A decision that all investors will have to make when choosing what to invest in is whether to limit themselves to investing in the best companies from their domestic stock market or expand their horizons to international stock markets. In this article, we’ll explain the distinction between domestic and international investing and share whether we think it’s a good idea to include international companies when building your investment portfolio.
Domestic v international investing – what are domestic shares and international shares?
When companies ‘go public’ and allow their shares to be freely traded between investors, they are permitting their shares to be traded on a stock exchange. But investors cannot expect to buy and sell the shares of any company on any stock exchange.
Instead, a company picks a stock exchange to admit its shares for trading. A market works best when all buyers and sellers can easily find each other, so if all orders are routed through the same stock exchange then this solves this issue. By concentrating trading activity through only one or two bourses, the company is ensuring that the marketplace will be active and liquid. This should result in fewer price shocks in response to large buy or sell orders.
Shares can also be traded off-stock exchange, through private services known as dark pools. Although these are not accessible to retail investors, we won’t dwell on this type of trading.
- Domestic shares are the companies listed on the stock exchange(s) located in your country.
- International shares are the companies listed on any other worldwide stock exchange.
Therefore the terms ‘domestic’ and ‘international’ are relative terms. Whether a company is international to you depends on your country of residence.
Here is a summary of some of the largest stock exchanges in the world, and well-known companies which list their shares there:
- New York Stock Exchange – USA
- NASDAQ – USA
- London Stock Exchange – UK
- Shanghai Stock Exchange – China
- Japan Exchange Group – Japan
- Hong Kong Stock Exchange – Hong Kong, China
- Euronext – Europe (Comprising Amsterdam, Brussels, Dublin, Lisbon, Milan, Oslo, Paris)
- Shenzen Stock Exchange – China
- Toronto Stock Exchange – Canada
- Deutsche Stock Exchange – Germany
- Korea Stock Exchange – Korea
- Bombay Stock Exchange – India
Each stock exchange has a geographic location. While share trading doesn’t occur through the traditional face-to-face ‘outcry’ trading pits any longer, their location still has an impact upon the companies listed:
- The timezone and opening hours determine when the shares can be traded
- The laws of the land determine what governance and financial report rules must be followed by companies listed on the exchange
- The currency that securities are priced in
- The bias for investors to invest in their domestic stock exchange also means that the location of a stock exchange also impacts the amount of capital available
Domestic v international investing – what is the difference
The key differences you will experience when buying international shares compared to domestic shares are:
You can only place trades during their opening hours, which may not fall into your daylight hours. Trading in international shares will require you to wait until the respective foreign stock exchange has opened for trading.
For example, the Tokyo Stock Exchange is open between 09:00 – 15:00 local Japan time. This is 01:00 – 07:00 in the UK. This time zone clash makes it very impractical for a UK trader to actively trade shares listed in Tokyo.
The US stock markets open from 14:30-21:00 in the UK, which makes the US markets far more accessible to UK retailer investors. In some ways, these trading hours are more convenient for retail investors with full-time jobs who cannot trade during UK working hours.
International shares are priced in the currency of the stock exchange, which is usually the official currency of the country hosting the exchange. Therefore US shares are priced in US Dollars and Euronext shares are priced in Euros.
The best UK stockbrokers can handle this additional complexity with ease. When placing a buy order, your broker will usually handle the currency conversion automatically. This may attract a foreign exchange fee.
When you receive dividends from international shares or funds, these will appear in your account in the same currency as the share. This also applies to when selling shares.
Because international shares are denominated in a foreign currency, this introduces a new layer of price volatility because you will experience movements in valuation caused by your currency changing value relative to the foreign currency.
If a $20 share was worth £10 at current exchange rates, your broker will report your portfolio value as £10. If exchange rates move, then tomorrow that same $20 share at the same USD price may convert to a valuation of £9.50 per share. This is a valuation movement totally unconnected to the share price itself.
Some investing apps charge higher fees for international share trades, although many brokers charge the same fee to buy shares home and abroad. When comparing stockbrokers this is a key feature to consider if you’re planning to invest internationally.
What international shares can do for your diversification
The movement in the total valuation of national stock markets are closely correlated, but this doesn’t mean that they move in tandem. It is possible for three different stock markets to have very different years in terms of total shareholder return.
For example, the S&P 500 (which tracks the largest companies on the US stock market) hit a pre-pandemic high on 14 February 2020, and suffered a slump as the widespread devastation of the virus became known. However, it had recovered completely by the 21 August of the same year.
The UK’s FTSE 100 index has (at the date of writing in September 2021) yet to reach its pre-pandemic high watermark set in January 2020.
Both the US and UK have experienced success with their vaccination programmes and successfully ‘unlocked’ their economies at similar points, however, the UK stock market simply hasn’t performed as well. This is attributed to the different composition of companies on the UK market compared to the US. The US stock market is tech-heavy, meaning it includes many large firms who have expanded their dominance and profitability over the 2020, 2021 period. The FTSE 100 in stark contrast includes many banks, energy companies, retailers and miners who haven’t experienced the same bounce. Commentators have repeated constantly that the largest companies in the FTSE 100 index simply don’t have the same growth prospects as their digitally-enabled US cousins.
A UK investor who invested domestically would have missed out on the bonanza of returns available in the US.
Tips when investing in international shares
- For effortless international diversification, consider global funds which invest in companies from across the globe as part of their remit. Global funds are usually dominated by US shares, although European and UK shares can form 20% – 30% of the total fund value.
- Global funds will include UK shares by default. Therefore if you’re adding a global fund to a UK-centric portfolio, check out ‘Ex-UK’ variants of funds that exclude the UK. This ensures that each pound you invest in the global fund actually goes to an international asset. Examples include:
- If you want to avoid the extra administration and transaction fees of international share dealing, the best global funds to invest in are those with an ‘accumulation’ distribution strategy. This means that they reinvest dividends and interest within the fund itself. This spares you, the investor, from dealing with cents and Euro cent dividends appearing in your account. These small sums are prohibitively expensive to convert back to GBP or reinvest, and therefore they often languish as uninvested cash.
- Be aware of the high risk of emerging markets equity funds. Emerging markets funds invest in companies from a group of developing countries such as China, Russia and Brazil. Investing in emerging markets will increase the risk of your portfolio, rather than merely diversify, due to the political and economic risks. Read the best emerging markets books to understand more.
In conclusion – domestic v international investing
International shares offer a sensible way for investors to further diversify their equity portfolio. International markets trade at different times and are denominated in foreign currencies, which makes them slightly more complicated to invest in. However, through accumulating equity ETFs with a global focus, investors can access international shares with a few clicks and won’t have to deal with the administration of reinvesting small dividends paid in foreign currencies.
However, not all international markets are created equally, higher risk regions such as emerging or frontier markets have a far high level of risk than developed markets such as the US or Europe.