16th Hole, Apes Hill Club
In the Caribbean, there are plenty of reasons to invest in our own back yards. Some investors are drawn to the idea of supporting local business people and economic development. At times they can be handsomely rewarded, and at others not so much. The Jamaican stock market, for example, has shown great returns in recent times after struggling for many years.
Other Caribbean investors find themselves bound by a web of regulations in areas like pension and insurance company investments, as well as currency controls which can keep large pools of investment capital homebound in several countries, not by choice but by necessity. This can lead to a fundamental lack of diversification which acts against the best interests of these institutions and their beneficiaries in the long-term.
Investing globally key to financial health
There are significant benefits to including the rest of the world in investment portfolios, especially in a region where countries can have small, segmented capital markets with the scope for both really good and really bad outcomes. Investing globally is important to the financial health of our institutions and to each one of us. Our futures may depend on it, and here are three reasons why.
Global diversification helps avoid disaster. Each year the global investment bank Credit Suisse publishes a Global Investment Returns Yearbookwhich summarises 100+ years of asset returns for most countries around the world. This might sound boring, but it is beautiful. Over such a long horizon the day-to-day noise is cut out and you can truly see what matters. And, as it turns out, what matters for long-term investment returns is avoiding disaster. In the stock and bond markets at different places and times, this has taken the forms of war, hyperinflation, debt default, government confiscation of private assets, and catastrophic economic mismanagement.
Spread risk around the world
Places like Australia wind up with some of the highest long-term returns on their stock markets ($1 in 1900 becomes approximately $2,000 today) due to the luck of not having had their productive wealth destroyed by calamity. Countries like France, Germany and China on the other hand had a very different experience, seeing the same $1 become only $41, $42 and $0.50 respectively over the same period. Closer to home, we know what effect currency devaluations in places like Guyana have had, as well as the impact of debt defaults and losses in companies like CLICO. Spreading risk around the world is just plain common sense.
Global diversification helps liquidity. Institutions like insurance companies often need to sell assets to pay claims in circumstances they cannot predict in advance. Caribbean capital markets can be challenging places to find liquidity at the best of times, but immediately following a hurricane, for example, small markets will almost certainly find that their institutions cannot raise cash at the exact moment they need it. A sensibly constructed portfolio of global investments can usually be liquidated in a matter of days, helping institutions and individuals meet the obligations that the assets were set aside for in the first place.
Global diversification gets better returns. Caribbean capital markets are dominated by government bonds. The same Credit Suisse yearbook highlighted another important lesson: equity investments far outpace bonds over time. One reason for this is that they can recover given enough time but when bond investments become permanently impaired (i.e. by default) there is no coming back. Global diversification lets you own a share of the profitable activity of a wide range of companies.
Pay attention to today’s prices
There are two important footnotes to investing globally – and anywhere for that matter. The first is that investors need to pay attention to price, focusing holdings in attractively valued securities where today’s prices imply the best chance of good returns in the future; the second is that they need to keep the management and other fees on the investments to a reasonable level. With globally diversified portfolios of reasonably valued securities to complement local investments, Caribbean investors will be able to avoid some important trouble spots and take proper care of their financial health now, and for the next 100 years.