Which region of the world should I invest in – UK, USA, Europe?
When you get started with investing, one of the most important considerations is where in the world you want to invest your money – writes Edmund Greaves
And while there’s no quick answer, different geographic areas of the world offer different advantages, and indeed have different risks, for investors.
The global economy is made up of a myriad of countries at different stages of their development.
Countries such as the USA and UK have well-developed, highly industrialised and service-based economies. Meanwhile nations in developing regions such as Asia or South America have younger economies that are still undergoing some major aspects of industrialisation and political change.
When investing by region it is important to first consider what your goals are. Investing in Western markets is a more conservative choice.
If you have a longer timeframe to invest and want to grow your money, you may want to consider other sectors such as emerging markets or Asia, where the growth potential is greater but the level of risk may also be higher.
In fact it’s probably a good idea to have a blend of both to get the best out of each.
The different regions offer different kinds of potential, which should form a key part of your decision-making process when it comes to where to invest.
This quick guide is going to focus on the most ‘developed’ investment markets in the world – Europe, the UK and USA.
‘there are still significant growth opportunities in these regions, particularly when investing in smaller companies’
Because Europe, the UK and US are more developed economies, it means many companies in these regions focus on paying income to investors rather than growing the value of their share price over time.
That being said, there are still significant growth opportunities in these regions, particularly when investing in smaller companies instead of the “biggest” companies in indices such as the FTSE 100.
The big benefit of Western market though is greater stability, mature companies that have a tried and tested record, and economies that underpin a large proportion of the wealth of the global economy.
While you should be aware of the current crisis unfolding thanks to coronavirus, investing is inherently a long-term pursuit, so these decisions can be made with the future in mind, rather than the here and now.
If you are an EQi customer, chances are you’re reading this from the UK. As such it may seem the most sensible place to invest your money. You know the state of play in the country and what kinds of companies you might want to buy shares or funds in.
But there are some more careful considerations to make with the UK.
Firstly, while the UK economy is big relative to other countries, it is just one economy in a world full of them. Investors tend to invest a major proportion of their own money in their home economy.
This is called ‘home-bias’ and any investor should have this in mind when apportioning a portfolio.
You can still take advantage of opportunities of your home market by investing a portion of your portfolio in it, but don’t fall into the trap of putting all your eggs in one basket, because then you are exposed if the UK suffers a major economic shock.
‘tend to invest a major proportion of their own money in their home economy’
The UK has a very mature economy. While there are still plenty of investment funds and companies that focus on growth potential, many also focus on income because mature companies tend to be steady businesses that pay regular dividends rather than striving for major growth.
If you look at an index such as the FTSE 100, many firms focus on paying incomes or ‘dividends’, and many are in fact global companies that are just listed or have a head office in the UK. The next index down in terms of company size, the FTSE 250, is much more UK-focused and is considered a bellwether for the UK economy at large.
The UK has a strong history of property rights, a fair legal system and world-class education, which makes it a very attractive proposition for investors who want to know their investments will be safe from expropriation or other political risks.
In terms of education it also means some of the world’s brightest minds are encouraged to come to the UK to learn and stay and start innovative businesses which add to the economic story.
There is currently the consideration of the impact of Brexit on the UK economy, but as UK company shares have underperformed the rest of the world in recent years, this may actually present a buying opportunity instead of a reason to avoid.
America is perhaps the largest investment market in the world. As the world’s biggest economy and a powerhouse of industry and innovation, having a stake in it should be a big consideration for any investor.
The US has many of the benefits of the UK in terms of the institutional benefits of things like strong property rights, education and legal traditions.
It is also regulated and taxed much more lightly than countries such as the UK. While this might mean that certain aspect such as employment rights aren’t as robust, it does mean that US companies tend to be some of the strongest and most dynamic in the world.
‘US companies tend to be some of the strongest and most dynamic in the world’
The US is the country where companies as influential and powerful as the so-called ‘FAANGs’ –Facebook, Apple, Amazon, Netflix and Google – emerged. If you want a slice of these incredibly successful firms, the US is the place for it.
There is a caveat, however. Knowing that the US is a prime place to invest, many other investors also dive into buying American companies. The most pronounced issue this creates is that it makes US companies expensive to own a share of.
While this matters less if you buy fractional units of a US-focused fund, it also means in times of market falls, US firms’ share prices have the furthest to fall. This has been the case during the recent coronavirus crisis, but this also means that US companies are now available as cheaply as they have been in nigh-on a decade.
Much the same consideration can be made of European investment markets as the UK and the US. Within Europe, however, there is some regional variation, as it is a bigger continent with a multitude of nations and regulatory jurisdictions that extends further than just the EU – think Switzerland and Norway.
Like the US and UK, Europe has some of the world’s largest national economies, namely France, Germany and Italy. All are highly developed and have world-leading businesses in their fields.
In terms of the EU, some consideration should be given to the structural issues faced by the bloc. This came to the fore during the 2011 Sovereign Debt Crisis when the wealthier northern countries refused to help the poorer southern nations that had racked up large debts.
The same issue is currently playing out during the coronavirus crisis, potentially making the region riskier for private investors in the short term.
The Euro is also a structural issue in play for the EU, as it tends to make investing in weaker economies such as Italy and Spain more expensive relative to the real value, and cheaper in countries such as Germany, where the value of the currency should really be higher.
‘potentially making the region riskier for private investors in the short term’
That being said, investing through a good quality fund can still be an excellent way to take advantage of the best-performing companies in the region.
One thing to note about investing in non-UK investments is that they will also be impacted by currency fluctuations if you are investing in pounds and they are valued in dollars or euros, for example.
When the pound is strong this means you can buy more of a particular investment, but conversely when it is weaker, your money won’t go as far.
While it’s impossible to predict the given value of a currency, it is just something to be aware of as affecting your international investment purchasing power.
To get an idea of investment funds for all of these regions that take advantage of opportunities for growth and income, check our list of rated funds from our investment analyst partner, Square Mile.
We’ll be looking more closely at the developing regions of Asia, Emerging Markets and Global sectors in the next installment.
EQi is a DIY investing platform designed for individuals. It gives you access to global markets, control over your investments and offers customers award-winning support.
Edmund Greaves is a consultant at MRM. Before entering PR, he spent nearly a decade as a journalist, most recently as Deputy Editor of Moneywise magazine & website. That wide-ranging role saw him cover the full spectrum of financial services, from investing, pensions and savings to day-to-day finances.