Investing In International Stocks: What Are The Risks And Benefits?
The global market performance is currently experiencing a bullish trend with the S&P500 experiencing a 14% surge at the beginning of 2023 and Japanese stocks hitting a 33-year high, topping at 225 on the Nikkei index.
As an investor, observing the current performance of global markets might indicate the opportunity to broaden your investment horizons by considering international assets, a strategy commonly referred to as ‘global investing’.
But just like any form of investment, global investing does come with pros and cons. So, before you jump into the waters of investing in markets beyond Malaysia, we break down what global investing is about, what the benefits are, and the risk that comes with it.
What is global investing?
To put it simply, global or international investing is the strategy of investing in financial securities or assets in countries across the world for diversification, maximising returns and reducing your risk exposure.
While the first thing that comes to mind may be direct investments in foreign markets in the form of stocks, other options include exchange-traded funds (ETFs), mutual funds or even index and fixed-income funds.
Investing globally in different asset classes outside our own country allows you to gain exposure to sectors that are not available or underrepresented locally.
What are the benefits?
While investing in international assets might seem tricky, many benefits come with it. And as an investor, these are benefits that can add to your investment portfolio.
1. Diversifying your investments
This is the most crucial and obvious benefit of investing globally. A diversified portfolio can act as a stabilising force during market volatility. Spreading out your investments across different countries significantly reduces your risk, as an economic slowdown that happens in one country could only have a limited impact on your overall portfolio.
2. A wider range of investment options/opportunities
The beauty of investing globally is that you’re no longer limited to investment options within your country. Our Malaysian market may be well-represented if you want to invest in manufacturing and global services, but local investors may not have sufficient exposure to other areas like healthcare and information technology innovations.
For example, you can choose to invest in the US or Europe for technology, healthcare or pharmaceutical markets, engineering in Europe, or even Australia for commodities.
3. More potential for growth
Growth potential is another unique benefit that comes from investing in international assets. Different sectors and industries are in various stages of growth globally and opportunities arise by entering the market at the right time. Through global investing, you can potentially capitalise on profits and high returns from growing markets, including countries that are emerging economies or recovering from recession.
4. Protection against fraud and market abuse
One overlooked benefit of global investing is the added layer of protection that you get for your investments against fraud and liquidations. Companies in developed countries often operate under stricter regulations have sound corporate governance and are heavily penalised for market abuse.
What are the risks?
Of course, with any financial decision, there are always risks involved and global investing is no exception. The difference is that, as an investor, you face certain unique risks that come with investing in assets internationally.
1. The transaction costs might be higher
Depending on the country that you’re investing in, you could face additional costs for FX conversion charges, transfer fees, and even maintenance fees, on top of brokerage commissions. Certain foreign markets, such as US markets, are highly liquid with many market participants, resulting in lower transaction costs.
2. Currency risk and volatility
Investing in foreign markets means that you must convert from Malaysian Ringgit to a foreign currency.
Depending on how the domestic currency of your market is performing, this can either be a risk or a benefit. An example would be buying stocks in the foreign market and selling them after a year, only to end up with losses due to negative currency movements. But the opposite can be true as well.
3. Political instability within the region
A factor that you need to consider before investing in any foreign market is to understand what the country’s geopolitical climate is. Political instability can negatively affect the domestic market, which in turn, can affect your investments as well.
4. Lack of access to information and insights
Research is always necessary before investing in any stocks, assets, or investments, but it gets even harder when you’re trying to gather information from foreign markets that you’re not familiar with.
There may be layers of complexity that you need to deal with such as language, customs, currency, creating accounts, and on top of that, trying to decipher the correct information needed to make the right investment decision.
The right investment platform should provide you with the latest news affecting your investments.
How to start investing in international assets
If you are ready to go global with your investments, where do you start? Why not enter the most highly sought-after investment markets – US stock markets including the New York Stock Exchange (NYSE) and Nasdaq.
On these markets, you can find well-known US companies, such as Tesla, Apple, Microsoft and McDonalds. There are over 10,000 stocks and ETFs listed on US stock exchanges, meaning there are many opportunities to expand your investment horizon.
Through ETFs offered on these markets, Malaysian investors can also invest in global markets. For example, the iShares MSCI Japan ETF (ticker: EWJ) and Global X MSCI Vietnam ETF (ticker: VNAM) provide diversified investment exposure to Japanese and Vietnamese companies, respectively. As these ETFs are traded in US dollars, investors can avoid having to convert their Malaysian Ringgit to multiple currencies.
There are also ETFs that track specific commodities, such as iShares Gold Trust (ticker: IAU) and ETFs that are specific to certain industries, such as Vanguard Information Technology ETF (ticker: VGT). Should you want to invest in asset classes such as fixed-income funds, look for ETFs like iShares Interest Rate Hedged Long-Term Corporate Bond ETF (ticker: IGBH).
As you can see from above, there are many investment opportunities to consider on US stock exchanges but make sure you do your research and invest at your own pace.
You can directly invest in the US using a Malaysian brokerage that is regulated by local authorities. Doing so protects your investments, so you can sleep well at night. Even better if the local brokerage comes with competitive rates, user-friendly apps, the latest company news and professional-grade analytics, such as MIDF Invest.
MIDF Invest does not impose any minimum deposits and caters to sophisticated and new investors. It even has an option for Shariah investors. For as low as RM 150, a new investor can purchase a Shariah ETF that tracks the S&P 500 and best of all, brokerage fees for such purchases are waived for new account holders.
Once you understand the risks and benefits that come with any form of investing, it is now easier than ever for you to achieve the right mix of domestic and international assets through platforms such as MIDF Invest.
Just follow the app instructions to open an account, transfer funds and buy stocks. It takes less than a day to set it up online and don’t forget to enjoy the introductory pricing for new accounts when you start trading.