4 reasons to invest outside of the USA

Overseas investments have dwindled in the US market since the middle of the last decade because of the success of the home stock market. However, recent events like the ongoing Ukraine war and the high inflation in the US have encouraged investors to reconsider the international market.

If you are still on the fence, here are four primary reasons why you should consider putting your assets outside the state.

Diversification to reduce risk

Diversifying your investments is one of the main reasons investment experts recommend overseas investments. Doing so reduces the risk of your assets being affected simultaneously by a single market fluctuation. If you spread your money across various markets and industries, you are more likely to be protected against wide swings in one market.

For example, following Russia’s invasion of Ukraine earlier this year, the Russian Stock Exchange plunged to a record low. Overnight, investors who only invested in the Russian stock market lost more than 40% of their wealth. However, investors who had diversified into other markets were relatively unaffected by the local market crash because the Russian Stock Exchange accounted for a trivial percentage of their portfolio.

There is no denying that the stock market can be unpredictable. No market is better or more stable than another, and inflation in most western countries only contributes to the uncertainty. By investing in global markets, you can protect your assets from internal and regional factors that may threaten the success of your portfolio. Additionally, it allows you to generate cash flow in other currencies, further reducing risks.

Huge overseas market

International markets are too big to ignore, which is another reason to invest overseas.

The United States stock market may be the largest in the world, but it only makes up less than half of the global market. The number of US investable securities has declined over the past 20 years, and at the same time, the number of investment opportunities outside the US has grown substantially. As a result, 80% of today’s investable securities are foreign-issued. If you only invest in US stocks, you’re missing out on a large piece of the pie and limiting your alpha potential.

Since the 1990s, developing countries’ markets have experienced significant economic growth, with new industries and businesses emerging. Business leaders in developing countries, like BH Holding Group’s Bassim Haidar, Grupo Petropolis’s Walter Faria, and Alibaba’s Jack Ma, are creating innovative business models and contributing to some of the world’s fastest-growing and most valuable markets. Because of this, overseas markets offer better opportunities to invest in successful companies. If you invest entirely in the local market, you are limiting your success to the performance of your local economy and the companies listed on your local stock exchange.

High growth rate abroad

The US market may offer some benefits to home investors, but it cannot compete with some other countries’ high growth rates and investment opportunities.

Many merging economies are expected to grow up to two to three times faster than those in currently developed markets. Over the next five years, US GDP is expected to grow at a slower rate of 1%-3%, while many non-US economies are predicted to expand more rapidly. Corporate revenues grow faster in countries with high growth rates, which makes countries like China attractive investment destinations. 

Additionally, because of the strong performance of US stocks over the past decade, “buying low and selling high” has become nearly impossible.” At the moment, only a bottom-up, disciplined stock selection strategy can potentially lead to higher stock returns in the US, while outside the state, there is more room for valuation expansion. Overseas investors can position their portfolios to perform well in the long run by identifying investments that are trading at a discount to their value.

Currency benefit

You can also benefit from trading in different currencies when you invest in overseas markets. It makes sense to diversify your investment portfolio as the fear of the US dollar weakening spreads. If the US dollar falls, people who invest in international share funds will profit as the value of international assets in US dollars increases.

Foreign currency hedging, however, comes with some risks. The returns for investors might not look so good if the US dollar rises. It is because any losses or gains with currency must be converted back into US dollars, which is the risk of investing with foreign currency.

You can further mitigate risk by following this rule of thumb. It is better to always hold your investments in a recognised currency because a weakening currency threatens your wealth when you invest globally.