UK investors are spoilt for choice when it comes to where to invest. With more than 1,100 companies listed on the London Stock Exchange, we don’t lack selection. But did you know that you might be able to get better returns on your investment by looking beyond the UK?
Let’s take a look at how to invest in two international markets, South Korea and Italy, which have been shown to be cheaper than the UK. We’ll also look at some things to be wary of if you decide to take the plunge.
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Shares are cheaper in South Korea and Italy
When it comes to investing, costs play an important role.
It doesn’t matter how good your stock is if you are paying over the odds for it. After all, that extra charge could ruin your chances of a healthy return.
Fortunately, the UK has one of the world’s cheapest stock markets, with a current price-to-earnings (p/e) ratio of 12.5. The p/e ratio measures how cheap shares are relative to the company’s profits.
But as it turns out, for investors who are willing to look a bit further afield, there are some even cheaper alternatives.
Shares listed in South Korea and Italy are, according to Fidelity International, cheaper than those listed in the United Kingdom.
South Korean shares trade at a p/e ratio of 11.9 based on next year’s forecast earnings. Shares listed in Italy trade at a p/e ratio of 11.7.
This is significantly lower than the 12.5 p/e ratio in the UK. Basically, shares listed in Italy and South Korea could cost you less than those in the UK while still delivering the same levels of growth and income.
How can I invest in foreign shares?
A decade ago, buying shares in foreign companies would have been relatively difficult and costly for the average investor.
But today, with the rise of online brokerages, it’s pretty straightforward and simple. In fact, you can do it without ever leaving your desk.
All you need is a share dealing account with a reputable online broker. If you don’t have one already, we’ve created this list of share dealing account providers to help you narrow down your choices.
Some brokerages will give you the option of buying overseas shares within a stocks and shares ISA. The main advantage of investing via a stocks and shares ISA is that it comes with a tax-free wrapper. This means that all the gains from your investment won’t be subject to tax.
Keep in mind that tax rules can change and that tax treatment depends on your individual circumstances.
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What do I need to be aware of when trading foreign stocks?
Foreign stocks are typically priced and traded in the currencies of their respective home countries. That means that when you buy, there is a conversion from sterling to the currency in which you are purchasing the stock, and vice versa when you sell. These transactions will incur a cost.
One way to avoid repeatedly incurring sterling exchange fees is to open a foreign currency account with your broker. This will allow you to trade shares directly in the same currency as they are priced in. Many brokers will allow you to do this. But you can only open a foreign currency account for a share dealing account and not an ISA.
Also remember that with overseas stocks, your investment will be directly affected by fluctuations in the exchange rate between sterling and the currency in which the shares are priced.
There might also be potential tax implications for overseas shares. For example, some countries might automatically deduct tax from dividends at source. This could result in you paying tax twice.
The good news for investors wanting to invest in the South Korean and Italian markets is that both countries have a double taxation agreement with the UK. This essentially allows you to reclaim any extra tax that you might pay on income from your shares.
Should I buy shares in South Korea and Italy?
Ultimately, the choice is yours. The two markets do offer cheap options for investors who are keen to broaden or diversify their portfolios with overseas stocks. Though the selection might not be as big as in the UK, there could still be a few gems worth snapping up.
The most important thing, as always, is to conduct thorough research and ensure that any decisions you make are consistent with your long-term investment strategy.
If you’re unsure about the suitability of an investment for your specific circumstances, seek financial advice from qualified professionals first.
