Your main goals as an investor are high profits, low risk, high liquidity and easy access. Global financial markets offer a diverse range of investment windows, each with its own set of risk, liquidity, opportunity and access characteristics. You should also consider the impact of taxes and inflation on your investment, whether in local or global markets.
To make an informed decision, weigh the pros and cons of investing in local and global markets and build a portfolio of local, global or hybrid assets to maximize returns while minimizing risk.
The majority of the most successful companies are in the developed world. This means that if you focus on investing in stocks in the Kenyan market, you may choose stocks that are definitely not the best globally.
While Safaricom was the best performing stock on the Nairobi Stock Exchange and is arguably Africa’s most valuable stock, it ranks lower globally than behemoths like Apple, Tesla, Nvidia and Google.
If you decide to invest in the bond market, you should be aware that bonds from frontier markets, such as Kenya, have some of the highest yields because the governments backing them have lower credit ratings than emerging markets and developed.
Investments in frontier market bonds are subject to higher inflation risk and inflation-adjusted returns may not differ materially from those in emerging and developed markets. With good research, one can identify an attractive opportunity in frontier market bonds and invest there.
Global investing, on the other hand, allows them to benefit from a diverse range of products that they use on a daily basis.
This includes well-known companies such as Netflix, Philips, Uber, Unilever and Nike. This helps move from a simple Kenyan consumer to a beneficiary of brand growth and profitability.
Investing in stocks from developed countries offers investors better protection than investing in local markets. Strict regulations ensure good corporate governance and tough penalties for market abuse in companies in developed markets.
This protects retail investors from potential fraud and insider trading losses. For example, the Securities Investor Protection Corporation (SIPC) in the United States guarantees up to $500,000 in losses if your broker goes bankrupt.
Modern developments in financial technology have made it possible for investors to access global financial markets from the convenience of a smartphone, laptop or tablet.
Opening an account is free, and brokers in regulated financial markets such as FXPesa offer free investment training. This gives access to virtually anyone with an internet-enabled device and a willingness to learn and invest.
The risk of loss of value of investments due to economic developments or other events affecting the general market is always a reality. Market risk is classified into three types: equity risk, interest rate risk and currency risk.
Market risk exists whether you invest in domestic or international stocks. Due to economic developments, their value may increase or decrease.
They are exposed to the interest rate risk of the jurisdiction if spread across debt markets such as bonds, where a rise in interest rates would cause bond valuations to fall. In addition, if offshore, funds are exposed to currency risk, as investment amounts are subject to fluctuations in exchange rates as well as profits, yields and dividends.
When investing directly in foreign markets, you must first convert the Kenyan shilling into a foreign currency at the current exchange rate.
Suppose you own a foreign stock for a year and then sell it. The foreign currency is then converted back into shillings. Depending on the direction of the national currency, this could help or hurt your return. The shilling has lost ground over the past decade, and if this trend continues, investing in dollar-denominated assets will benefit your returns.
Liquidity refers to the efficiency or ease with which an asset or security can be converted into available cash without affecting its market price. Liquidity risk refers to the risk of not being able to sell your investment at a fair price and withdraw your money when you want. You may have to accept a lower price to sell the investment or wait longer.
The global equity, commodity, foreign exchange and derivatives markets are highly liquid and retail transactions are settled almost instantaneously. This means that they have low liquidity risk. Local equity, land and real estate markets tend to trade on low liquidity and carry higher liquidity risk.
Investing in global markets gives instant access to high liquidity, allowing easy conversion of investments into cash at a fair price.
If you have all of your investments in Kenya, you expose yourself to concentration risk as events such as unstable political environments can impact the value of your portfolio.
Rufas is a market analyst at EGM Securities