Contributed by BILL BLEVINS
Financial Correspondent
Blevins Franks
Global economies are part of the modern investment approach to diversification, i.e. spreading your investments across different geographical zones to lessen any adverse impact of volatility in one country or continent alone. By investing across a number of different global regions, if one country or region is experiencing a down period in its economic cycle, another is likely to be enjoying economic growth, to your benefit.
Economic cycles, in different countries, do not move up and down simultaneously and so diversifying in this way balances out the highs and lows, spreading the risk to your advantage.
Over the last 25 to 30 years, the influence of international markets has grown. More and more large corporations have extended into the global market, aided by easing of restrictions in international trade laws, the dramatic advance of technology and vastly improved means of transportation. Types of industry sectors have also played a part, with an ever-increasing global demand for ‘new’ inventions, such as mobile phones, computers and the worldwide web. Companies like Coca-Cola, Nokia, Microsoft and HSBC are just a few examples, which are now truly global, despite their origins or the market where their shares are traded.
Global investing offers a far wider choice of sectors than if you limit the market to one country alone. If you wanted to invest in automobile manufacture for instance, some of the best-known, and former flourishing companies, have now gone from the UK and many of the top-selling cars in the US are produced overseas by companies not listed on the US stock exchanges.
Many of today’s leading multinational companies are based in continental Europe, Japan and the Pacific Rim such as Nestlé, Toyota and HSBC. Asia is a particularly rising market as well as the emerging markets of the eastern European bloc. International investing also expands opportunities to participate in industries like the natural resources of Australia and Canada, as well as the technology from Japan, Korea and Taiwan, and the financial activities in Hong Kong and Singapore.
Indeed, HSBC has just released details of an 18 per cent surge in half-year profits for 2006 in its global banking industry, boosted by the developing potential in emerging markets, such as China, India and Brazil, where profits rose by 20 per cent and over. HSBC’s pre-tax profits exceeded forecast, at 6.7 billion pounds sterling. Pre-tax profits in the bank’s corporate division were up 37 per cent compared with the first half of 2005.
Some 25 years ago, a Briton who wanted to invest internationally would probably have looked no further than the US. However, restricting your global portfolio to just US equities would mean ignoring more than a third of the total investment opportunities available. On the other hand, any investor who ignores the US equity market opportunities is risking underperformance, since the US market represents more than 55 per cent of all issues equity worldwide. The asset allocation of your portfolio is therefore a key issue to its success.
Likewise, the UK market comprises around 10 per cent of global markets. A portfolio consisting of purely UK equities could be ignoring 90 per cent of total investment opportunities.
Every country has its own fiscal and monetary rhythm. The best performing market varies country by country and year by year. Local economic developments cause unique fluctuations within national financial markets, creating a variety of opportunities. Diversifying into many markets can reduce the impact of a downturn in any single market, as well as giving you opportunities for growth, that you may otherwise have missed.
For example, three years ago, the best performing countries were in the emerging markets, such as Argentina, providing investors with a superb opportunity for growth. However, many investors preferring to stick to the more familiar UK and US equities would not even have thought of investing in Argentina.
Of course, countries like Argentina are far less stable than the UK or US. Argentina was, in fact, the worst performing country in 2005 – another issue that needs to be considered, since so often in a general market decline in a region like South America, the fall overshoots what is needed for a correction. Various factors can influence their financial markets and they are considered high risk investment areas. In the long run, they can give high returns, but you will need to select the percentage of your portfolio (your asset allocation) to place in these markets carefully.
A different way of global investing is to invest in a fund where carefully selected specialist managers are appointed to find international investment opportunities, in essence, a world equity fund. Such funds are few and far between, and are designed to provide investors with access to a set of specialist strategies and skills that aim to extract value from global equity markets.
A global manager can invest in the best companies in the world, regardless of where they are based, to the benefit of the investor. Usually, an investor would have a combination of global and regional funds in his portfolio.
Diversification across international borders is just one way of diversifying your portfolio. By spreading your portfolio across a wide range of equities, bonds, property funds and cash, and holding a variety of assets in each, will smooth out the risk and result in steady returns and capital growth.
Ask your local financial adviser for more information on global investing and the best funds, global and regional, to suit your needs and circumstances.
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