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Investing in international markets offers opportunities beyond domestic sources, including foreign currencies, ETFs, and emerging markets. However, emerging markets pose greater risks due to less economic and trade history and unstable political regimes.
Investment opportunities are not limited to domestic sources. International markets are represented by economies outside national markets. Investing in global markets would include both international and domestic markets, but international markets exclude domestic opportunities by many standards. It extends to the stock and bond markets of international economies. If an investor in the United States chooses to deposit money with an asset manager in Asia who focuses on investment opportunities in Europe and Europe, for example, the investor is gaining exposure to international markets.
There are several ways in which one can invest in international markets. One such strategy is investing in foreign currencies or another country’s monetary system. This investment strategy is encouraged when the home markets currency starts to show signs of weakness and inflation. Currency trading involves buying debt or bonds issued by the government of another country.
Another way for an investor to gain exposure to international currency markets is through foreign exchange traded funds (ETFs). These index funds are traded like securities in the financial markets. ETFs are assigned a trading symbol and gain and lose in value similar to a single stock. These investments, however, can exhibit volatility or extreme gains and losses because the strength of the currency can change on a whim. Through a foreign currency ETF, investors gain access to the underlying currency in another country and subsequently to international markets.
A subset of international markets includes emerging markets. These economies represent developing economies as opposed to already developed markets. In the early 21st century, some of the common emerging markets included Brazil, Russia, India and China. Investing in emerging markets is one way to introduce diversification into a portfolio. It’s a strategy often applied by some of the world’s largest investors, including financial institutions, pension funds, and endowments.
Developing nations pose a greater risk than already developed economies because there is less economic and trade history there. Additionally, some of the more nascent markets have unstable political regimes in place, which can affect the stability of the nation’s economic markets. Thus, with the promise of potential growth and lucrative returns, investors are taking on additional risk, which is why only a fraction of the total investment portfolio is usually directed there. These investments become increasingly attractive when home investment is scarce or when an investor such as a pension fund needs to generate sizable returns to meet funding obligations.
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