Foreign investors flocked out of the NSE from March to June this year. This was mainly attributed to the uncertainty that comes with the national elections. Other reasons included the weakening Kenyan shilling, while others said that the foreigners were exiting to hop onto better investment opportunities in other markets.
Not forgetting the supply chain issues affecting the world due to the ongoing Russia- Ukraine war and the high inflation that has caused central banks to raise interest rates to curb the high inflation. There were indeed a lot of reasons why foreigners would exit the local bourse.
This also highlights the advantages and disadvantages of investing globally and the reasons that should make any investor want to invest globally.
Why You Should Invest Globally
1. Diversification
When Russia invaded Ukraine earlier this year, the global markets did not respond well and imposed many sanctions on Russia. As a result, stocks traded at the Russian Stock Exchange plunged, and the stock exchange was shut down for nearly a month to prevent further damage.
The Russian Stock Exchange had crashed by more than 40 per cent just a few hours after Russia invaded Ukraine.
That news was a nightmare for Russian investors with all their wealth on the Russian Stock Exchange. They could hardly sleep at night seeing their wealth wiped out by more than 40 per cent in just a few hours.
But for investors who had diversified into other markets, the Russian Stock Exchange represented only a portion of their portfolio; hence they were still in a good position despite the market crash.
In The Little Book of Safe Money, Jason Zweig writes,
“Diversification does not depend on how many investments you have. It depends on how different your investments are from each other.”
Investing in global markets allows you to invest in different markets which in turn shields your portfolio in case of any internal or regional factors that may threaten the success of your portfolio.
2. Better Investment Opportunities
As a local investor, when you only invest in the investment opportunities available locally, your success will be limited by the success of your local economy and the companies listed on your local stock exchange.
You will miss opportunities in emerging and well-performing markets in other parts of the world.
For example, if you are a Kenyan investor, you may think that Safaricom was probably the best company to invest in in the last decade. But if you compare the performance of Safaricom with that of other companies like Amazon, Apple or Tesla in the previous decade, you will see even better opportunities to invest.
In the 2018 letter to shareholders, Warren Buffett acknowledged the importance of investing in markets that are doing well. He wrote,
“Charlie and I happily acknowledge that much of Berkshire’s success has simply been a product of what I think should be called The American Tailwind.
It is beyond arrogance for American businesses or individuals to boast that they have “done it alone.” The tidy rows of simple white crosses at Normandy should shame those who make such claims.
There are also many other countries around the world that have bright futures. About that, we should rejoice: Americans will be both more prosperous and safer if all nations thrive.”
3. Hedge Against A Weakening Currency
Recently, when the general elections were a few months away, there was an increase in the amounts saved in dollars.
Business Daily reported that Rich Kenyans saved Sh2.1B in dollars daily before polls. These companies and individuals understood that the Kenyan shilling was losing against the U.S. dollar, and they better reserve their money in a strong currency, more so when the elections brought a lot of uncertainty in the Kenyan markets.
When you invest globally, you must hold your investments in a globally recognized currency like the U.S. Dollar. Holding your assets in such a strong currency will help protect your wealth from the threats that come with a weakening currency.
4. Exposure To More Asset Classes
As a Kenyan investor in the stock market, you only get exposure to stocks, a gold ETF and Real Estate Investment Trusts.
Investing in global markets will expose you to asset classes like index funds, exchange-traded funds, commodities and even cryptocurrency.
The Demerits
1. High Taxation
One of the most significant disadvantages of investing in global markets comes with taxation. Even though some countries offer opportunities that attract investors and provide tax-free investment opportunities, most global markets come with higher taxes for foreigners.
For example, as a Kenyan Investor investing in the U.S. markets, my returns on investments are charged a withholding tax of 30% compared to a withholding tax of 15% for local investments.
2. Complexity of Foreign Markets
While it’s easy to understand how companies work and are affected by different internal factors in your country, it becomes harder to do the same for foreign markets. This is because governments are run differently, and the internal factors affecting markets are also different. Thus you may miss or fail to understand some factors that may affect the performance of markets.
Even though the advancement of technology has dramatically minimized the challenge, there is still a steep learning curve to getting up to speed with foreign markets.
