In our ever-shrinking global village, national boundaries are no longer the obstacles to business that they once were. Spotting the potential for foreign investments and looking for profitable overseas trades are essential tools for any money manager in the current climate. Commodity trading advisers and fiduciary consultants must be familiar with the legalities of foreign investments; ensuring that the guidance they offer is in compliance with regional laws. And the private investor who simply wishes to learn more about where his money is going will naturally be curious to learn about attractive overseas openings. Understanding the potential for foreign investment is crucial for anybody associated with the financial sector.

But what are the drawbacks? What does the investor put on the line and do the potential returns justify the initial investment? Analysing any potential country risk is essential, and taking a look at the experts Lloyds is excellent place to start.

Now the risks:
The first and perhaps largest drawback to foreign investment strategies is the asymmetric nature of international markets. Trading patterns do not move in synchronisation with each other: a net increase in share prices in the American markets may coincide with a fall in Europe. This requires extra consideration on the money manager’s part. He will need to develop bespoke investment patterns for each region. Similarly, the value of each market’s shares is measured by the exchange rate of the currency that backs the shares. If you invest your funds into an Icelandic company, then you must take into consideration the currency exchange rate between your own capital and the currency backing the shares: in this case the króna.

Finally, but perhaps most importantly of all, there are legal concerns. Each market is independently regulated, and all transactions must comply with stringent legal criteria. Breaking into a foreign market increases the workload and expenditure in compliance as each trade must be shown to follow the best practices of that region. Regulations are revised and continuously strengthened, making compliance an investment of time and resources that should never be under-estimated.

With these risks and limitations there are many benefits. First and foremost, foreign investments are seen as a reliable way to introduce diversification into an investment portfolio. One of the primary considerations for any money manager is a diverse portfolio is recognised by regulators as one of the most robust defences against loss, if you are unsure, a good investment company would be your best bet for advice.

Equally, it is possible to develop strategies that exploit the apparent risk of currency exchange rates. Were you to invest into that Icelandic company and subsequently the króna increases in value, your investment too will see a matched increase. This strategy of market arbitrage between foreign markets can grow an investment without acquiring excess risk.

Finally, it is the wealth of opportunities that attracts many investors to foreign markets. With Brazil, Russia, India and China increasingly making up a larger portion of the world’s productivity, these emerging markets offer attractive opportunities unavailable in domestic territories. From the competitive production costs in soft commodities to the large-scale of mining and extraction operations it has become not just possible, but crucial, that investors consider the global options open to them.