking at international investment opportunities. My strategy for portfolios is typically to include a percentage of international funds, mostly in developed countries, but occasionally a smattering in emerging markets.

Diversification Benefits

By diversifying a portion of a portfolio into international investments, investors take advantage of different economic and stock market cycles worldwide. Instead of avoiding economic risk, you can diversify it across many economies, such as those benefiting from economic reforms where the price of natural resources and the growth of consumer markets are making them viable options. Of course, with the global recession, all stock markets around the world posted losses in 2008.¹ But markets in Morocco, Israel, Switzerland and Japan posted the best returns, leaving the U.S. to place fifth out of 46 markets.

Greater Potential for Return

Some of the world’s economies are growing at a faster rate than the U.S. economy.² For example, the real growth rate of India’s Gross Domestic Product (GDP) was an estimated 6.6% in 2008, while the real growth rate of Morocco’s GDP was 5.9%. Compared to the 1.3% annual growth rate for the United States in 2008³, investing in these emerging markets may look appealing. We select international investments that balance the potential return with the risks.

Investment Choices

Investing internationally can include individual stocks trading in American depositary receipts (ADRs), international mutual funds, international closed-end funds, or regional or single country exchange-traded funds. Our investment strategies are based on meeting your long-term goals. When we select international investments, we consider the following risks:

Market Risk: Stock markets of many emerging economies are not subject to the same accounting standards or regulatory oversight as the U.S. That lack of oversight can make it difficult to accurately value a publicly traded company.

Political Risk: Civil or political unrest can affect the relative attractiveness of a country’s investment market. Even developed markets can undergo economic shifts due to international conflicts, sanctions, and more.

Currency Risk: The returns of an international security can be affected by swings in currency exchange rates. It’s important that the value of the U.S. dollar will convert favorably when trades are made.

Diversification and growth opportunities can be found in international emerging and developed markets.