Business »
Article Vault »
Risks in International Investment?
There are 3 risks associated:
- Currency risk:
Unlike New Zealand investments, the value of overseas investments can be affected by what happens to the exchange rate. If the currency appreciates the New Zealand dollar value falls and if our currency depreciates, then the value rises. A weakening New Zealand dollar means it takes more New Zealand dollars to pay for imports and of course the price of everything else, including overseas holidays, goes up.
The New Zealand dollar is less likely to gain against all other currencies at the same time, so if you have any overseas investments, in a range of currencies, in a range of countries, the appreciation of the Kiwi currency against some other currencies can be offset by the depreciation against others. This means having investments in a range of countries minimises any exchange rate risk.
- Market risk:
The overseas share markets will have good times as well as bad times, just like here in New Zealand. The best way to minimise market risk is to diversify and invest in a range of countries, as well as a range of companies within those countries. This ensures that any losses can be offset by gains from other areas.
- Economic risk:
Economic risk comes about where the overseas countries outperform the New Zealand economy, which means the New Zealand investor will potentially miss out on the higher returns overseas. Most New Zealanders are exposed to the local economy and their income is linked to the success of the economy. Unfortunately, New Zealand has performed badly in relation to other developed countries over the last 20-odd years and the future does not look that great either.
The reason for this is:
• We are isolated geographically.
• We have a small population.
• There is too much reliance on the commodity prices by the primary sector.
• There is a much larger drain on government spending in the form of welfare benefits, etc, as the population ages.
© 2005 StartRunGrow