When the UK voted to leave the European Union in June 2016, it had one very obvious and dramatic effect – the drop in the value of sterling. Whatever your view on Brexit or its potential long-term disadvantages and advantages, the immediate impact on investors (sterling’s collapse) was pretty clear.
To some extent, UK investors were insulated from these economic challenges. Weaker sterling pushed up earnings for international companies and helped exporters. More than 70% of FTSE 100 profits are generated outside of the UK and over the past ten years this index has produced an average annual total return of 6.5%.
The FTSE 250 index has also performed particularly well, returning 8.3% over the past ten years on a total return basis. These figures suggest investors have seen real annual returns of 4.7% and 5% per annum respectively.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
But even these figures pale in comparison to the rate of return UK investors would have been able to achieve investing in US stocks. An investment of £1,000 in a low-cost S&P 500 tracker fund would have grown at a compound annual rate of 15.6% over the past ten years thanks to a combination of the stronger US equity market performance and sterling’s devaluation.
Why am I bringing up this example right now? Because I believe it clearly illustrates why investors need to have some exposure to international markets, regardless of how comfortable they are with their home market. Too much exposure to a home region can bring unnecessary risks – the immediate effect of Brexit being an excellent illustrative example.
The outcome of the referendum was unknowable until the day after it happened. And once the results came through, investors had little or no time to re-position before the pound slid.
We had a similar event earlier this year. In the space of a few days the outlook for European economies deteriorated rapidly overnight when Russia invaded Ukraine. High oil and gas prices are sucking money away from energy importers to exporters (the UK is relatively self-sufficient in this respect with around half of its natural gas consumption coming from the North Sea), causing pain around the world. This only adds weight to the diversification argument.
It does not pay to have all of your eggs in one basket
The aim of international diversification is not necessarily to try and bet which country is going to succeed or fail over the next decade. Trying to predict these sorts of macroeconomic events is almost impossible.
One of the greatest advantages private investors have is the fact that we can invest anywhere in the world, in any opportunity where we believe there’s money to be made. And some countries do things much better than others.
While the UK might be a science and pharmaceutical superpower, America clearly has the edge when it comes to global technology giants. The US market is dominated by technology companies while one of the biggest sectors in the FTSE 100‘s resource stocks. There are also attractive opportunities in Europe in the pharmaceutical sector and luxury goods. Meanwhile, there are far more semiconductor manufacturers listed in Asia than there are in the West.
There is far more to international investing than just trying to pick which countries will succeed or fail over the next five or ten years. It’s really about picking the best companies in the world. If they are part of an economy that happens to outperform the rest of the world, then that’s an added bonus.
If I have to choose between picking the best tech company in the world listed in the US and the second-best in the UK, why would I pick the second best? It does not make any sense.
However, I would caution against international diversification for international diversification’s sake. For example, there’s really no sense in buying Brazilian stocks just because I have too much exposure to North American equities. The most important part is finding the right opportunities.
I personally wouldn’t invest in any South American markets because I’m not comfortable with the level of protection given to international investors, though you may differ. Instead, I focus on finding the best companies in markets I understand, mainly Europe, the UK and North America.
The barriers to entry are always getting lower
The barriers to international investing are no-longer as high as they once were either. Most online stockbrokers now offer international equity dealing for the same price as UK stocks and shares. A few are holding onto antiquated ways of charging over the odds for international deals, but with so much choice on offer, investors don’t need to use these brokers.
And if you’re not comfortable picking stocks in other markets and currencies, there’s always the option of buying an index tracker fund or investment trust with international exposure.
Rupert was the former Deputy Digital Editor of MoneyWeek. He's an active investor and has always been fascinated by the world of business and investing.
His style has been heavily influenced by US investors Warren Buffett and Philip Carret. He is always looking for high-quality growth opportunities trading at a reasonable price, preferring cash generative businesses with strong balance sheets over blue-sky growth stocks.
Rupert has freelanced as a financial journalist for 10 years, writing for several UK and international publications aimed at a range of readers, from the first timer to experienced high net wealth individuals and fund managers. During this time he had developed a deep understanding of the financial markets and the factors that influence them.
He has written for the Motley Fool, Gurufocus and ValueWalk among others. Rupert has also founded and managed several businesses, including New York-based hedge fund newsletter, Hidden Value Stocks, written over 20 ebooks and appeared as an expert commentator on the BBC World Service.
He has achieved the CFA UK Certificate in Investment Management, Chartered Institute for Securities & Investment Investment Advice Diploma and Chartered Institute for Securities & Investment Private Client Investment Advice & Management (PCIAM) qualification.
Should you invest in sector funds?
Sector funds can be a useful way to fine-tune a portfolio or track a theme, but check what the index holds.
By Cris Sholto Heaton Published
What is the future of Royal Mail in the UK?
With fewer of us sending letters and parcels, the Royal Mail is finding dealing with the nation’s post is an increasingly unprofitable and costly business.
By Simon Wilson Published
Halifax: House price slump continues as prices slide for the sixth consecutive month
UK house prices fell again in September as buyers returned, but the slowdown was not as fast as anticipated, latest Halifax data shows. Where are house prices falling the most?
By Kalpana Fitzpatrick Published
Rents hit a record high - but is the opportunity for buy-to-let investors still strong?
UK rent prices have hit a record high with the average hitting over £1,200 a month says Rightmove. Are there still opportunities in buy-to-let?
By Marc Shoffman Published
Pension savers turn to gold investments
Investors are racing to buy gold to protect their pensions from a stock market correction and high inflation, experts say
By Ruth Emery Published
Where to find the best returns from student accommodation
Student accommodation can be a lucrative investment if you know where to look.
By Marc Shoffman Published
Best investing apps
We round up the best investing apps. Looking for an easy-to-use app to help you start investing, keep track of your portfolio or make trades on the go?
By Ruth Emery Last updated
The top funds to invest in
Tips Tech-focused funds are continuing to attract private investors and Scottish Mortgage falls back into favour - we look at the top fund, trusts and stocks investors are pumping their money into in the last month
By Vaishali Varu Last updated
The world’s best bargain stocks
Searching for bargain stocks with Alec Cutler of the Orbis Global Balanced Fund, who tells Andrew Van Sickle which sectors are being overlooked.
By Andrew Van Sickle Published
Revealed: the cheapest cities to own a home in Britain
New research reveals the cheapest cities to own a home, taking account of mortgage payments, utility bills and council tax
By Ruth Emery Published