13 September 2022
When looking at your portfolio of investments, it is sensible to look at diversification as a means of spreading the risk. As a consequence of the Internet, it is now possible to deal in global markets at the touch of a button. Many people have used this new route to global investment but do you need to go international?
If you’re looking to put together a long-term investment portfolio, you will need a degree of diversification to spread the local risk. While passive investors may look towards collective investments for their international exposure, active investors may look to manage this element by purchasing shares in individual global companies. Is this the correct route?
If we look at the Hang Seng index, there are many Hong Kong/Chinese giants with operations across the globe. If we take one example, HSBC (formerly Hong Kong and Shanghai Banking Corporation), we know that the company has subsidies in:-
The company is listed in Hong Kong, London, Bermuda and New York. So, is there an argument to suggest that by acquiring shares in HSBC, you diversify your risk across all of the different continents on which the company operates? Or does the historical exposure to the Asia-Pacific somehow dilute the company's global presence?
The argument about buying international companies works in all the main markets, the UK, the US, and Hong Kong. Whether looking at the Dow Jones Industrial Average, Hang Seng Index or the FTSE 100, many of their constituents have a global presence. Banks to oil and gas companies, car manufacturers to technology giants, there are literally hundreds of companies with significant international exposure.
Historically, many international companies tended to be overexposed to their domestic markets, diluting their global operations. That may have been the case, but the situation has changed dramatically in recent years. The likes of Amazon are now valued at more than $1 trillion, and even relatively young electric car manufacturer Tesla is looking to re-enter the $1 trillion club. These companies are just two of many which have substantial global exposure. In addition, the Internet has allowed businesses to trade anywhere in the world at the drop of a hat.
If you are looking to create an investment portfolio with global exposure and managed diversification, there may also be clearing and custody services issues to consider. For example, in some overseas markets, it can be beneficial to hold stock locally via a third-party safe custody agent to facilitate delivery and settlement. However, this can sometimes add an element of risk and additional costs compared to holding your stocks electronically in-house.
As investors look to streamline their cost structure, and simplify their global investment strategy, while attempting to gain a degree of international exposure, maybe investment in international companies is the way forward.
In theory, if a company is listed on numerous stock exchanges worldwide, the price on each exchange should be comparable. This is because the basis on which the shares are valued is the same for each listing. However, in the event of pricing discrepancies, we know that arbitrageurs have their finger on the button to make a quick turn and narrow the spread.
So, when looking at your global investment strategy, there are numerous issues to consider. For example, there is true diversification, over-diversification, clearing and custodyservices and the overall cost of investing in different markets. Quite a list!Back to News