About the Author
Keith Noonan is a contributing writer at The Motley Fool covering technology, consumer goods, and other sectors. He holds a bachelor’s degree in English from Boston College.
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Headquartered in the Netherlands, ASML Holding (NASDAQ:ASML) is one of the world's leading providers of semiconductor manufacturing equipment. Semiconductors extend beyond powering computers and mobile devices and providing the hardware foundations for big leaps forward in artificial intelligence.
Semiconductors are now essential components for automobiles, appliances, and a wide range of everyday products and services. And access to chip supplies is a major national security issue for countries around the world.
As a result, there's a big push for localized chip production in the U.S., Europe, and other major markets. ASML's extreme ultraviolet lithography (EUV) machines are unmatched when it comes to manufacturing state-of-the-art chips. So, the company is set to play a big role in expanding global manufacturing capacity.
Based in Poland, CD Projekt (OTC:OTGLY) has established itself as a strong player in the video game industry. The company is best known for games such as The Witcher and Cyberpunk 2077, but it also operates an online marketplace and sharing platform for digitally distributing games.
Demand for interactive entertainment is still poised for huge growth over the long term. CD Projekt has compelling opportunities as it releases content expansions for existing titles, launches new properties, and taps into emerging trends, including augmented reality and the metaverse.
MercadoLibre (NASDAQ:MELI) is a leading provider of e-commerce and fintech services in Latin America. The company was founded in Argentina and is still growing quickly there, but it actually does most of its business in Brazil and generates a major portion of its revenue in Mexico.
MercadoLibre has continued to increase sales rapidly despite macroeconomic headwinds, and it's actually making a big hiring push at a time when many other businesses are reducing their employee counts. MercadoLibre's forefront positions in online retail and fintech point to huge expansion potential as these services become more popular in Latin America.
The United Nations predicts Africa will account for more than half of global population growth through 2050, and Shoprite Holdings Limited's (OTC:SRGHY) status as the continent's largest grocery chain positions it to benefit from economic and demographic tailwinds. The company is headquartered in South Africa and operates more than 3,600 locations across 14 countries.
India's largest private sector lender, HDFC Bank (NYSE:HDB), is in a favorable position to benefit as the country's economy continues to develop. The company has more than 7,800 bank branches across more than 3,800 cities and towns. HDFC is also a player in the digital payments space and appears poised to benefit from "the war on cash."
Foreign markets present opportunities you miss if your holdings are strictly limited to U.S.-based stocks. While foreign companies sometimes come with added risks, international companies tend to be cheaply valued relative to comparable businesses in the U.S.
Many investors prefer to pay more for domestic stocks because business growth in international markets is considered less reliable than growth in the U.S. Another big factor is that most investors simply aren't as familiar with opportunities in international markets because they have limited personal experience with foreign companies -- and because these businesses tend to receive less coverage from U.S. analysts and media outlets.
But with the vast majority of global population growth in the coming decades projected to occur outside of the U.S., the associated demographic factors and the industrialization of relatively underdeveloped areas suggest that this century's biggest economic growth will also happen outside the country.
As the world's largest, the U.S. economy is likely to grow more slowly than countries with smaller, less-developed economies. While the U.S. has a population of roughly 338 million, India and China each have populations of roughly 1.4 billion people, and rising per-capita productivity could allow the economies of both countries to post dramatic growth over the next decade.
Even countries such as Poland, which is home to roughly 38.5 million people and has actually seen its population shrink in recent years, could expand its gross domestic product (GDP) at rates that significantly exceed the GDP growth rate in the U.S. Poland is benefiting from industrialization initiatives and a fast-growing tech sector that are boosting most Polish companies.
Of course, domestic companies are working to expand their presence in international markets and should profit from global growth. Investing in foreign stocks is a way to have a direct stake in growth outside the U.S. and benefit from a broader range of market trends and opportunities.
As an American, you can gain portfolio exposure to international stocks in a few ways.
The easiest (and perhaps safest) way to invest in foreign stocks is through exchange-traded funds (ETFs) or mutual funds that include non-domestic companies.
Buying shares of a fund, such as the Vanguard FTSE Europe ETF (NYSEMKT:VGK), gives you a position in more than 1,300 companies on the continent, while the iShares MSCI Emerging Markets ETF (NYSEMKT:EEM) confers exposure to more than 1,200 large and mid-size companies from countries such as China, India, Brazil, South Korea, and South Africa.
Alternatively, the iShares Semiconductor ETF (NASDAQ:SOXX) mostly comprises U.S. companies, but Taiwan Semiconductor Manufacturing (NYSE:TSM) stock is one of its biggest components. The fund also includes foreign chipmakers ASML Holding and NXP Semiconductors (NASDAQ:NXPI), among others.
Some foreign companies list their stocks on U.S. exchanges in addition to their home markets. In that case, you can simply purchase shares on the Nasdaq or the New York Stock Exchange (NYSE) through domestic brokerages, just as you would for a U.S.-based company.
These shares will usually be in the form of American depositary receipts (ADRs) and represent equity stakes equivalent to a predesignated number of shares of the company's core stock on its home exchange. For example, an ADR share of the Chinese video streaming company iQiyi (NASDAQ:IQ) trading on the Nasdaq is roughly equivalent to seven ordinary shares on the Chinese exchange.
You may also be able to buy ADR stakes in companies that don't trade on U.S. exchanges through over-the-counter (OTC) markets accessible through your broker. But be aware that ADRs may not offer privileges, such as voting rights conferred by owning a company's home-market shares. So, you may need to be willing to forgo the prospect of voting as a shareholder to acquire stakes in promising international companies.
The other main way to invest in foreign stocks is to use a brokerage to obtain direct access to the exchange where the company is listed. A global account with a participating U.S. brokerage is suitable, or you can establish one in the country where you intend to trade.
Opening a global or foreign brokerage account may cause you to incur fees and taxes and face more regulations than you'd expect from a U.S. equity market. Also, your investment is not protected by domestic securities laws, and you could face difficulty achieving restitution through a foreign court.
Although the rewards of investing in international stocks can be high, there are some risks to consider. Political instability and other developments in the country can devalue an investment, and the values of currencies fluctuate. Particularly in emerging markets, you may have relatively poor visibility into a company's business operations and other factors that affect valuations.
For an example of these dynamics at play, consider the case of Yandex, sometimes referred to as "the Google of Russia." An earlier version of this article included it as a top international stock to watch, but Russia's invasion of Ukraine disrupted the company's outlook.
Yandex had been posting remarkable sales growth and may otherwise have been on track for more wins. Despite this, geopolitical conditions created massive headaches for investors.
Investors who own stakes in China-based companies have also faced a challenging backdrop amid rising tensions with the U.S. In response to this increasingly adversarial relationship, many large U.S.-based institutional investors have reduced their exposure to the Chinese market. The withdrawal of support from institutional investors can lead to poor stock performance, even if the underlying company is financially healthy and has continued to post strong sales and earnings results.
In addition to political instability, international markets often see outsize impacts when economic conditions worsen. High levels of inflation, rising interest rates, Russia's invasion of Ukraine, worsening relations between the U.S. and China, and other factors have combined to weaken the global growth outlook, and some regions are facing intense headwinds.
For instance, many countries in Latin America have seen inflation levels even higher than in the U.S. and relatively weak economic recoveries on the heels of the coronavirus pandemic. While foreign stocks often trade at low price-to-earnings and price-to-sales multiples relative to comparable domestic companies, they also tend to be even more sensitive to macroeconomic shifts, and the current backdrop suggests plenty of potential for volatility.
Foreign companies are also more likely to fail to meet most U.S. investors' communications and reliability expectations. Even foreign companies approved by the U.S. Securities and Exchange Commission (SEC) to list ADRs on U.S. exchanges sometimes fail to meet reporting expectations. So, it's vital to understand how well and by what means an international company communicates with investors.
Before investing in international stocks, consider how much risk you're comfortable with. While emerging markets grow faster, they also tend to be more volatile, so you may prefer to focus on developed economies. By establishing a clear strategy for your non-domestic portfolio, you are better positioned to endure market turbulence and pursue long-term gains.
International stocks can be an excellent component of your investment portfolio, whether you're looking to strengthen your portfolio through diversification or create new avenues to explosive growth.
Expanding international economies, increasing productivity, and improving living standards are creating a new global middle class. These trends suggest the world's most dramatic economic growth will occur outside the United States over the next century. So, many investors should strongly consider allocating a percentage of their portfolios to stocks in international markets.
Political instability is a risk to weigh when investing internationally.
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