Capitalizing on a growing global economy
Four reasons you may want to invest in this expanding marketplace
One of the notable trends in 2017 was that for the first time since the Great Recession, virtually all economies around the world enjoyed synchronized global growth. This is one of several reasons investors have increasingly turned to international stocks and bonds to diversify their portfolio over the long term.
If you are wondering if overseas markets should be a part — or an increased part — of your diversified portfolio, here are four considerations to keep in mind.
1. Non-U.S. markets make up a growing portion of the world’s economy: The U.S. is still the largest economy in the world, representing about one-quarter of total global GDP, according to the International Monetary Fund. Yet emerging markets, including countries with much larger populations such as China and India, represent more than 50 percent of global GDP. This may
represent significant investment potential.
2. Growing economies lead to an emerging middle class: For the past generation, an important economic story has been the ascendance of the emerging global middle class. Improved economic prospects for millions of people across the globe continue to generate a new wave of consumers and business growth. Additionally, established companies in the U.S. and overseas are capitalizing on the burgeoning numbers of consumers and businesses. This rapid growth may create the potential for attractive investment opportunities in other markets.
3. Overall stock value is still skewed to the U.S.: U.S. stocks still draw more attention than any other part of the market. For example, their value makes up more than half of the total value of the Morgan Stanley Capital World Index of 23 developed markets. However, the influence of emerging markets is growing. As non-U.S. economies continue to become more prominent on the world stage, more investment dollars may flow into their equity and fixed income markets.
4. Global investments can help diversify your portfolio: A risk of having all your money invested in U.S. stocks and bonds is that when markets move in a negative direction, your portfolio will be significantly exposed to the potential for losses. For example, if interest rates in the U.S. begin to trend higher, it could create a challenging environment for domestic bonds. However, that doesn’t mean the same trend will be happening in all overseas markets. There may be attractive opportunities in bonds issued by foreign governments or corporations. The same is true of equity markets. As markets move up and down, there could be times when the U.S. market may perform better than overseas markets, and vice versa.
If you haven’t sufficiently incorporated global investments into your own portfolio, this may be the time to explore it further. There are risks to consider, such as currency fluctuations, which can impact the net return you receive on investments in overseas securities. Purchasing individual securities may be more challenging on a global level than it is when you focus on U.S. investments.
For that reason, a good alternative for many investors may be to utilize mutual funds or exchange-traded funds that invest in broad global markets or specific segments of them. Talk to your financial advisor to determine whether you might be able to capitalize on this expanding piece of the investment marketplace.
Bob Bonfiglio, a private wealth advisor and managing director with Rise Private Wealth Management, Bedford, can be contacted at 603-606-4255