Why Invest InternationallySeptember 22, 2017
- Global trade opens up new markets to investors.
- International economies are growing at different rates than the U.S. economy.
- Globally diversified portfolios benefit from diverging cycles of performance.
Over the past 25 years, globalization has opened up new investment opportunities as economies worldwide have become more intertwined. Adding international stocks and bonds to portfolios allows investors to reap the advantages of accessing some of the world’s fastest-growing economies. Exposure to those investments also offers diversification benefits that can help smooth volatility. While international investing may involve complexity—including assessing local and regional companies, economies, and politics, as well as additional risks—professional portfolio management can help investors successfully navigate this sector.
Find Growth Outside the U.S.
Since the early 1990s, emerging economies have become key drivers of global growth. (See “Emerging Markets Drive Global Growth.”) Countries such as Russia and China have privatized formerly state-run enterprises and opened their borders to direct foreign investment. Developing regions such as Asia and Latin America have dropped tariffs and trade barriers that once restricted the importation of goods.
Emerging markets stocks have trailed developed markets stocks in recent years, but there is still room for expansion in these countries’ economies over the long term. The International Monetary Fund projects that global growth in the next few years will come primarily from emerging market and developing economies.* “It makes sense to have a healthy amount of exposure to both developed and developing countries around the world,” says Chris Alderson, head of International Equity at T. Rowe Price. “There are a lot of top-quality companies outside the U.S. that could do well in the medium term.”
Gross domestic product (GDP) growth in emerging and developing markets has outpaced that of developed economies over the past 25 years (1/1/1992–12/31/2016).
Source: International Monetary Fund, World Economic Outlook Database, August 2017.
Benefit From Cycles of Outperformance
While emerging markets have been more volatile than U.S. markets historically, international markets may not be uniformly volatile at the same time. What’s more, international investments go through cycles of underperformance and outperformance. (See “With Higher Return Potential Comes Greater Volatility.”)
Rather than trying to anticipate which markets will outperform, investors are better served by allocating a portion of their portfolios to multiple international regions. This strategy offers the potential to benefit from these divergent cycles of performance around the world. Be sure to evaluate your current holdings to determine how much foreign investment you already have. Keep in mind that some funds that invest primarily in the U.S. may have international holdings as well. Of course, diversification cannot assure a profit or protect against loss in a declining market.
Global developed markets generally tracked the U.S. market, while emerging markets were more volatile.
Past performance cannot guarantee future results.
Source: FactSet, December 31, 2016.
Challenges in Accessing Global Markets
While international investing can offer individuals more growth potential, it also entails certain risks. Political instability, war, trade disputes, and other disruptions can have a large impact on countries whose economies are less diverse or developed than the U.S. Such events can hurt both the prospects of a nation and the companies located there. In addition, some countries’ markets are less liquid than U.S. markets, which could lead to large price swings of a given country’s stocks or bonds in a short time period. Non-U.S. investments also are subject to currency risk, in addition to general market risks.
Investors also can have difficulty gaining access to certain international markets. They may have to pay high fees or commissions to own shares of companies that don’t trade on U.S. exchanges or to invest in non-U.S. bond issues.
International-focused mutual funds that invest in diversified holdings across sectors and countries offer a relatively easy way for investors to gain exposure to overseas opportunities. T. Rowe Price actively managed mutual funds benefit from a globally based research team that finds local investment opportunities and has access to many locally listed shares. Such access helps diminish transaction costs.
“Active managers have the resources to seek out global equity and fixed income opportunities by looking for improving industries and companies that are gaining market share because of better business models,” Alderson says. By relying on professional management and broad diversification, investors can manage many of the risks of global investing while gaining exposure to the rewards of investing overseas.
*International Monetary Fund, World Economic Outlook, April 2017.
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