THE RIGHT MENTALITY WHEN INVESTING OVERSEAS
Most investors depend on developed nations to diversify portfolios in a safer manner and generate higher returns. But a Credit Suisse Group report tells us otherwise. Entitled "The Success of Small Countries and Markets," the findings implied investors may want to consider smaller developed markets to fully understand the real growth, as there are some cases huge things can come in small packages.
Developed countries such as France, Germany, Japan, or the United Kingdom are the best places to generate huge returns in the long run. Some of the world’s largest multinational companies, reputable financial markets, stable governments, and wealthy population are found in these countries. But the above-mentioned report suggested investors may want to think smaller, but not in a small-cap sense. Smaller countries have managed to surpass their bigger rivals by huge margin, saying they are the winners over the long stretch.
The Credit Suisse report accounted the operating and profitability measures for stocks within smaller emerging, small developed, and large developed markets. The study revealed small developed nations gained much higher cash flow returns on invested capital (CFROI). Aside from that, the ratio between CFROI and the cost of capital is consistently advantageous.
First, nearly ⅓ of the annual excess of return of small developed markets relative to large developed markets has come from financials and industrials sectors. Second, small developed nations dominated export sectors belong to higher value-added categories, such as chemicals, healthcare, and heavy industrial engineering. And third, these markets do not rely on a strong global economy and the overall health of their neighboring nations.
The Credit Suisse research, upon collating and analyzing the findings, recommended investing in the companies within smaller developed markets. Normally, several international index funds, including Vanguard FTSE Developed Markets, are overweight bigger nations. So, might as well do it yourself.
One may start venturing in Denmark, Finland, Norway, and Sweden. These nations have considerable industrial export base and vast natural resource wealth, plus stable tax and fiscal policies. The Global X FTSE Nordic 30 ETF has the widest fund trailing the group and holds 30 of the largest companies throughout the four countries. Or, go with iShares MSCI Norway Capped and iShares MSCI Sweden ETF if considering Norway and Sweden.
Investors may also invest in Israel, which is known as the seedbed of biotech, healthcare, technology, and the like. The Market Vectors Israel ETF, tracking 120 of the country’s biggest holdings, has a great way to continue Israel’s long-term outperformance.
Last, but not the least, the Netherlands. Being the second largest eurozone exporter, the country has a strong economy and well-developed financial sector. Consider including iShares MSCI Netherlands ETF. But a word of caution: Many Dutch stocks trade as ADRs on American exchanges.
What is the right mentality when investing abroad? Think small, but not like small companies.
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