Investing overseas can seem like a big step financially, especially if you’re looking at markets in which you have no experience. While investing overseas does come with a different set of economic, legal and political risks, there are also a range of benefits such as wider market exposure.
To minimise the risks of investing overseas and maximize the potential profits, it’s essential to do your research before committing your finances overseas.
Let’s have a look at the potential advantages that becoming an international investor and investing overseas could bring you:
1. Exposure to larger economies
Australia’s economy is the 13th largest in the world, but our gross domestic product only makes up about 1.7% of the world’s economic output, so investors who only operate within the country are only open to a fraction of the economic possibilities that are out there today. The U.S.A., China, Japan, Britain and Germany hold the globe’s five largest economies and could provide a wealth of opportunities for investing. Most large economies are developed markets and thus more stable, making them the safest destinations for investment, although you may not experience the high growth rates that can come from investing in emerging markets.
2. More opportunities
Investing overseas will allow you to explore opportunities that aren’t available in Australia. Every country has its own core industries, making it difficult to get involved in different types of business unless you invest internationally. A whole host of major companies and industries are based overseas, and keeping your portfolio within the country means that you miss out on profiting from all these investment opportunities worldwide. Investing overseas also gives you the chance to take advantage of beneficial stock performance in various markets.
3. Diversified investment portfolio
Investing overseas is a great way to diversify your portfolio. While it initially seems risky to invest in other countries, it can actually be more of a problem to put all of your eggs in one basket and only invest within Australia. Any economic problems that come up within your local market may not affect other countries, leaving you with stocks or other investments that are unharmed. It’s extremely important to diversify between countries too; never put all of your foreign investments into just one region as this makes you vulnerable to political and economic issues.
4. High growth rates
Australia has a stable economy and thus has relatively small growth rates, whereas investing abroad allows you to choose which markets you want to get involved in. Emerging markets, such as China, India and Brazil can be riskier options for investment as the economy is less stable, but there is also greater potential for growth, especially fast growth. Frontier markets are smaller than emerging markets, but they also offer huge growth potential, especially if they develop into emerging markets. Argentina, Kenya and Slovenia are some examples of frontier markets. Emerging and frontier markets are not just risky due to under developed or volatile economies, but can also present significant political risk, as many developing nations have unstable political situations, that can significantly impact on investments.
5. Different currencies
The value of currencies fluctuate all the time and even a strong currency can take a dip. Investing in a country with a stronger currency than the Australian dollar can really amp up your finances, without affecting your entire income if that currency were to fall in value. Working with several currencies can also provide inflation protection, so that if the purchasing power of the Aussie dollar were to go down, you would have access to income in another currency as back up.
In this article, we looked at how to manage foreign currency risk when investing in overseas property.
How to get started investing overseas
There are several pathways to overseas investment;
- you could invest in Australian companies that have operations abroad;
- purchase shares in overseas based companies listed on a foreign stock market;
- invest in a managed or index fund or an Exchange Traded Fund (ETF) that is internationally focussed; or
- invest in overseas property
The key factor in doing anything abroad is always research, and this is especially important when it comes to your finances. Countries have different economic regulations, investment laws, tax systems, currency risk levels, political climates and so on. There are many variables that you need to be familiar with, which you may not have needed to consider before when focussed on only investing in Australia, and the tax treatment of overseas investments may be different to investing in Australian assets. But if you’re willing to put in the legwork to research your investment opportunities, the potential rewards can be well worth the effort.
Disclaimer : This information is for educational purposes only and does not constitute financial or taxation advice. As this information is not advice and has been prepared without taking into account your objectives, financial situation or needs you should, before acting on this information, consider its appropriateness for your circumstances. Independent advice should be obtained from an Australian financial services licensee before making investment decisions, and a registered (tax) financial advisor/accountant in relation to taxation decisions. To the extent permitted by law, we exclude all liability for any loss or damage arising in any way.