Traditionally, most American investors have invested in American companies. But in today’s global marketplace, investors who stay strictly focused on U.S.-based investments may be missing out on opportunities for higher returns. Stocks in some international markets pay much higher dividends than those in the United States, and bond yields in some international markets are much higher than those here, says Aaron Katsman, a financial advisor, blogger and author of “Retirement GPS: How to Navigate Your Way to a Secure Financial Future with Global Investing.”
“The conventional wisdom is just to invest in America,” says Katsman. “But there’s a whole world out there of opportunity, and it’s like putting your head in the sand to ignore it. The world has changed. There are countries competing against the United States and doing well, and smart investors will take advantage of it.”
Americans investing in foreign equities can purchase stocks through a local exchange or by an American Depository Receipt, shares in foreign companies that are deposited in U.S. bank accounts. Other options are to purchase international mutual funds or exchange traded funds (ETFs) in a specific geographic region. To find an ETF in the country of your choice, search the ETF database. If you’re ready to get serious about investing internationally, here are five regions worth a look.
Silicon Valley isn’t the only place to find promising high-tech stocks. The Middle East, particularly Israel, has become a hot location for companies seeking ingenuity and creativity, Katsman says. Many of the latest innovations, such as computer firewalls and smartphone technologies, have come from Israel.
“Israel is a bastion of technology,” Katsman says, adding that most of the U.S.-based major players in the high-tech industry, such as Microsoft and Intel, undertake research in Israel and are known for buying up innovative Israeli companies. In fact, Israel is home to more stocks that trade in the United States than any other country except China.
“A lot of smart money has been investing in Israeli technology,” Katsman says. “For instance, the biggest investment Warren Buffett ever made outside the United States was in an Israeli company.”
The middle class is exploding across Asia, and all projections are that there will be a mass transfer of wealth from the west to the east, Katsman says. That means it may be a good time to invest in Asian companies.
Traditionally, Asian economies have been known for exporting electronics, but as the middle class has grown, those economies have become more localized and consumer driven. “They are no longer relying on exports to the United States and can be more self-sustaining now,” Katsman says. While countries across Asia are experiencing economic growth, Katsman especially recommends taking a look at Hong Kong, South Korea and Singapore.
Hong Kong, the second largest financial center in Asia, is “looking promising for stock market investors,” says Peter Pham, managing director of AlphaVM Securities. “It has been the most attractive free trade zone in Asia and is financially trading with the biggest countries in the world.”
Additionally, Hong Kong’s tax rates, which are much lower than other financial centers in Asia and globally, appeal to investors, Pham says. For instance, Hong Kong offers zero withholding tax for local and foreign investors, while the United States charges a dividend tax rate of 15 to 40 percent. “Hong Kong is a gateway for investors to invest in other Chinese markets, as many of these companies are publicly traded as H-Shares on the Hong Kong exchange and traded in Hong Kong currency,” Pham says.
With one of the largest populations in the world, China promises huge potential for mass consumption. For investors looking to invest in consumer products and services, the “sheer population” of China is an important factor to consider, Pham says. “If even one product was purchased by each Chinese household, it would generate over a billion unit sales.”
Not only does China offer a large population, but also its largest city, Shanghai, recently became a free-trade zone. This means Shanghai “will allow foreign companies to invest freely into banks, shipping ventures, travel agencies and medical health insurers,” Pham says. “Also, restriction will be taken off in some telecommunications services and on the production and sale of video game consoles. Foreign investors will easily move capital into and out of China.”
While the new free-trade zone makes China more attractive to investors, it also serves as an example that “even developed countries also change their policy and method of trading frequently,” Pham says. While such regulation changes often serve to make the country more investor-friendly, foreign investors are wise to continually monitor government reforms and policy changes.
Very quietly, Brazil is about to become the fifth-largest economy in the world, Katsman says. The South American country is “loaded with natural resources and filled with young people,” he adds. “Brazilian government policy has enabled a lot of entrepreneurship with lower taxes, and there are a lot of people making a lot of money.”
While Brazil offers great investment opportunity, it remains an emerging market that requires careful research. “It’s a really interesting time to get into the Brazilian market, but it’s very much two steps forward and one step back,” Katsman says. “Investors should be warned that there is volatility when you invest in these markets.”
Europe’s economic woes have been widely discussed, but that doesn’t mean investors should write off the whole continent. “I’m not overly optimistic about Europe in general, but European markets are slowly coming out of the recession, and there are a lot of opportunities,” Katsman says. “There are some European companies that pay higher dividends than U.S. markets that are very interesting.”
Over the past several months, the United Kingdom has been “the star” in Europe, with a strong currency and intriguing economic prospects, Katsman says. Germany is another strong leader worth considering.
When looking to invest in Europe, keep in mind that the individual company is more important than its location. For instance, “Spain is in bad shape, so investors want to stay away, but just because a company is domiciled in Spain doesn’t mean they do all their business there,” Katsman says. He notes that one Spanish bank conducts 80 percent of its business in Latin America, pays dividends around 10 percent and has continued to pay those dividends throughout the entire recession.