Maybe you have always wanted to take your investment overseas, but
as a novice investor, is that really for you? With US stocks
accounting for over half of the global market capitalisation,
maybe the land of McDonald’s is a good place to start from.
Many Japanese believe investing only in Japanese stocks is enough and may even find themselves expressing sentiments or concerns such as those outlined below:
- “I don’t see any benefits from buying foreign stocks” - “Information is in English, a language which I can’t read” - “Since Japanese stocks are currently performing relatively well, there’s no need to invest in foreign stocks.” - “I am interested in foreign stocks but it seems difficult to make investment decisions.”
Such doubts and uncertainty can be typical of Japanese investors and even for investors outside Japan interested in foreign stocks. However, those who expand their investments overseas may find themselves enjoying:
- A larger number of promising investment opportunities - A diversified and stronger portfolio that is not solely reliant on the home country
In this article, I want to show you how to incorporate foreign stocks into your portfolio.
The US makes up over half of the world’s market capitalisation
Many people think of “foreign stocks” as stocks from global
markets, for example stocks in ASEAN countries such as Indonesia
and the Philippines, or European stocks.
While emerging markets like the ASEAN countries may have attractive growth potential, the hurdles for information collection and transaction fees are higher. On the other hand, Europe has a lower market capitalisation compared to the US and China, and not many securities companies handle them.
For these reasons, I believe foreign investment in the US market makes for a comparatively safer choice for novice investors.
Strictly speaking, it may not even be necessary to cover every market in the world, given the US alone accounts for over 50% of global market capitalisation.
So, just by incorporating US shares, Japanese investors can be exposed to over half of the global stock market’s size – especially important for a diversified portfolio.
As of October 2018, the second-largest market by market capitalisation is Japan with China rounding out the top three, a culmination of the recent shake-up in which Japan overtook China. Even so, Japan – as the second largest market – accounts for only less than 10% of the world’s total market capitalisation. That is a huge gap between the US and Japan.
This means that investors with only Japanese equities confines themselves to only a select market – approximately 10% of the global market.
Increase your share of foreign stocks
It is common for investors living in Japan to own assets that are
inherently tied to Japan. This is not just limited to stocks;
deposit accounts also tend to be denominated in Japanese Yen while
the real estate you own and your workplace are in Japan as well.
In other words, your risks are not being diversified.
If the price movements of assets are solely dependent on Japan’s performance, the potential loss could be huge should the Japanese economy worsen. Through increasing the proportion of foreign assets, however, it would be possible to diversify the risks.
Gaining exposure in overseas investment markets is prudent for any responsible investor . Though investing in foreign stocks used to be complex, it is now an easy task accessible from anywhere in the world.
The attractive US Market
Many top companies in the world are listed in the US. Besides IT
companies like Apple (NASDAQ: AAPL), Google (NASDAQ: GOOGL),
Amazon (NASDAQ: AMZN), and Facebook (NASDAQ: FB), there are also
industry giants such as Coca-Cola (NYSE: KO), McDonald's (NYSE:
MCD), and American Express (NYSE: AXP). Japanese investors may be
more comfortable investing in these stocks in that they are
household names that many Japanese investors would likely be
Rapidly growing Chinese IT companies such as Alibaba (NYSE: BABA) and Baidu (NASDAQ: BIDU) are also certified to be listed on the US market – the American Depositary Receipt (ADR) grants these foreign companies the rights to trade shares in the US.
In addition, investors can also increase their investment exposure in various countries all over the world through the many Exchange-Traded Funds (ETFs) available in the US market. For example, if you buy an ETF related to the Indian market, you can gain exposure to Indian stocks.
For these reasons, it may be sufficient to invest only in the US if you are just starting to invest in foreign stocks.
In the future, should you want to expand your horizons beyond the US, you may even venture into other Asian markets such as Hong Kong, Taiwan or Singapore – markets which are easily accessible from Japan.
Where can I get information on foreign stocks?
Information on foreign stocks has become increasingly accessible You can also visit FIGS at www.figsinc.com, to access information on stocks from seven key global markets. You can also find reliable analysts and try out our other tools as part of your investment research.
by Michihiro Soma, Japanese Editor @ FIGS
02 Nov 2018
(Please note that all views expressed in this article are solely my own and do not represent the opinions of FIGS or its related companies)
The information contained in the FIGS Blog is for your general information only and is not meant to constitute professional and/or financial advice. Please note that the use of the FIGS Blog is subject to the Disclaimers.