Investors have compelling reasons to invest in international equities, says Denny Baish, senior investment analyst for Fort Pitt Capital Group.
For starters, the U. S. share of the global equity market is now down to about 46%, and slightly less than half (46%) of the revenues of S&P 500 companies are now generated abroad, Baish says. What’s more, there is fast-growing demand for consumer goods from the rising middle class in China, India and other emerging markets, he adds: “We take items like food and clothing and so-called ‘luxury’ goods like watches, purses and handbags for granted, but to people just entering the middle class, they are a big deal.”
Slightly less than one-third of Fort Pitt’s equity allocation is now in international funds, Baish says.
But for all the opportunities, there are a number of issues advisors should make sure they understand before putting a client in an international stock or fund.
- Politics: “Industries that are government ‘jewels’ are subject to shifting political views over seeing them as a source of growth for the country versus a source of taxation,” said Michael Tiedemann, chief investing officer of Tiedemann Wealth Management.
- State-ownership or control: “Stay away from” these enterprises, says Baish.
- Law: “Rule of law is a variable,” Tiedemann says. “Distressed and event-driven investing is far more complicated overseas, but it also creates opportunities for those who have local legal expertise.”
- Taxes: “Can the international company provide appropriate tax reporting for U.S. onshore investors?” Tiedemann asks. “Many cannot or will not because of the extra cost.” Other questions he suggests: Will after-tax returns be translated back as income or capital gains? And can your clients make use of tax credits from local taxes paid?”
- Currency: Investors need to decide whether to be hedged or unhedged in local currency. “There are layers of risk and reward,” Tiedemann warns.