Developed Markets Equities

What does investing in developing market equities involve?

By investing in Developed Market Equities, the investor obtains a return linked to the profits and expectations of listed companies in countries that are classified as developed.

When we talk about Developed Markets, we mostly refer to Europe, the United States and Japan, which can be invested in either individually - by investing in one of these regions - or jointly - through investment known as Global Equities, which can also include an additional country such as Australia or Singapore.

What does investing in global equities involve? 

Investing in Global Equities provides diversification: which translates into a lower risk than investing in other equity regions individually, and a lower dependence on the performance of one economy or region in particular. 

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Investment in Global Equities is an approximation of investing in U.S. Equities + European Equities + Japanese Equities in their corresponding proportions (around 65%, 25% and 10%, respectively). These proportions are determined by the size of the stock markets in terms of market valuation and they may vary over time (for example, the value of the sum of the companies registered in the United States is approximately 2.5 times the value of European companies).

What does investing in European equities involve?

Investment in European Equities involves investing in the largest companies of the 15 most highly-developed countries in Europe: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. Of all of them, the most important countries are the United Kingdom, France and Germany.

These companies engage in different types of business activities, the largest being the financial sector and the basic consumer sector (food, drinks and tobacco). Some examples of these companies include: Nestlé, HSBC, Total, Roche, Bayer, Novartis, BP and British American Tobacco.

It is important not to confuse investment in European Equities with investment in Eurozone Equities. The Eurozone does NOT include the United Kingdom, Switzerland and some Nordic countries, which have several very important companies within Europe. This means that returns on one investment compared to the other can vary significantly at any given time, which is why it is essential to know which of the two regions the fund we choose invests in.

What does investing in U.S. equities involve?

The U.S. market is the most important in the world, in terms of both trading volumes and the size of its companies. Companies listed on the New York stock market have a market capitalization value that exceeds the country's GDP, approaching 20 trillion dollars, practically double that of the Eurozone.

Being the largest market also means that it is the most highly-analyzed, which is why it has come to be known as the most efficient market in the world, especially regarding big companies.

The U.S. market is also recognized as the most innovative. It was the first to launch an investment fund sometime in the 1920s, as well as having the longest-lasting ETF in the world, at over 25 years old, which replicates the main U.S. index.

Whereas in Spain the services sector is the driving force of the economy, in the case of the United States it is the consumer goods sector. However, it should be pointed out that the biggest companies in the U.S. market, and therefore in the world, do not belong to this sector but rather to the technology sector. The main examples are Apple, Microsoft, Facebook and Google.

Some of the other companies which investing in the United States provides access to are also in sectors with an important representation in the U.S. market, such as Amazon and Johnson & Johnson in the consumer sector, and JPMorgan and Wells Fargo in finance.

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What does investing in Japanese equities involve?

When we invest in funds in “Japanese listed companies”, we are generally investing in the biggest companies in Japan. Some examples are: Toyota, Honda, Mitsubishi UFJ Financial Group, SoftBank, Mizuho Financial Group and Nippon Telegraph and Telephone.

These companies engage in different types of business activities, although the most important sectors in Japan are the financial sector, the industrial sector and the consumer discretionary sector (especially the car industry).

Japanese companies are mostly exporters and therefore, usually benefit from a yen depreciation. As a result, falls in the yen are usually accompanied by rallies in the Japanese stock market, whereas rises in the yen usually come with losses in the Japanese stock market. For this reason, it is especially important to know that there are some funds which offer the option, within their range of categories, to hedge the euro against the yen to avoid this currency risk.

How does my investment generate returns?

The variables that determine the returns are:

  • Company profits and, where applicable, if they distribute dividends or buy back stock.
  • Expectations: if investors believe that the companies will improve their future profits, they will buy more shares and this will increase their price. Otherwise, they will sell the shares they have and their price will fall.

It should be taken into account that both factors can result in notable gains or losses. 

How does the fact that my region's currency and that of the companies I invest in are different affect my investment?

A European investor who invests in Global Equities, from the U.S. or from Japan, assumes a currency exchange risk, unless they use a hedging product. That is, the returns they obtain will depend not only on how the price of the companies they invest in vary over time, but also on how these companies' currencies fluctuate against the currency they make the investment in. A depreciation of the companies' currency would lead to lower returns, and vice-versa in the event of an appreciation. It should be pointed out that some funds offer the option, within their range of categories, to carry out currency hedges to mitigate this risk.

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