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Global financial markets are often perceived as one unified entity, but regional differences need to be factored in when making investment decisions. Learn about the distinctive features in four of the world’s major economies: the United States, Europe, China and Japan.


Asset prices in financial markets are driven by the underlying health of a country’s economy. Analyzing the characteristics of macroeconomics, and their impact across different regions, can help you to track an economy’s cyclical phases of growth and contraction, thereby identifying trading opportunities that align with your personal strategy.

United States


As most people know, the US is the world’s largest economy, and as a result, the events that occur will often impact the rest of the world, across all asset classes. Moreover, the country has one of the most well-established bases of retail investors, making investing in the US both convenient and cost-effective. 

Tip: Understanding the country’s macro indicators is key, even if you are not directly investing in US stocks or bonds.

US macroeconomic characteristics


US government spending significantly surpasses that of all other countries. With an annual federal budget of $3.353 trillion, decisions regarding taxation and expenditure can have extensive ramifications domestically, as well as abroad. 

In addition, interest rate decisions made by the US Federal Reserve, the country’s central bank, often serve as one of the leading indicators for rates in other countries. The US dollar also has a unique role as the world’s base currency, being widely used to conduct trade in international commodity markets and in day-to-day transactions outside of the United States. 

US market characteristics


US stock markets are highly liquid and well-regulated. As a result, US stocks are attractive to domestic and international investors alike, providing access to some of the largest companies in the global stock market, such as Tesla, Johnson & Johnson and Alphabet Inc

The S&P 500 stock index is widely regarded as one of the world’s key economic indicators, serving as a benchmark against which other stock indices are measured.

Tip: The US dollar dominates the global forex markets, forming one half of the seven major forex pairs.

Europe

The major European economies have achieved high levels of development. While demographic factors, such as aging populations, may pose challenges to future economic growth, the presence of established wealth helps to counterbalance these concerns. 

Europe may not be associated with the ground-breaking investment opportunities found in other regions, but this does not stop a large number of investors from being attracted to the relative stability offered by the market.

Europe macroeconomic characteristics


According to the conventional definition, Europe comprises 44 different nation-states. It is therefore important that investors carry out a detailed analysis to establish which assets present the best opportunities in each country. 

The establishment of the Eurozone has made notable progress in diminishing the significance of national borders and facilitating the free movement of goods, capital, services and people.

Tip: Interest rates set by the European Central Bank apply to all countries within the Eurozone.

Europe market characteristics

European investment opportunities typically revolve around traditional industries, as few European tech companies have had the success of American companies such as Apple and Microsoft

Including stock picks from the banking and industrial sectors can provide an opportunity to balance a portfolio by incorporating shares of a more defensive nature. 

The EURO STOXX 50 Index tracks 50 of the Eurozone’s most liquid stocks and can provide a good indication of how the region is performing.

Tip: The EURUSD currency pair makes up approximately 30% of total global foreign exchange transactions.

China


Reforms to business practices and an opening up to international trade have contributed to an average annual gross domestic product (GDP) growth rate of 15.8% in China over the past 32 years.

This performance has presented once-in-a-lifetime opportunities, although the appetite for Chinese assets among international investors is often tempered by the concerns surrounding high levels of state intervention.

Chinese macroeconomic characteristics


China boasts the world’s largest population and ranks second to the US in terms of GDP. The country’s economic growth has been carefully managed by the Chinese government, which is particularly active in terms of fiscal policies and regulations.

Macroeconomic indicators, such as the management of the foreign exchange conversion rate of the Chinese yuan, are overseen by Beijing authorities.

Chinese market characteristics


China’s stock market operates primarily through two main exchanges. The Shanghai Stock Exchange is the largest stock exchange in mainland China, where stocks are listed and priced in both Chinese yuan and US dollars. 

On the other hand, the Shenzhen Stock Exchange is comparatively smaller in size and is known for listing stocks of smaller, more dynamic companies, offering potentially higher risk-return profiles.

Due to central bank controls, the Chinese yuan trades within a tight range against the US dollar. This allows the authorities to establish exchange rates that align with their political and economic objectives, but leaves few opportunities for forex traders looking to buy and sell the currency for speculative purposes.

The China 50 Index can be used both as a guide to how China’s economy is performing, as well as a means for investors to invest in a basket of China’s 50 largest companies.

Japan


In comparison to China, Japan has a market economy that is more closely aligned with the US and Europe, allowing prices of goods and services to be determined by market forces. 

Traditionally, Japan has been a net exporter of goods and services, currently ranking fourth in the world in terms of export sales. Its internationalist outlook is demonstrated by its membership in both the Asia-Pacific Economic Cooperation and the Trans-Pacific Partnership.

Japan macroeconomic characteristics


The Japanese economy, ranking as the third largest in the world, is considered to be a relatively safe market for international investors. However, due to an aging population, the country has a historical track record of being deflationary, which poses a unique set of challenges. 

While the rest of the world has been expanding and increasing its prosperity, Japan’s low growth rates have led to a relative decline in its economic standing.

Japan market characteristics


Many of the stocks listed on the Tokyo Stock Exchange are globally recognized, household names. International investors have the opportunity to purchase stocks of companies such as Sony, Mitsubishi and Toyota.

It is worth noting, however, that the revenues of these companies rely heavily on exports, meaning stock prices can be influenced by changes in Japanese yen forex conversion rates.

The JPN225 Index represents the Nikkei 225, a stock market index for the TSE. The JPN225 tracks and measures the price of 225 Japanese companies and can illustrate how the region is performing.

Final thoughts


Although investing in foreign markets may sound like a risky proposition, building an investment portfolio with exposure to different regions can provide opportunities for capital returns, as well as a certain degree of portfolio diversification

If positions in one region underperform, investors can hope for those in another region to generate above-average returns. This can help to smooth out overall returns and lessen the likelihood of emotional investing as market prices react to the ups and downs of each region’s economic cycle.

Visit the eToro Academy to learn more about investing in different economic regions.

Quiz

Which of the following regions typically sees the most significant government spending?
China
Japan
US
Europe
 

FAQs

How can I buy stocks in foreign countries?

One option is to buy stocks on the local stock exchange, although the ease of this will depend on which country you are looking to invest in. Alternatively, consider investing in ADRs (American Depositary Receipts) and GDRs (Global Depositary Receipts). These investment instruments are designed to enable investors to purchase stocks of foreign companies but trade them on exchanges such as the New York Stock Exchange and London Stock Exchange

Which stock should I buy in China?

Single-stock risk is an issue, regardless of the country you are investing in. To mitigate this risk and enhance convenience, some investors choose to invest in fund-style products. 

Exchange-traded funds (ETFs), such as the iShares MSCI China ETF, are worth looking into, as they are specifically designed to provide a cost-effective way to gain broad exposure to a particular country. 

What is currency risk on an equity investment?

When converting US dollars to Japanese yen in order to purchase a Japanese stock, for example, your total return will imply an element of forex risk. The realized profit or loss on the trade will be converted back to US dollars at the prevailing exchange rate (USDJPY) when you close the trade. If the dollar appreciates by 10% against the yen during the lifecycle of your stock trade, your net profits will be 10% lower in terms of dollars.

This communication is for information and education purposes only and should not be taken as investment advice, a personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments.

This material has been prepared without taking into account any particular recipient’s investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results.

eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication.

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