Question

Discuss the pros and cons of investing in US companies that operate internationally to gain international diversification vs. investing in foreign companies that are listed on financial markets outside the U.S. What are the business risk, foreign exchange, political risk, etc. differences? Which would you advise and why?

Answer 1

Answer: Pros of investing US companies that operate internationally:

US companies that operate internationally, provide benefit of diversification, they operate in US as well as other countries, they get revenues in different currencies, their trade remain balanced as if one market is not perform well, other market is performing so portfolio will be balanced, If US economy is slow but Asian countries' economy is doing well then US companies' share will perform well and investors who invest into US MNCs, get growth.

Cons of investing US companies that operate internationally:

When US companies are operating internationally, their business is affected by the economic, political and exchange changes in other countries, it affect their share prices also, that affects the investment of people.

Pros of investing in foreign companies:

Investors get benefit of diversification by investing into foreign countries

Cons of investing in foreign companies: There are many disadvantages investing into foreign companies, these are as following:

1. Business risk- Business has its business cycle, it can grow in some season and can come down in other season, business depends upon the industry life cycle in which, it is operating. Business risk affects the return of the foreign companies.
2. Economic risk- Foreign countries economy may change, it can slow down, it can boom, each economy has its economic cycle, if economy slows down, return of foreign companies will also come down.
3. Political risk- If central government is changing and uncertain, it affects the stock market of that country and stocks come down that provide negative returns.
4. Exchange rate risk- There may be currency fluctuations in the countries, currency of one country can devaluated in terms of other currency, that affects the commodity prices and it affects economy and stock market also. Currency changes affect companies' revenues that lead to lower margins.

Which would you advise and why?

Answer: I will advise US companies that are operating internationally because these have comparatively less risk than foreign companies.