International investing is a theme that has been relentlessly pushed by financial professionals over the last 25 years. Many financial advisors have jumped on the bandwagon too, advising their clients to invest a portion of their investment portfolios overseas. And there are plenty of investments to choose from. Mutual fund giants, like Vanguard and Fidelity, have dozens of funds and ETFs dedicated to everything from emerging market small cap stocks to foreign sovereign bonds.
According to the experts, the main advantage of international investing is diversification. It gives you exposure to other countries that may be experiencing much faster economic growth than your home country. In addition to gaining outsized growth abroad, foreign investments may also be non-correlated to your domestic investments, thus reducing your portfolio’s overall volatility.
But there are substantial risks in international investing that most asset managers don’t like to talk about. Foremost among these is political risk. This is the possibility that a foreign government might change its laws in ways that disadvantage a business operating in that country. Revised laws can be relatively minor changes, like new certifications or filing requirements, or they may be major impairments, such as the imposition of heavy new taxes or strict environmental standards.
In its most extreme form, political risk manifests as nationalization or state-sponsored confiscation. This is actually a far more common occurrence in history than many people might first believe. Wikipedia lists literally dozens of major nationalizations that have occurred since the beginning of the 20th century, and this catalogue is by no means comprehensive. While some of these nationalizations only occurred after companies had already failed, many others were outright confiscations, with either no, or utterly inadequate, compensation paid to foreign shareholders.
For today’s international investors, uncompensated nationalization may seem like a distant and unrealistic threat. But it would not be wise to be too sanguine. Such sovereign confiscations were absolutely commonplace in the politically tumultuous 1930s and 1940s. However, after the end of World War II, a new global trade system was established with the United States at its core. This new system has become known as the Pax Americana and it has reduced the number and severity of international property disputes to negligible levels in the modern era.
Unfortunately for those wishing to diversify through international investing today, the Pax Americana is slowly dying. This means that the world will experience far more international turmoil, trade disputes and political maneuverings over the next few decades than most of us have experienced in our lives to date. In this sort of environment, the partial or complete confiscation of assets by foreign governments will undoubtedly become a fact of life.
The terminally optimistic may counter that investing in foreign debt does not carry the same risk of nationalization that foreign equities have. While this assertion is largely true, international investing via bonds has its own unique problem – currency exchange rate risk.
There are two different kinds of foreign bonds that an investor can buy. The first is local-currency denominated bonds. These are bonds issued in a country’s home currency. So, for example, the Indonesian government might issue bonds denominated in Indonesian rupiah, or Brazil might offer debt denominated in Brazilian real.
The second kind of foreign bond is called hard-currency debt. These are bonds issued by foreign governments or businesses in an internationally accepted currency, like the U.S. dollar, British pound or euro.
The value of local-currency denominated debt is highly dependent on the goodwill of the foreign government in question. A foreign central bank can, at its government’s direction, print large quantities of the local currency, thus radically reducing the foreign exchange value of your local-currency bond.
Hard-currency bonds aren’t perfect either. Foreign countries that run into financial problems can easily print their own currency, but can’t print hard currencies. Although this preserves the foreign exchange value of hard-currency debt, it doesn’t help the issuer get any more dollars, pounds or euros to pay its obligations. As a result, some foreign issuers of hard -currency debt, especially those from emerging market countries, have a tendency to default.
While traditional international investing may sound hopelessly risky, antiques are an often overlooked way to enjoy the benefits of foreign diversification without the twin political risks of nationalization and currency depreciation. If you purchase antiques from a foreign country, you will have physical possession of tangible assets that will fluctuate in value based, at least in part, on how well their country of origin performs economically.
The theory behind this unconventional approach to international investing is not idle speculation either. Anyone who purchased high quality Chinese antiques on the cheap in the 1980s and 1990s is now sitting on a veritable fortune. As China became progressively richer over the last couple of decades, newly wealthy Chinese entrepreneurs and businessmen have begun buying back fine Chinese antiques that were exported overseas a century or more ago.
Investor behavior in other foreign countries works much the same way. As a nation’s population becomes wealthier, they typically develop a keen interest in their own history and culture. Antiques from a country that is economically successful will naturally benefit from this trend. In fact, a very similar relationship between national GDP and collector’s coin prices has already been well established.
Antiques grant a tremendous amount of flexibility to the aspiring overseas investor. For instance, an international investor interested in diversifying into the dynamic Mexican economy could target Mexican sterling silverware. Silver has been mined commercially in Mexico for 500 years. As a result, Mexican silversmiths have had ample time to perfect their art. Ravishingly gorgeous Mexican sterling silver is both functional and beautiful simultaneously.
Those excited by the rising economic presence of the Indian subcontinent might be interested in antiques from the Mughal Empire. The Mughals ruled India for 200 years, from the mid 16th century until their kingdom disintegrated in the 18th century. I especially like silver Mughal rupee coins as Indian-oriented investments due to their rich history, elaborate calligraphy and reasonable prices.
Of course, more developed economies like Great Britain, Germany and France are also well represented in the field of overseas antiques. Vintage European items are a mainstay of the global antiques market because of their superlative quality and enduring beauty. Good quality European antique jewelry, silver, art medals and objets d’art are all highly desirable pieces that could add safe international diversification to a traditional asset portfolio.
I believe that international investing is a sound strategy. But I also think it is wise to mitigate investment risks whenever possible. Antiques allow the savvy investor to reap the substantial benefits of international asset exposure without the worry of foreign political risks like nationalization or rapid currency depreciation.
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