Roads across the World: international trade and investment
Investing in international stocks – shares of companies located outside South Africa – creates diversification for your portfolio, which in turn hedges against risk and taps into growth in economies beyond our own. Given the vast amount of choice that currently awaits in global stock markets, it is generally considered a good move.
The value of international trade
- International trade is the exchange of goods and services between countries, and as such allows countries to expand their markets and access goods and services that otherwise may not have been available domestically.
- As a result of international trade, markets become more competitive, which ultimately results in more competitive pricing – and at the end game, reduces prices on products for consumers.
International trade and investment are critical drivers of economic growth. They support the long-term viability of companies, and are therefore important to a country’s prosperity.
- Participating in a global economy encourages opportunities for foreign direct investment in countries, thus contributing to more efficient growth of economies while enabling greater competitiveness, social development, and job creation.
A map of many roads
- If an investor wants real exposure to international stocks, they will look to invest in international funds and indexes.
- Investing internationally may help boost your returns by exposing your investment to favourable conditions such as progressive government leadership, tax incentives, and faster growing economies. However, keep in mind that stocks and bonds have different risk and return profiles in different countries.
- By investing in a different country’s companies, you’re also almost de facto investing in another currency. This creates opportunities of its own for growth, should these other currencies appreciate against the dollar.
- While some domestic index funds offer limited exposure to international stocks, this often doesn’t go far enough to ensure broad diversification.
- As companies continue to combine trade with investment to develop supply chains, expand in new markets, and access knowledge, etc – global value chains will ever sharpen interdependencies between trade and foreign direct investment.
- The old idiom applies – don’t put all your eggs in one basket. Owning a variety of stocks across different geographies, industries and sizes of companies, is a simple way to boost long-term investment returns while reducing risk.
The world and its risks
There are two major risks to investing in international stocks: currency and geopolitical. Put succinctly, this means beware of turmoil. Some countries may be liable to violent swings with regard to politics, economic uncertainty, foreign currency rates, corruption, or even war.
Currency Risk: If the US dollar becomes stronger against other currencies, your international stock could return a weaker performance.
Geopolitical Risk: The very same geopolitical conditions that may allow foreign companies to experience exceptional growth can leave your international holding vulnerable. In addition to political unrest or economic instability in a region, there’s also the possibility that an investment might experience limited liquidity – meaning that countries may limit foreign investors from withdrawing their money in times of crisis.
The Tax Turnup: Almost any investment sold for a profit outside of a tax-advantaged account will incur some level of tax. International stocks are no different. The country of origin of your stocks will likely retain a portion of your dividends for local taxes—or even charge a capital gains tax. While filing your home income taxes, you should receive a foreign tax credit or deduction for foreign taxes you have paid.
The importance of professional guidance
- As with all new investments, you should ensure a professional advisor is along for the ride. They can walk you through the tax issues and other implications of owning international stocks.
- Information is key to making the right decisions; always follow informed decision-making processes. A professional will assist you to preferably start small and scale up over time.
- Investors should continually re-evaluate their investment horizon, risk against returns preferences, financial goals, and level of risk tolerance, before investing in international stocks.
- Compliance with the exchange control regulations, reporting of foreign assets and income, as well as compliance within the country of investment, are crucially important aspects that require the valuable guidance of an experienced financial advisor.
Foster Wealth: steering business, driving wealth
At Foster Wealth innovation, agility and in-depth market acumen are our daily fare. The volatility of markets, unexpected events and fluctuating values continually take us to new levels of interest and possibility. Constant re-assessment and evaluation are how we keep ahead of the curve – but our hard work, professionalism, attention to detail and personal attention are the hallmarks of our business and will never change.
Find out more about us at: www.fosterwealth.co.za