Should you invest primarily in the UK or around the world? Whilst there are advantages to investing at home for UK investors, neglecting assets overseas can bring needless risks and opportunity costs.
In this article, our Teesside financial planners offer four reasons to consider investing in a globally-diversified portfolio – tailored to your unique financial goals and situation.
Please contact us for more information or to speak with a financial adviser:
t: 01228 210 137
e: [email protected]
#1 Enhanced return potential
There are opportunities in overseas markets which simply may not be available at home.
At certain times, the UK may be experiencing slow economic growth compared to other regions and countries. In 2023, for instance, the UK has the highest inflation rate in the G7 and its gross domestic product (GDP) in the first quarter was 0.5% lower than pre-pandemic levels.
The Eurozone’s GDP, by contrast, was 2.2% higher and US GDP was 5.6% higher. Inflation in the latter is also now 3% – far lower than the UK, which was recorded as 7.9% in June.
Whilst economic performance does not necessarily guarantee good market performance, expanding business activity usually increases valuations and leads to stock market gains.
By investing in many regions and countries, investors can still access growth opportunities around the world, even if the UK market may be struggling.
#2 Inflation hedging
One of the big headlines about the UK in 2023 is its stubbornly high inflation rate.
Inflation can be a headache for investors because it both undermines their “real” returns but also can impact on the performance of their investments. For instance, suppose your UK equity portfolio grows by 6% in a given year, but at the same time inflation stands at 4%. Here, the real return (excluding taxes and fees) would be just 2%.
Other countries, however, may experience lower inflation rates – helping companies and consumers within them to trade with greater confidence. The US, for instance, is looking quite attractive right now to many investors due to its latest 3% inflation rate.
However, UK investors’ real returns can also be affected by currency exchange rates. For instance, if the US dollar strengthens against the British pound, it becomes more expensive for UK investors to buy US equities. The value of their existing US shares, however, may go up.
Balancing inflation, currency exchange and related factors can be a challenge to manage alone as a UK investor. Consider seeking financial advice to navigate this area of global investing more confidently and effectively.
#3 Liquidity benefits
The UK markets are only open at certain times of the day. For instance, the London Stock Exchange (LSE) is open Monday through Friday from 8:00 am to 4:30 pm. If you want to buy or sell British funds or shares outside of those hours, you will need to wait.
With a globally-diversified portfolio, however, overseas markets may open and close at different times. The New York Stock Exchange (NYSE), for example, operates at a 5-hour time difference. Between London and Hong Kong, there is a 7-hour time difference the other way.
This can all add up to increased liquidity for investors, allowing for continuous access to investment opportunities.
#4 Risk mitigation
Perhaps one of the biggest advantages of global investing is diversification. Having investments in multiple parts of the world helps you to reduce the investment risks associated with each one.
Each country, region and asset class can experience its own economic cycles, market conditions and geopolitical events. For example when US stock markets are performing poorly, more positive economic news in East Asia could be boosting performance of those assets. By spreading your risk across many markets and industries, you can minimise volatility in your portfolio and mitigate the impact of downturns.
However, care still needs to be taken when investing globally. After all, 60% of the world’s stock market capitalisation is based in the US. If there are issues in the US stock market, therefore, these are still likely to disrupt globally-diversified portfolios (“When the American market sneezes, the world catches a cold”).
This highlights the importance of taking a long-term perspective when building a portfolio. Having investments both in the UK and overseas is not a panacea to market volatility. However, a robust global strategy can help investors better weather the storms.
Invitation
If you would like to discuss your financial plan and retirement strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
e: [email protected]
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.