Four major risks of international investing

If you do choose to go ahead and invest in global equities, make sure you do so with an awareness of the potential flipsides of doing so.

Buying, investing, international stocks, funds, equities, global
With so many countries coming out openly in favour of “de-dollarization,” the dollar itself may be under threat in the coming years.

By Mayank Bhatnagar

With domestic equities witnessing an extended time-correction over the past 18 months, it is natural for investors to grow a little impatient and look for alternate investment solutions. And one of the options that invariably crops up is international funds. In our previous post in this two-part series, we explained why we believe that it is not essential to look too far from home at this point. After all, domestic equities are fairly valued at this point, and our economy is looking a lot more resilient than our global peers. In this article, we focus on some risks that are specific to international investing. If you do choose to go ahead and invest, make sure you do so with an awareness of the potential flipsides of doing so.

Country Risk

The specific country risks associated with domestic equity markets are relatively easy to understand. However, the exact risk and reward associated with foreign markets are relatively opaque, unless you take it upon yourself to do some serious research.

Sometimes, what looks like a shining light at the end of the tunnel can end up being an incoming train!

Take a recent example from 2020 – U.S technology stocks were skyrocketing as paradigm shifts due to COVID made investors ultra-bullish, and mutual fund companies were quick to cash in on the opportunity by launching and promoting a host of U.S Tech focused funds.

Now, most of these funds are languishing with -20% to -25% returns in the past two years, as the swathes of liquidity that drove up these stocks to irrational heights have receded. Ultimately, forecasting investment growth requires a stable context – and it is quite difficult to predict the long-term future of an international market unless you are present in the thick of the action.

Currency Risk

Investing into foreign markets carry currency risks too – if the currency of your foreign fund depreciates, if could lead to a dual negative impact on returns. With the INR near an all-time low against the USD, keep in mind that investing in USD denominated stocks or mutual funds carries an additional layer of risk in case the USD corrects from here.

All in all, it is very difficult to project how the currency of a particular country will fare over longer periods such as 5-7 years or more, due to the complex dynamics in play. With so many countries coming out openly in favour of “de-dollarization,” the dollar itself may be under threat in the coming years. How a dollar denominated fund or stock will perform in this period is anybody’s guess!

Regulatory Risk

In the end, the roll of the dice will work against you from a regulatory standpoint when it comes to investing overseas. After all, no country will want a large portion of its moneys flowing away from its shores, and so you will always face an uncertain regulatory environment with your international investments.

Examples of these would be the levy of hefty taxes at source while remitting moneys abroad for buying international stocks, or the imposition of fund level or AMC level caps for holding international stocks. Such hurdles can disrupt your investing journey, cause unnecessary panic, and hold you back from achieving your goals in the long term.

Liquidity Risks

Apart from the above three risks, there is also the danger of illiquidity with respect to your overseas portfolio. In an extreme scenario such as a pandemic, a war, or a systemic stock market meltdown that we witnessed back in 2008, the investee country may well be subject to liquidity risks that could drive the price of your investment even lower if the mood there turns excessively risk off or hedge funds start dumping stocks en-masse. Coupled with the fall in currency, this could result in a double whammy to your portfolio.

End Note

Unfortunately, a lot of behavioural biases tend to be a lot more pronounced when it comes to international investing. At the forefront is the tendency to chase past returns and invest with an eye on the rear-view mirror! These behavioural pitfalls, coupled with the clear and present risks associated with international investing often end up creating an unrewarding experience for many investors. With domestic markets looking well poised to deliver growth over the next 5-7 years, why look outside India at all? It makes sense to invest systematically with correct investing processes and practices into domestic funds instead.

(Author is Chief Operating Officer, FinEdge)

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First published on: 22-04-2023 at 18:11 IST
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