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Benefits and Risks of International Equity | Deeva Ventures Pvt Ltd

Benefits and Risks of International Equity

 International investing has become vital for our portfolios as we take part in the global growth story. 


Adding international stocks to a portfolio offers diversification and may provide higher returns. However, there are both benefits and risks associated with global investing.


Benefits of International Equity


a. Diversification

Diversification is the most obvious yet the most crucial benefit of global investing. A diversified portfolio acts as a source of stability during market volatility. 


When you spread out your investments across geographies, there is a low correlation between them. This means that the volatility in one market is likely not to affect your other assets. 


Many of the US-listed companies have global revenues. Over 40% of the revenues of the S&P500 companies come from outside the US. By investing in the US itself, you can build a globally diversified portfolio. 


b. Wide range of investment options

Global investing enables you to access investment opportunities that are not present domestically. Developed markets like the US are home to some of the world’s largest tech companies – something you cannot access by investing in India. 


You may even choose a theme or a combination of multiple sectors. For example, you can prefer the US market for technology, Europe for engineering, and Australia for commodities. 


If you are interested in healthcare or pharmaceuticals, there are several options in the US and Europe. 


You can access multiple geographies through ETFs. For example, you can invest in German equities through the US-listed EWG ETF or in the Brazilian market through the EWZ ETF.


c. Investment Protection

Another significant benefit of global investing is the protection of investments against fraud and liquidations. 


Developed market companies generally have strong regulations that ensure sound corporate governance and severe penalties for market abuse. This protects retail investors from potential scams and insider trading losses.


Remember, capital is always at risk, but many foreign financial institutions, offer protection from seizures and other threats such as liquidation of the broker-dealer. For instance, in the US, SIPC protects investments up to $500,000 if your broker-dealer faces liquidation.


d. Currency Diversification

Investing overseas exposes you to currency appreciation (or depreciation). For example, the USD has been appreciating, on average, between 3-5 percent versus the INR over the last few years. 


Emerging markets’ currencies depreciate over the longer term. Interest rates in domestic savings accounts are at a low of 3-4 percent on average. 


By investing globally, portfolios have generally had the dual benefit of better markets and appreciating currencies.


Risks of International Equity


a. Higher Transaction Costs 

The most significant barrier to investing in global markets is the added transaction cost, which varies depending on the foreign market you want to invest in. For the US markets, for many other markets, access may not be as inexpensive.


There may be additional costs like FX conversion charges, transfer fees, and annual maintenance fees that you should know on top of the brokerage commissions.


b. Currency Volatility

When investing directly in foreign markets, you first have to convert your Indian rupees into a foreign currency at the current exchange rate. Let’s assume you own a foreign stock for a year and then sell it. 


You then convert the foreign currency back into the Indian rupee. That could help or hurt your return, depending on which way the domestic currency is moving. 


c. Political Risk 

While investing, you should also consider the geopolitical environment of the country. Political events affect the domestic markets of the country and may lead to volatility. 


In developing markets, government and policy decisions could hurt even the most prominent companies. We have seen this frequently in countries like Brazil and Argentina.


Conclusion

International investing has become the need of the hour to achieve strong portfolio diversification. While the benefits are lucrative, you must pay attention to the risks as well. There is a lot of information available online to measure the risks and ensure your portfolio’s right mix. 


Source:- Winvesta


10 Minutes to wall street

Why Should We Invest in US Stock Market?

The US stock market is home to some of the largest and robust companies with sturdy underlying fundamentals, who are poised to prosper despite the uncertain future.

Taking your current portfolio into account, an addition of US equities will add stability without sacrificing returns. Investing in global equities as an Indian gives you the opportunity to participate in the growth of global economies. Here are a few reasons why one should invest in US stocks:


Why Should We Invest in the US Stock Market?


  1. Global Exposure – A majority of listed companies in the US are foreign companies that have penetrated the US market to take advantage of a large number of investors and to be where the money is.                                                                                                                                                                                                                          While being invested in US stocks, actual exposure to the US economy is relatively low. Purchasing stocks from the US market will have you not only be invested in the American market but also in international markets giving you access to the whole world.                                                                                                                                          
  2. Largest and Most Liquid Market – Market Capitalization refers to the total value of outstanding shares of a listed company that can be traded. The US is the topmost country in the world in terms of market capitalization as can be clearly seen in the below-given graph.                                                                                                                                                                                                                                                                   The market capitalization of the US is nearly five times that of China and fifteen       times that of India. The US market is also the most liquid market in the world with   more than double trades in the stock exchange as compared with China.                          
  3. Currency Exposure – When one invests in global stocks they are exposed heavily to currency exchange rate fluctuations. One must take precautions while investing in equities with volatile and unstable currency.In the last decade, the Indian Rupee has depreciated approximately 37% against the US dollar.                                                     
    By taking this into consideration, we can see how an investor who has invested in US stocks would have seen their returns boosted by the depreciating rupee over the years.                                                                                                                                                                                                                                                                                          India’s economy in comparison to the US is more likely to remain a higher inflated economy, keeping the trend unchanged.                                                                                                                                                                                                                      Diversification and long term positioning will keep investors in the green and help them benefit from rupee depreciation.                                                                                   
  4. FAANG – Simply put, the acronym FAANG represents five stocks which are Facebook, Amazon, Apple, Netflix, and Google. Traded on the NASDAQ, investors turn to technology companies when they are looking to invest in growth stocks and a large amount of media attention and investors’ portfolios are concentrated around FAANG.                                                                                                    
    The members of FAANG are so massive and profitable that they generate more than a significant amount of the Gross Domestic Product (GDP) in the US. They currently have a market capitalization of around US$ 3.1 trillion and they make up over 10% of the total value of the S&P 500.                                                                          
  5.  Performance – Since 1990, the US markets have greatly outperformed the Indian markets. The Compounded Annual Growth Rate (CAGR) of the BSE 500 is 7.86% and the S&P 500 is 10.06%.

There is a multitude of opportunities in the US market and analysis shows that the time has come to consider this market to diversify your assets outside the country as well.                                                                                                                                                                          The US is an economic superpower and its innovative nature offers a competitive edge to its investors. Several factors make the US a highly lucrative market. 


In the long run, as an investor investing in US stocks helps with diversification in terms of geography as well as the ability to invest in large companies, the scale and size of which is unavailable locally.