Investing internationally is an important aspect of the global economy, providing a way for people to invest their money across borders. This helps to foster economic growth and provides investors with diverse opportunities to increase their wealth.
These investments aim to achieve higher returns, access new markets, and reduce risk through geographical diversification. However, global investment also has challenges, including political instability, fluctuations in exchange rates, and varying regulatory environments.
As globalization continues to intensify, investors must understand the complexities of investment to capitalize on opportunities in the global market. In this article, we’ll explore what it is, the available options, and what to consider to maximize your returns.
However, for many foreign investors, forking out thousands of dollars for investing involves risk. When one or more shares go south, you could be facing a possible loss. We’ll also explore the disadvantages of putting your assets in foreign companies, international funds, or an exchange traded fund.
What is international investment?
International investments play a significant role in globalization, allowing investors to expand their investment portfolios beyond their own country’s borders. It connects different economies and moves capital to the places where it can be used most effectively, promoting global growth and innovation.
There are two main types of investment: Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). FDI involves acquiring a significant stake or establishing business operations overseas to gain control over a foreign enterprise.
In contrast, FPI involves investing in foreign financial assets, such as stocks and bonds, which do not offer control but allow investors to diversify and potentially earn higher returns available in different markets.
Investors seek diversification, higher potential returns, and access to emerging markets. However, these investments can pose risks, including political instability, currency fluctuations, and different regulatory landscapes.
To navigate these challenges, investors need to understand the international financial environment and the specific contexts of their investments. As global dynamics shift, the landscape of international investing continually evolves, presenting new opportunities and risks.
Read Our Guide on Investing in Turkey
Importance of international investment
International investing is crucial for various reasons, as it benefits both the global economy and individual investors.
It plays a significant role in driving global economics forward, promoting interdependence among nations, fostering stability, and encouraging policy frameworks that support open and fair trade and investment practices.
Economic Growth: Investment facilitates growth by redistributing funds from countries with surplus capital to those with a deficit, leading to job creation, technology advancements, and increased productivity.
Diversification: Investors look for international opportunities to diversify their portfolios beyond domestic markets. This diversification reduces risk as it spreads investment across different economies and industries, which may not be directly correlated with the home country’s economic dynamics.
Access to New Markets: Expanding into new markets through investment is crucial for businesses seeking growth and larger customer bases.
Enhanced Innovation and Technology Transfer: When investing across borders, the transfer of technology and practices promotes innovation, improves industry standards, and fosters global competition, benefiting both the investor and the host country.
Higher Returns: Emerging markets offer higher growth potential compared to mature economies, providing investors with the opportunity for higher returns on their investments due to rapid economic gains and untapped potential.
Political and Economic Influence: Countries and corporations use foreign investment to establish ties between investing and recipient countries, leading to more stable relationships.
Resource Allocation: Global investments aid in the efficient allocation of global resources, promoting economic stability and development.
International asset classes
International asset classes represent diverse investment options available across global financial markets. These asset classes offer investors the opportunity to diversify their portfolios by tapping into securities and investment opportunities outside their home country.
Here are three of the most common asset classes. In many cases, making such investments can lead to citizenship or residency. Some of the most popular examples of this are Portugal’s Golden Visa and Malta’s Citizenship by Investment program.
Global Real Estate
Global real estate refers to investing in property markets outside an investor’s home country. This form of investment can serve multiple strategic purposes, from diversification and potential for higher returns to accessing growth in emerging markets.
Real Estate Investment Trusts (REITs) offer a more accessible form of investment in real estate, as they trade on stock exchanges similar to stocks. International REITs invest in properties located outside the investor’s home country. They provide liquidity and reduce the need for direct management of properties while offering a dividend yield from the rents collected.
On the other hand, Real Estate Funds are mutual funds or ETFs that invest in international real estate portfolios. They provide diversified exposure across various regions, sectors (commercial, residential, industrial, retail), and types of real estate investments (equity, debt).
Another aspect of global real estate is indirect ownership through developers and homebuilders. Investors invest in companies that develop properties or provide housing construction services internationally. This form of investment allows participation in the real estate market without owning physical property.
Read our guide on Real Estate Investing
International Equities
International equities are stocks of companies that are based outside an investor’s home country. They offer a way to diversify investment portfolios by tapping into the economic dynamics of different regions and industries worldwide.
These stocks can be grouped into three categories based on the economic maturity of the markets they operate in. Developed markets, such as Western Europe and Japan, are known for their stability.
Emerging markets, such as China and India, are known for their rapid growth but higher volatility. Frontier markets, such as Vietnam and Nigeria, are less mature and carry higher risks along with potentially higher returns.
Investing in international equities allows investors to mitigate risks associated with downturns in their own domestic markets as global markets often perform differently under various economic conditions.
Additionally, it presents opportunities to invest in industries and sectors not available in the investor’s home market, thus broadening potential growth prospects. For example, investors can gain exposure to leading luxury goods companies in France or automotive giants in Germany.
International bonds
International bonds are debt securities issued by foreign governments, municipalities, or corporations outside of an investor’s home country.
These bonds provide investors with an opportunity to diversify their portfolios beyond domestic investments and tap into different interest rate environments, which can offer varied returns based on the economic conditions of other countries.
When investors purchase international bonds, they lend money to the issuer in exchange for periodic interest payments and the return of the principal at maturity. The interest rate or yield on these bonds can be influenced by factors such as the creditworthiness of the issuer, political stability, and economic policies of the issuing country.
For instance, bonds issued by governments or companies in developed markets typically offer lower yields due to their perceived lower risk, whereas those in emerging markets might offer higher yields to compensate for higher risks, including political instability and economic volatility.
One of the key attractions of international bonds is their potential to provide income in foreign currencies, which can be beneficial if the currency appreciates relative to the investor’s home currency.
Risks when you invest internationally
International investing involves diversifying your investment portfolio by allocating funds to international markets, including emerging markets and developed markets. This strategy aims to tap into the economic growth of foreign markets, which can offer higher profit potential than domestic investments alone. However, investing internationally carries its own set of risks that investors need to consider.
One of the primary risks is currency fluctuations. When you invest in international funds, mutual funds, or direct investments like foreign stocks or American Depositary Receipts (ADRs), you’re exposed to currency exchange rates that can dramatically affect the market value of your international investments.
For instance, if the currency in the country where you’ve invested depreciates against your home currency, the return on your investment when converted back to your domestic currency can be reduced, even if the underlying assets have performed well.
Another significant investment risk is the political and economic stability of the countries you invest in. Emerging markets often offer high growth potential, but they can also be more volatile and less predictable than more developed markets. Changes in government, economic policies, or interest rates can adversely affect foreign companies and, consequently, your investments.
Investors also face liquidity risks. Some international markets may not have the same level of trading activity as domestic markets, so trading securities such as stocks and exchange-traded funds (ETFs) can be more challenging. Lower liquidity can lead to higher trading costs and can make it difficult to enter or exit positions without affecting the securities’ price.
Furthermore, investing in foreign markets often incurs higher costs due to management fees for international mutual funds or ETFs, taxes on international transactions, and possibly higher commission rates by exchanges. These costs can erode potential returns, making it crucial for investors to weigh these expenses against the benefits of international exposure.
Additionally, investors should be aware that past performance of global investment instruments is not indicative of future results. Each international market has its unique factors that drive returns, and just because a market or a fund has done well in the past does not guarantee it will continue to do so.
Lastly, investors should ensure their international investments align with their broader objectives. While diversification is a significant advantage of international investing, spreading investments across various markets and securities should fit the investor’s overall risk tolerance, investment horizon, and financial goals.
In conclusion, while international investing can provide access to profitable opportunities worldwide and enhance portfolio diversification, it comes with challenges such as currency risk, economic and political uncertainty, higher costs, and liquidity issues. These factors must be carefully managed to align with the investor’s long-term investment objectives and risk profile.
How Can Global Citizen Solutions Help You?
Global Citizen Solutions is a boutique migration consultancy firm with years of experience delivering bespoke residence and citizenship by investment solutions for international families. With offices worldwide and an experienced, hands-on team, we have helped hundreds of clients worldwide acquire citizenship, residence visas, or homes while diversifying their portfolios with robust investments.
We guide you from start to finish, taking you beyond your citizenship or residency by investment application.
Frequently Asked Questions About International Investing
Why should investors consider international investments?
Investors consider global investments primarily for the diversification benefits. By spreading investments across various countries and regions, they can reduce the overall risk of their portfolios. Additionally, international markets may offer growth opportunities not available domestically, particularly in emerging markets where rapid growth can lead to higher returns.
What are the risks associated when you invest internationally?
The main risks include political risk, currency risk, and economic risk. Political risk arises from instability or changes in government policies that can affect the investment climate. Currency risk stems from fluctuations in exchange rates that can impact the value of returns when converted back to the investor’s home currency. Economic risk involves changes in the economic health of the investment country, such as recession, which can affect the performance of investments
How can I invest internationally?
Investors can start by investing in international mutual funds, exchange-traded funds (ETFs), or directly purchasing foreign stocks and bonds. Using these instruments can simplify the process by providing diversified exposure without the need for detailed knowledge of foreign markets. Additionally, investors can use platforms that offer international brokerage services to directly access foreign securities.
What are the tax implications of international investing?
The tax implications can be complex and vary depending on the investor’s home country and the country where the investment is made. Typically, investors may be subject to withholding taxes by the country where the investment is located, and they may also need to report foreign income in their home country. In many cases, tax treaties between countries can provide relief from double taxation. It’s advisable for investors to consult with a tax professional who understands international tax law to navigate these issues effectively.
What is the difference between Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI)?
Foreign Direct Investment (FDI) involves investing in a foreign business in a way that gives the investor a controlling interest in the management of the business, such as mutual funds. Foreign Portfolio Investment (FPI), on the other hand, involves purchasing securities such as foreign stock and bonds in foreign markets without aiming for control over the companies issuing these securities.
