Should You Be Investing Offshore?

The US stock market rally may have run its course. But the old saying is that there is always a bull market somewhere. Should you be investing in foreign stocks? Money Watch writes about why foreign stocks are beckoning US investors.

Investors in Wall Street’s long-running bull market are obviously a very happy bunch. But many who now question just how long the party will hold up have started looking elsewhere to move at least part of their money. And these days, the international equity markets are beckoning – enticingly so.

Indeed, recent trends have fueled rallies in Europe and the emerging markets, analysts point out, although the US equity market continues to have an enormous lead on the rest of the world after the financial crisis. Many global market analysts note that prices are no longer cheap by historical standards, but even so, international stocks look more favorable compared with US stocks.

As earnings continue to drive growth the best places to be may well be Europe or in emerging markets. Further down the list is China where there is still great promise but also increasing risk based on excess manufacturing capacity and an awful lot of debt that just keeps increasing.

The underlying risk in investing in China is still that the government controls the economy. An example is the recent shadow bank clampdown that briefly drove Chinese stocks higher. Bloomberg writes about how investors drove stocks higher in the belief that the government will move in to cover bad debts.

Chinese stocks rallied in late trade as markets took a closer look at the nation’s new plans to rein in shadow banks and some traders speculated that state funds would act to stem excessive losses.

While analysts applauded the plan as an important step toward curbing risk in China’s financial system, they also warned of turbulence as markets adjust to outflows from popular shadow-banking products. The government directives, set to take effect in 2019, are the latest in a series of moves to reduce financial risk that have whipsawed financial markets this year.

China is trying to change its economy from a borrow, produce, export and grow model based on increasing markets when markets are not going to keep increasing forever. Likewise many emerging markets show promise but investors need to be aware of the resource curse of boom and bust cycles in economies that depend so heavily on selling the raw materials used by more advanced economies.

Brazil rode high during its commodity boom and has been licking its wounds ever since. Venezuela bought friends in the Caribbean with discounted oil and now its citizens cannot find milk, diapers or toilet paper in the stores. Beware of the resource curse of boom and bust cycles in commodity dependent economies.

However, these economies have gone bust with the onset of the Great Recession and are growing again. Look at the World Bank information on foreign direct investment to see where the smart money is going. Then consider US multinationals that do business in these regions or funds that invest in the region and help you diversify your risk. Last of all consider ADRs of individual companies if you are investing offshore.

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