Which Regions Should Your Portfolio Be Exposed To?

My portfolio construction series continues with a discussion now on which regions and countries a portfolio should be exposed to. You can read about Parts 1, 2 and 3 where I talked about how much of a stock one should buy, how many positions one should have in a portfolio and which sectors or industries your portfolio should be exposed to, respectively.

The investor usually has a choice as to whether he would like to invest directly in shares listed on stock exchanges outside of Singapore, or to simply stick to listed companies within Singapore. There is a term for the latter – home bias, and it refers to an investor who feels more comfortable investing locally (“at home”) compared to other countries as there could be rules and regulations which the investor is unaware of.

Note that by investing in overseas exchanges, there are two risks investors should take note of, that of taxes and exchange rates. An example would be US-listed shares where a withholding tax of 30% is levied on all dividends received by investors outside of the USA. This can turn a 6% dividend yield into a less attractive 4.2% yield, and should, therefore, be an important consideration for any non-US investor. Exchange rates also determine the returns an investor receives in terms of capital gains or dividends, as the profits received in one currency may be eroded by the exchange loss when converted back to Singapore dollars.

What I advocate is for investors to consider investing in local companies to gain exposure to other regions or countries. This has a two-fold benefit – you can avoid the complicated tax and regulatory jurisdictions present in those countries, and the investor also has better access to resources and management for locally-listed companies. An example would be an investor investing in a company which distributes coffee and beverage products to Russia, or an electronic components firm which exports to Europe and the USA. There are also many companies which are listed in Singapore but have factories and operations in other countries such as India, Hong Kong and China. Hence, investors can get access to different regions of the world through the business operations of such companies.

The investor thus has to check if a company is serving merely local customers, or has operations regionally or internationally. It is also vital that there is not too much overlap by way of regions – an example would be an investor purchasing shares in five companies that have dealings with only China and Hong Kong. The concentration would pose a risk as the investor may get badly burnt if there is negative economic news coming from these two countries.

In the next article, I shall talk about the importance of a dividend yield within a portfolio, and how it can help investors compound their wealth.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.