Financial Matters Search

International Stock Investing

Investing internationally has grown rapidly in recent years. The bias for investing only within our national borders is diminishing, as an increasing number of individual and institutional investors boost their international exposure to pursue their investment goals. Behind the trend toward international investing are the realizations that the global market can offer attractive opportunities for investment and that diversification abroad can help reduce risk.

Shift in U.S. and World Market Capitalizations

 

 

Source: ChartSource®, DST Systems, Inc. Market-share data is from the World Federation of Exchanges. Estimate for 2030 is based on the rate of growth of non-U.S. markets vs. the U.S. since 1975. Past performance is not a guarantee of future returns. © 2018, DST Systems, Inc. All rights reserved. Not responsible for any errors or omissions. (CS000175)


The Investment World Grows Larger

In 2017 foreign markets represented 62% of the world's investment opportunities. It is estimated that by 2030 the U.S. stock market will represent just 32% of the world market.1

Diversification and Higher Returns

The quest for diversification and higher returns are driving forces behind the internationalization process. When U.S. investors began to invest in foreign equities, a key reason for the move was increased diversification. Because international markets do not always move in sync -- some may zig while the others zag -- diversification on a global scale may help offset the effect of a downturn in the U.S. market. Investors in international securities may face additional risks, such as higher taxation, less liquidity, political problems, and currency fluctuations, that do not affect domestic investors. But despite these risks, the potential for higher returns and diversification makes these markets attractive to many investors.

As investors around the world become more sophisticated and aggressively explore investment opportunities, they find that the global arena can offer competitive returns. The MSCI Europe, Australasia, Far East (EAFE) index, which tracks 21 major world markets, posted a 5.97% annualized rate of return for the 30 years ended December 31, 2017, compared with the 10.70% annualized return of the S&P 500 index.1 Past performance does not guarantee future results.

This difference in returns is due in part to differences in economic and market environments in countries around the world. For example, the Japanese market throughout the 1990s was depressed due to the country's economic recession. Many Japanese stocks became undervalued. In 1999 the Japanese stock market bounced back, producing a gain of more than 60%.2

How to Invest in Foreign Equities

One way you can include international exposure in your portfolio is to invest in stocks of U.S. companies that derive a large portion of their annual revenue from overseas markets. Examples of such companies are Coca-Cola and McDonald's.

You can also buy stocks of foreign companies through American Depositary Receipts (ADRs) -- traded on the New York Stock Exchange -- and through mutual funds that invest in foreign companies. ADRs are negotiable certificates that represent the shares of a publicly traded foreign company. ADRs are issued in the United States and their underlying shares are held in U.S. banks.

But familiarizing yourself with international markets (including the regulatory, political, and economic environments) is time consuming, and access to company information can be difficult to obtain. An easier way to invest internationally is to buy shares of broadly diversified international mutual funds or exchange-traded funds, which invest exclusively overseas, or global funds, which may buy a mix of foreign and U.S. stocks. These types of funds offer instant diversification through an array of foreign market stocks.

For more experienced and more aggressive investors wishing to target stocks in particular regions or countries, regional or country funds are also available. These funds are designed to take advantage of specific opportunities in the world's developed and emerging markets, but they do carry an increased risk of volatility.

International Investing

This chart compares the annual total return of the S&P 500 index (U.S. stocks) and the MSCI EAFE index (foreign stocks) for the calendar years from 1988 to 2017. 

Source: ChartSource®, DST Systems, Inc. For the period from January 1, 1988, through December 31, 2017. Stocks are represented by the S&P 500 index. Foreign stocks are represented by the MSCI EAFE index. It is not possible to invest directly in an index. Index performance does not reflect the effects of investing costs and taxes. Actual results would vary from benchmarks and would likely have been lower. Past performance is not a guarantee of future results. © 2018, DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions. (CS000176)


Special Risks of International Investing

International investing does present unique risks and considerations. A U.S. investor's foreign-investment return depends on both the local currency's exchange value against the U.S. dollar and the stock price in the local currency. For example, falling currency values and plummeting stock prices in Asian nations in 1998 not only drove down stock prices for international investors in Asia, but also in the U.S., because many American companies depend on Asia for customers. For U.S. investors, currency losses could also stem from a rise in the dollar's value against the currency of the foreign country they are investing in. In the past, currency fluctuations have tended to balance out over extended periods of time, although there are no guarantees this will always be the case. Maintaining a long-term perspective and diversifying international investments can help minimize these risks.

Domestic vs. Foreign Stock Performance

This chart shows when developed foreign markets (EAFE) outperformed or underperformed domestic markets (S&P 500) over trailing three-year periods.

Source: ChartSource®, DST Systems, Inc. Based on 36-month rolling periods from the period ended January 31, 1988, through the period ended December 31, 2017. U.S. stocks represented by the S&P 500 index. Foreign stocks represented by the MSCI EAFE index. It is not possible to invest directly in an index. Index performance does not reflect the effects of investing costs and taxes. Actual results would vary from benchmarks and would likely have been lower. Past performance is not a guarantee of future results. © 2018, DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions. (CS000173)

 



1Sources: DST Systems, Inc., World Federation of Exchanges. 2030 estimate based on the relative growth rates of the weights since 1975. Index performance is not indicative of the performance of a particular investment, and past performance does not guarantee future results. Individuals cannot invest directly in any index.

2Source: DST Systems, Inc. Based on total returns of the MSCI EAFE and S&P 500 indexes in U.S. dollars. The S&P 500 is an unmanaged index generally considered representative of the U.S. stock market. The MSCI EAFE is an unmanaged index generally considered representative of the international market. Index performance is not indicative of the performance of a particular investment and past performance does not guarantee future results. Individuals cannot invest directly in any index.

Content is provided by Wealth Management Systems Inc. as a service to Wells Fargo. Copyright © 2019, Wealth Management Systems Inc. All rights reserved.