Expand horizons with international investing
- Emerging markets are embracing free-market concepts to close the income gap.
- Investing internationally abroad is fraught with risk, as business transparency is nonexistent.
- Gain exposure to overseas markets through large U.S. or foreign stocks.
Look around you. The computer on which you are reading this was made in China. The wooden chair you're sitting on was crafted in Brazil. The foreign car in your neighbor's garage was manufactured in Asia.
If you aren't looking beyond the U.S. by taking advantage of international investing options, you're missing out on some of the best opportunities in the world to make money.
Michael Martin, chief investment officer of Financial Advantage, an investment management company near Baltimore, says some of the most obvious international investment opportunities are in China and India, which have enjoyed long-running manufacturing booms.
China, in particular, has grown 10 percent annually for the last 30 years, he notes. And though the growth rate in China or India may slow down at times, it hurtles forward at a breakneck pace compared to that of the U.S., with potential for more in the future. Output per person in the U.S. is $48,000, but in China, it's just $8,000 and it's only $4,000 in India.
"There are tremendous opportunities in these emerging markets as they embrace free-market concepts to close the prosperity gap," says Martin, adding that one-third of his company's investments are in emerging markets.
Nevertheless, they do hold risk, he warns.
- Developing countries are dependent on exports. If the U.S. and other Western countries stop buying, then their business will slow dramatically.
- Many developing countries are particularly vulnerable to shortages, inflation and politics because they import such basics as food, energy and industrial metals.
- Doing business in developing countries isn't like doing business in the U.S. The legal standards are hazy, and there's no such thing as business transparency.
- Intense poverty results in deadly uprisings, particularly in China and the Middle East.
- Banks are owned by the governments, which freely manipulate currencies and credit.
But none of those factors are shockers, and unfortunately, they're not unique to developing countries. So Martin and other investment experts believe that the risks are manageable and the returns make it all worthwhile.
If you agree, here's how to get started.
Domestic multinational companies
If your tolerance for risk is low, stick with U.S.-based companies that do lots of international business. You can do that by buying individual stocks, actively managed mutual funds or domestic index funds that focus on large companies.
F. John Mathis, professor of global banking and finance at Thunderbird School of Global Management, says some U.S. companies -- PepsiCo, for instance -- make 50 percent or more of their revenues from foreign customers.
If you stick to U.S.-only investments, you'll avoid one risk of investing in foreign equities: the ups and downs of foreign currencies against the U.S. dollar. "The companies manage the foreign exchange risk, and you don't have to worry about it," Mathis says.
Foreign companies and international funds
If you're feeling a little braver, consider investing in the stocks and bonds of companies that are based outside the U.S. -- but whose products are household names in this country. Such an overseas investment might be Nestle, which is based in Switzerland. Its products include Gerber baby food, Stouffers frozen dinners and Kit Kat candy bars, among dozens of other familiar brands.
Jonathan M. Bergman, chief investment officer of New York-based Palisades Hudson Financial Group, says the easiest way to invest in these companies is to buy an international mutual fund focused on non-U.S. large-cap firms. He says you can dilute your risk by choosing funds that are well-diversified with respect to products and the places where the companies are based.