Today’s investor needs to diversify not just across asset classes, but across different national markets. Risks to a country’s economic performance are difficult to quantify and account for. Emerging markets can offer incredible returns, but also subject the investor to substantial risk in the event of a sudden selloff.
For a useful case in point, let’s discuss a particularly turbulent period in international finance: 1997-2001. A couple of major events combined to make equity markets around the world suffer, and even geographic diversification was not enough to save investors.
Until 1997, Asian markets were considered some of the most attractive for foreign investors, offering high rates of return and a relatively tame risk profile for developing countries. However, this image was shattered when a global financial crisis, beginning with the collapse of Thailand’s currency, launching most of East and Southeast Asia into freefall. Several countries, like Indonesia, saw a double-digit loss in GDP. The Thai stock market lost 75% of its value, with similar losses in other countries’ equity markets.
During roughly the same time period, from 1997 to 2000, diversified investors would have seen their losses in Asia offset by a powerful bull market in the US, fueled by the dot com craze. This, however would also soon come to a close as that bubble popped in mid-2000, leading to major losses in a matter of weeks. Many tech companies with huge valuations lost most of their value or were completely wiped out.
This example is illustrative of the fact that geographic diversification, while a wise hedge against region-specific volatility, will not protect you from sharp falls across the board. As the global economy becomes increasingly integrated, happy times and economic woes tend to be shared around the world.
Knowing which horse to bet on is important, but the wise always hedge their bets. By taking out a securities-backed loan, you’re protected against a sudden drop in foreign securities’ value, while still enjoying the substantial returns on those stocks during the run upward.
We provide securities-backed loans for stocks traded on major international markets, including including Canada, the U.S., Hong Kong, China, Singapore, Europe and more.
Contact us to learn how you can maintain a more liquid, responsible portfolio with our loans.