Investing in Foreign Shares

There are many stock markets in the world.

All of them are susceptible to both good and bad news.

Every market's behaviour is dictated by global events.

Each market presents diverse opportunities for one to invest and realise financial gains.



What are some of the reasons for investing in foreign markets?

1.  The high transaction values in certain markets

• High transaction values indicate the dynamic volume and value of the shares traded.
• Bursa Malaysia in 2011 (Jan to Nov) had a market turnover of about USD 126b (RM410,507.51 million).
• Here are 4 markets in the world's top 10 Stock Exchanges and their rankings in term of transaction values in 2011 are:

                                     a)  NYSE  USD 20,161b

                                     b)  Nasdaq USD 13,552b

                                     c)  HKEX USD 1,447b

                                     d)  ASX USD 1,197b

Source: http://www.world-stock-exchanges.net

2.  Some countries are homes to many multinational companies and major financial institutions.  

3.  Some countries maybe a proxy for another country's economic growth

• For example, Hong Kong HKEX being the proxy for China.

4.  Some countries have stronger currencies than our home country and the disparity in currency strength between the two currencies will most likely continue to widen over time.

• For example, some invest in SGX listed shares because of the strength of the Singapore Dollar (SGD).  
• In 1993, the RM was trading at RM 1.55 against the SGD.  In Sept 2013, it was trading at RM 2.58.

5. Greater opportunity to discover undervalued companies due to more choices.

• Combined, the NYSE, NASDAQ, ASX, HKEX and SGX have almost 10,000 companies while Bursa Malaysia has about 1000.
• With more choices, there is greater opportunity to discover an undervalued company that suits your investment needs.

6.  Some stock markets lag behind others.

• You can invest in one market first, and then shift your funds to another stock market which is lagging behind the former and make your second round of profit.  
• You can also invest in one industry first, then move to another industry within the same stock market.

7.  Owning a world-class brand.   

• Most of these shares are mainly listed in the foreign stock exchanges.
• They offer you the chance to own world-class companies and participate in their global growth.

8.  Owning a piece of the cutting edge technology.

• Listed in the NASDAQ are many start-up internet and biotechnology companies at the forefront of new technology or new drug discoveries.

9.  Shares in a foreign stock exchange may have dividend yields better than your current FD rate.

• However, the dividend yield should never be the sole factor affecting your investment decision.

10.  Hedge against global economic uncertainties.

• The USD will always be the 'safe haven' currency in times of economic turmoil.  Owning shares in USD does help to pare down losses during such times.
• Similarly, the HKD being traded against the USD within a narrow band, can be an alternative 'safe haven' currency.

Summary:

Be brave and open your mind.

You can always find an undervalued company in any stock market if you are meticulous in your stock selection.

A value investor seeks a company that is undervalued with great potential to grow its business, locally and globally.

A look at a currency table

Now, let's take a look at a currency table:

Row 1 & Column 1: Currency Name (or symbol) The currencies are exactly the same in both the column and the row. This table allows you to compare the value of a currency in relation to another. The only exception on this table is gold, which is commonly quoted in currency tables because it is considered to be an alternative currency that anyone can purchase.

If you are reading this table the values are in the following context:

$1 in currency of row #1, is worth $___ in column #1 dollars.

For example, 1 euro is worth $1.3926 in Canadian dollars. If you were in Canada and you wanted to exchange your 1 euro for Canadian dollars, you would get $1.3926 in return. On the other side of the equation, if you had $1 Canadian and you wanted to convert it to euros, you would get 0.7181 in return. Both of these numbers are circled in red on the table.

It is also important to note that 1/1.3926 = 0.7181. If you only have the currency rate for one direction, then all you need to do is divide one by that number to find the value in the other country's currency.

Read more: http://www.investopedia.com/university/tables/tables5.asp#ixzz28JIVJCza

Foreign exchange risks

The roles of the central bankers and the governments are to ensure reasonable GDP growth, to manage inflation and to keep unemployment at a low rate. At anytime, their policies will be driven by the targets they choose to focus on. These can be done through fiscal and monetary policy.

The NZ and Australia government have both chosen to stimulate the growth in their economies by reducing interest rates. Their action will translate into weaker NZ and Australian dollars. Similarly, the interest rate in UK has been reduced to stimulate its weakening economy. The property prices in UK has also fallen by 10% to 20%. Japan has grown its GDP the last 5 years, but this year is likewise facing headwind given the downturn in the world economy. The yen is expected to weaken this year.

The Euro is expected to gain in strength since the ECB has chosen to control inflation by increasing its interest rate. China yuan is expected to continue to strengthen this year. The US dollar decline is not expected to continue and probably has bottomed recently. It may even strengthen slightly going forward.

What of the Malaysian ringgit? Due to the recent large hikes in oil price and electricity tariffs, the Malaysian inflation is at a high at present. This is expected to attenuate going forward. GDP is expected to slow down from 5% - 6% to 4.5% - 5.5% for this year. At present, the central bank has not felt the need to temper with the interest rate given the inflation expectation is not a problem presently. Nevertheless, the cost for borrowing for the public has increased.

My guesses are the UK pound, Australian and NZ dollar and Japanese yen are expected to weaken. The Euro, Chinese yuan and probably the US dollar, are expected to strengthen.

How will these various currency movements affect the KLSE counters that have significant business overseas? How will these movements affect capital flows seeking higher investment returns in the world?