The financial markets are crossing the market boundaries and have grown tremendously
over the past decades. More opportunities can be tapped elsewhere as compared to
the past many years.
While the established markets such as the U.S. and Japan continue to expand, major
growth is found in the emerging markets such as the South East Asian and Latin American
markets. Opportunities can also be found in the European continent.
Not all foreign markets move at the same direction at any point in time. Historically,
there is a wide range of deviation in terms of performance for most countries. Thus,
by diversifying internationally, you are spreading your investment risk effectively.
If you are investing in overseas markets for diversification, not only will you have
less risk exposure, but there is potential for higher returns in foreign markets.
En. Amin who diversifies his money across different markets could be better-off than
Miss Ng who is heavily invested in the local stockmarket.
However, diversifying in foreign markets may not be as simple as it appears. Let
us study some risk factors involved when investing globally.
If you are diversifying your money across the market boundaries, you should be aware
of foreign issues. Various factors such as the political and economical changes affect
the global financial markets significantly. Basically, there are two key risk factors;
i) Political factors
Political turbulence can have a great impact on any financial market. Events such
as strikes and riots can paralyze the markets you are in. Volatile foreign climates
often affect the performance of the fund managers. For illustration, the labour strike
that started at the end of 1996 severely hampered investment sentiment in Korea during
that period. The index fell from around 650 to 560. In short, political risk represents
a deterrent to foreign investors.
ii) Economical factor
Economic fundamentals too affect the market significantly. Bad economic conditions
drive the foreign investors away. Just picture this - Just two weeks ago, the regional
markets were brought down to earth when the Thai baht "tequila" crisis
spread through the South East Asian markets. Foreign fund managers were spooked by
Thailand's bad economy and battered currency. Despite attempts by the market to contain
the situation, the SET index fell by 2.4% on the first day of the attack.
If you are a highly conservative type, you would not put your hard-earned money in
a stockmarket like Thailand which is beleaguered by bad economic conditions. If you
are concerned about any potential conflict between South and North Korea, the Seoul
market is not your cup of tea. Nobody can systematically avoid the issue.