Monday 11 February 2019 7:16 am Interactive Investor Talk

International Investing – the whys and wherefores

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In 1926, engineer, inventor and philosopher Nicolas Tesla, said “"When wireless is perfectly applied the whole earth will be converted into a huge brain. We shall be able to communicate with one another instantly, irrespective of distance… and the instruments through which we shall be able to do his will be amazingly simple compared with our present telephone. A man will be able to carry one in his vest pocket."

This thinking was carried on in 1964 by Canadian professor Marshall McLuhan, who coined the term “global village”.

Unfortunately, in the UK in particular, investors did not get the memo.


A recent survey by Charles Schwab found that for retail investors, “home bias” – investing more in one’s home nation rather than overseas, usually because of familiarity – is more pronounced in the UK, where three out of four invest at home, only 7% intend to make significant investment in the US and this is despite the UK market accounting for 6% of the global market. This compares to 54% of the global market being attributable to the US, Europe (ex-UK) 19% and emerging markets 13%.

The list of the top five global brands gives a stark reminder of why to consider investing overseas (incidentally, the UK does not enter the list until number 37, in the form of Vodafone).

  Brand Category Country
1 Google Technology US
2 Apple Technology US
3 Amazon Retail US
4 Microsoft Technology US
5 Tencent Technology China

Source: “BrandZ” rankings – Kantar Millward Brown – July 2018

The US is dominating this list, unsurprisingly, largely because of the success its technology companies are enjoying.

In addition, there are other compelling reasons to be taking a global view. Quite apart from different economies moving at different speeds at any given time, the generally accepted wisdom of diversification does not just apply to sectors, but to geographies as well.

Currency risk is a factor to be borne in mind when investing overseas. Additionally, depending on the jurisdiction, there may be limited to access to a given stock market for individual investors, corporate governance may not be developed to the same degree as in the UK or US (although several funds are beginning to address this in their investment requirements, with Environmental, Social and Governance (ESG) becoming an increasingly important theme).

It is also possible to have international exposure indirectly.


For example, it is estimated that around 70% of earnings for FTSE100 companies come from overseas, which is of course one of the reasons why the recent strength in sterling has not been good news for the FTSE, as overseas earnings lose some of their value. Naturally the reverse largely applies also, but quite apart from this any number of FTSE100 have operations (and therefore profits) largely focused abroad – quite apart from the more obvious mining and oil stocks, think tobacco, HSBC, Prudential and so on.

There is also the world of Exchange Traded Funds, or ETFs, which these days means that an investor can slice and dice investments in many ways, such as by index, by country, by sector or by region. This gives the additional benefit of being specifically exposed to a theme in which the investor believes, without necessarily having to drill down into individual stocks.

And finally

One small practical consideration is that for an investor wishing to invest in US shares, a form known as W-8 BEN needs to be completed once every three years. This is a US tax document which allows UK residents to invest and hold US stocks and shares free from withholding tax.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

 

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