Many investors are worried about the declining position of the United States in the global economy. The dollar has been on a long-term downtrend, federal budget deficits and international trade deficits keep going up, and the country has lost many of its basic industries to overseas competitors. While disconcerting, these trends offer plenty of opportunity to an investor because their ability to invest outside of the domestic market has increased greatly over the last 30 years. Plus, foreign investing offers diversification that can smooth out returns: 97 percent of the world’s population and 75 percent of economic production are outside the United States.
The globalization of finance has opened up dozens of foreign stock and bond markets, from big and established to small and emerging, to outside investment. There are now thousands of international stock and bond mutual funds offering investors a low cost and efficient instrument for international investing. Domestic investors can profit off of the weak dollar just by purchasing foreign stocks or bonds. If foreign currencies rise in value vis-à-vis the dollar, then the domestic investor’s foreign holdings become more valuable in U.S. dollars. The U.S. domestic investor makes money on the deal, and the money is denominated in the currency he will use to buy goods and services, that is, the dollar.
But that’s not the only reason to invest abroad. Growth prospects are different country to country and many economists predict that a number of emerging economies will continue to grow at a faster pace than a mature economy like ours. The Brazilian stock market, for instance, gained almost 83% during 2009.U.S.investors who put money into Brazil did even better, because the U.S. dollar declined in value against the Brazilian real. A U.S. investor who owned the Brazilian Bovespa index last year gained 145 percent in U.S. dollar terms.
Successful investing in foreign markets often hinges on two factors: commodities and economic growth. A commodity-poor country like China or India that is rapidly industrializing can offer plenty of growth potential. Meanwhile, commodity-rich countries like Brazil and Russia offer investors the chance to profit from rising prices on oil, minerals, and even agricultural products. Also, other opportunities exist, even in mature economies in Europe or Asia. Europe got a boost 10 years ago when the euro was adopted and the region’s economies were more tightly linked. Japan’s economy, which has been in a slump since the late 1980s, is finally showing signs of life and may be growing again.
Stocks are not the only foreign investment opportunity: all governments issue bonds and many foreign companies do as well. Investors can benefit from the difference in interest rates from country to country. Investing directly in foreign securities can be expensive due to higher fees and taxes. The best way to approach foreign markets is through large pooled investment funds such as open-end mutual funds or electronically-traded funds, also known as ETFs. They provide diversification and handle all the details involved in dealing with different markets.
