There are many ways to invest in overseas markets, from stocks and mutual funds to foreign direct investments. Foreign direct investments (FDIs) are investments made by a firm or individual in one country into a company or company’s assets in another country. These investments can come in several forms, including voting stock in a foreign company or a merger-acquisition. Investing in the right overseas market or foreign company can produce big returns—and help in the economic and political relations with these countries, as well as their development.
Where do investors put their money, and how do they decide where to invest? For the ninth consecutive year, the U.S. has topped the list for the most foreign direct investments, according to the 2021 Foreign Direct Investment (FDI) Confidence Index by AT Kearney. While it’s a success for the U.S., the survey shows that investors still stick to highly developed countries. It also shows a higher percentage of investor caution due to the pandemic and other political and economic issues.
Overseas markets are loaded with opportunity, but for many investors, risk and fear of the unknown still outweigh the intrigue of global investing. Many may stick to a few tried and true markets, however, with the right knowledge and timing, reaching outside the norm of international investing can bring back big returns.
There are many things to consider when looking at foreign equities or foreign firms, including:
Knowing how to compare and contrast those elements is crucial in deciphering which overseas markets are worth it—and which ones you should steer clear of.
First, the politics of the country should be considered before investing in that country’s stock market or making an FDI. If a country has a relatively new form of government—or experiences quick growth, but the institutional changes haven’t caught up—then that is an area to avoid.
Another element to consider is the political risk. Think BREXIT or a civil war. Changes in public policy, corruption, and revisions in codes and regulations are all things that should be researched as well as avoided.
While it is impossible to prepare for all political and economic risks, the more you know about them, the more you can predict how they may impact the next consideration: area of investment.
The area of investment (e.g., consumer goods or natural resources) should be highly researched before making an investment. First, understand how different industries are impacted by events in that country. Oil, gas, and mining have the highest risk of being affected by political events, as do many other utilities. Tourism is another industry affected by political events and, most glaringly, viral pandemics. Foreign companies that are less affected by outside forces such as politics or the environment are a much better idea. (It is also important to look at the repatriation rules and whether or not you can get your money out.)
Due to discounted share prices and Biden’s trade-friendly policies, foreign equities in various industries show potential. Experts Jeremy Schwartz of WisdomTree Asset Management and Bryon Lake at J.P. Morgan Asset Management recently told CNBC’s “ETF Edge” that emerging markets may outperform U.S. stocks in the future. They positively cite technology (particularly in China), clean energy, luxury goods, and other areas of investment as potentially rewarding. However, you do not have to put all your eggs in individual baskets, as foreign ETFs can help diversify across a range of industries and stocks.
Knowing the culture of the country is just as important as knowing about its politics and economy—it can save you a lot of trouble and money. For example, some cultures accept lying to save face, and some have negative attitudes toward foreigners and foreign investors. Before investing in overseas markets, especially in the form of an FDI, it could be worth hiring a team that has local expertise—or simply investing in a mutual fund. As a sole investor living in your host country and investing in another, it is very hard to understand the cultural intricacies and fine print like a local.
The regulatory environment of a country is a major factor for many investors. Regulations that are conducive to businesses, as well as trusted and effective governance, will attract more investors. It’s no coincidence that programs like SelectUSA, which makes foreign direct investments more accessible, create a competitive advantage and place the U.S. as the top destination for foreign investors. Some countries have more restrictive trade, tax, and technology regulatory policies that can place a barrier on foreign investors and even limit their ownership in foreign companies and specific foreign industries.
Today’s investors, as reported in the AT Kearney survey, are looking at tax and data regulations in their investment countries. With a reliance on cross-border data flow for their operations, investors in foreign businesses report that data restrictions can have a significant impact on FDI, and compliance with these regulations can be costly. Many are also concerned about how data ‘nationalism,’ or actions by countries to maintain control of their data, can affect investments.
Before investing in overseas markets or directly in a foreign company, you should have a strong understanding of the company’s infrastructure and labor force. Does the country have an infrastructure in place to deal with and rebound from economic or political issues? Does the country have the technological infrastructure to remain competitive with other developed or developing countries?
When researching foreign investment opportunities, you should also examine the country’s unemployment rate, as well as the availability of skilled workers in a particular field or industry. Is there a stable and strong workforce behind the foreign companies you are investing in? And, what are the costs of labor and transportation of goods or services?
In the last few years, the countries that have continued to attract foreign investments—excluding the U.S.—include:
This is, of course, not a comprehensive list of all popular overseas markets or destinations for FDIs. Overall, most countries that continue to benefit from foreign investments are highly developed economies, like those in the EU or North America. However, as China, Brazil, India, and other developing and emerging economies gain popularity, it is clear that you don’t have to stick with Europe to find big success. In fact, investors are looking to places like Thailand, Vietnam, Chile, Colombia, and more to diversify their portfolios and increase their returns. It is possible to find smart investments in less-tapped overseas markets—but only if you perform the right due diligence.
By following the practices outlined above, thoroughly researching, and knowing what level of risk you are willing to take, investing overseas can serve you and your portfolio very well moving forward.
©All Rights Reserved. April 2021. DailyDACTM, LLC d/b/a/ Financial PoiseTM
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