Going global with equities
Marketing Communication
In a globalised world you might have a smartphone (produced by an American company) that has zinc components (mined by a company in South Africa), which you put in your pocket before you drive your hybrid car (from Japan) to a service station (which is British-owned) to fill it up with fuel (sourced from the United Arab Emirates).
If these companies’ stocks are listed on local or international stock exchanges, they form part of the equities investment universe. By investing in an exchange-traded fund (ETF) with global equities exposure, it then becomes possible for investors to invest in each of these companies across both developed markets (DM) and emerging markets (EM) through a single trade.
Although investing in the equity market offers potential gains, it comes with certain downsides and is generally considered to be riskier than other investments – cash for example. But there are several reasons why an investor would consider investing global equities.
Investing in equities provides an opportunity to benefit from the growth generated by companies across the world. By holding shares in a large number of companies, investors have a chance to benefit from diversification1.
An investment with broad equity exposure mitigates the risk of a sector-based downturn, say if the technology sector faces challenging market conditions. Investing in companies across various countries or regions (both DM and EM, for example) is one possible approach to making a portfolio more resilient. By diversifying across sectors and countries, investors can reduce what is known as concentration risk: this means the potential loss arising from a significant portion of a portfolio being invested in a single asset, sector, or geographic region.
Investing in equities provides an opportunity to benefit from the growth generated by companies across the world.
For understandable reasons, many people choose to invest first and foremost in companies in their home market2. Such companies are likely to be more familiar, and investors may also feel they have a better understanding of the conditions and dynamics of their home country – something that gives them greater peace of mind. But there are potential downsides to this approach including concentration risk.
Another related issue is that in some stock markets, certain sectors are more dominant than others. In the UK, for example, many of the largest firms operate in the energy and financial sectors, so any portfolio based on the UK market has a relatively high level of exposure to these sectors.
Research shows that over long periods, returns on equities have tended to be more attractive than on cash or other assets such as bonds3. Because some companies will perform better than others at different times, the overall returns from a diversified portfolio should be less volatile than an undiversified portfolio. This means that the portfolio’s value is less likely to experience sharp short and medium-term fluctuations, either upwards or downwards, than if it consisted of shares in just a handful of businesses.
Global equities are better suited to being held over the long term. The short-term volatility often displayed by equities means that investments can fall in value in early periods. For investors who need to access their money over shorter horizons, this can result in capital losses. However, as the chart below indicates, returns over the long term have tended to be much more reliable.
The chart shows the last 50 years of annualised returns for the MSCI World Index, which consists of equities in developed markets. While performance in some individual years has been much better or worse than the long-term average, returns over extended time periods have proved to be significantly smoother.
MSCI World – long-term performance (in %, annualised)
Performance NTR in USD. Source: Bloomberg, Amundi. Data as at 20/02/2024.
For many investors, the simplest way to access a diversified equities portfolio is through a fund that seeks to track the performance of a certain equity index. ETFs are a low-cost way to gain diversified exposure to a broad range of equities. However, it is important to think about which index or indices you want to include in your portfolio.
For individual investors, the alternative would be to buy hundreds of individual shares. Not only would this be a laborious process, but would likely incur significant trading and currency exchange costs.
Amundi offers ETFs that range from developed markets to ETFs that also include emerging markets equities with a cost-efficient product that offers exposure to large and mid-cap stocks in developed economies such as US, Europe and Japan, as well as emerging markets such as Brazil, Indonesia and Mexico. Responsible investors could consider ‘ESG world strategies’ that meet certain sustainability criteria and exclude companies that produce tobacco, thermal coal and controversial weapons etc.
Global Equity Exposures to Consider
Solactive GBS Global Markets Large & Mid Cap USD Index NTR
MSCI World Net Total Return USD Index
MSCI World ESG Broad CTB Select Net USD Index
1 Diversification does not guarantee a profit or protect against a loss.2 https://www.investorschronicle.co.uk/news/2022/05/16/how-harmful-is-home-country-bias/3 Source: Amundi ETF Weekly Pulse - Diversify with all-country equity exposure, 23 February 2024
