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.

Cross-Border Valuation

U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) have been converging over time.

The valuation of companies and subsidiaries in foreign countries has become easier.

Four issues need to be considered when analyzing foreign companies:

1. making forecasts in foreign and domestic currencies,
2. estimating the cost of capital in a foreign currency
3. incorporating foreign-currency risk in valuations, and 
4. using translated foreign-currency financial statements

For a given company, forecast the cash flows in the most relevant currency.

Use either the spot-rate method or the forward-rate method to convert the value of the cash flows into that of the parent company.

It is important to use consistent monetary assumptions in the process (e.g., concerning inflation and interest rates).

When estimating the cost of capital, use the equity premium from a global portfolio without an adjustment for currency risk.

When translating statements into another currency, there are three choices:

1. the current method, 
2. the temporal method, and,
3. the inflation-adjusted current method.

Using, the current method is the most appropriate approach.

How to approach international stocks?

The examination of these stocks for your international investing are the same.  Follow the QMV approach.

1.  Look at the QUALITY of the company (the existence of competitive advantages)
2.  Its MANAGEMENT must be of integrity and smart (and not suspicious management)
3.  The VALUATION of the company (and not an outrageously high valuation)

However, you need to add other risks to your due diligence process too.

1,  Country risk 
What's the political environment?
Is corruption a problem?
How is the country's debt structured?
What are its plans for economic development?

2.  Political risk
This is a subset of country risk.
Is there a real threat of nationalization?
Is there a real threat of rebellion or military action?

3.  Currency risk
This is a risk unique to foreign investing.
Pay attention to the level of exposure a company has to weak currencies.
Be reminded, Zimbabwe's insane inflation rate hit 66,000% in the early months of 2008.

4.  Investability risk
Are you able to buy shares of a company.
Do you have access to one of the exchanges it trades on?


So, to summarise, look for countries with:
1.  Respect for rule of law, strong rights of appeal, and low levels of corruption.
2.  Political stability and a government that doesn't dominate the local economy.
3.  A stable currency
4   Investability

Also, apply the bottom up search for the best companies with the brightest prospects.  

Be reminded once again.
-  Your top priority is to invest in your best ideas - ignoring country, sector, or number of vowels in the ticker.
-  Your secondary concern should be ensuing that you're not overexposed to any specific geographic region or industry sector.

With the U.S. market moving in lockstep with overseas markets (high correlation) - a trend that certainly doesn't seem to be reversing itself- diversification is no longer the reason to consider foreign equities for your portfolio.  

The reason to look overseas is much simpler:  opportunity.   

How to Invest Your MONEY: 30 Key Personal Investment Opportunities

1. Annuity
2. Bond, Corporate (Interest Bearing)
3. Closed-End Fund
4. Collectibles 
5. Common Stock
6. Convertible Security
7. Exchange-Traded Funds
8. Foreign Stocks and Bonds
9. Futures Contract on a Commodity
10. Futures Contract on an Interest Rate
11. Futures Contract on a Stock Index
12. Government Agency Security
13. Life Insurance (Cash Value)
14. Money Market Fund
15. Mortgage-Backed (Pass-Through) Security
16. Municipal Security
17. Mutual Funds (Open End)
18. Option Contract (Put or Call)
19. Option Contract on a Futures Contract (Future Option)
20. Option Contract on an Interest Rate (Debt Option)
21. Option Contract on a Stock Index
22. Option Contract or Futures Contract on a Currency
23. Precious Metals
24. Preferred Stock (Nonconvertible)
25. Real Estate Investment Trust (REIT and FREIT)
26. Real Estate, Physical
27. Savings Alternatives
28. Treasury Securities (Bills, Bonds and Notes)
29. Unit Investment Trust
30. Zero-Coupon Security

Malaysian stocks on bullish sentiment

Wednesday January 5, 2011

Malaysian stocks on bullish sentiment boosted by US data
By LEE KIAN SEONG
lks@thestar.com.my


PETALING JAYA: The FTSE Bursa Malaysia KLCI hit a new high yesterday, closing 18.47 points higher at 1,551.89, on high volume and positive investor sentiment.

Trading volume swelled to over two billion shares as investors were cheered by encouraging data from the United States and regional markets buoyed by rising liquidity.

After a long absence, Malaysia is also back on the radar screen of many international houses.

HwangDBS Investment Management Bhd head of equities Gan Eng Peng noted that last month, manufacturing in the United States grew at its fastest clip in seven months, sending US stocks to two-year highs.

“Investors' reaction was supported by encouraging data from the United States that suggested the economy is improving. Stocks in the United States did well on the first day of trading for the year, and investors call it the January barometer',” he told StarBiz.

Data released in the US on Monday indicated that the manufacturing sector grew in December at its fastest pace in seven months, reinforcing recovery signs.

Gan said foreign investors were increasingly confident about investing in countries like Malaysia.

“For the first time in many years, international research houses have recommended Malaysia as a stock market investment destination over and above many other markets in Asia Pacific .

“If you take this in the context where foreign ownership of stocks remains near historic lows, there could be a lot more buying activity, going forward,” Gan said.

Among the top gainers yesterday were British American Tobacco (M) Bhd which rose 60 sen to RM46.40; Sime Darby Bhd (+ 51 sen to RM9.46); Nestle (M) Bhd (+42 sen to RM43.84) and Ekovest Bhd (+ 37 sen to RM2.74).

Among regional bourses, the Nikkei 225 rose 169.18 points to 10398.10; Hang Seng Index (+232.43 points to 23668.48) and Straits Times (+14.52 points to 3250.29).

Gan said the multiple catalysts announced under the Economic Transformation Plan (ETP) and Budget 2011 would essentially benefit key stock market sectors like construction, building materials and property.

The ETP, if successfully implemented, would help to sustain the momentum.

An analyst from a local investment bank said the gains yesterday on the local bourse was in line with performance of the regional markets with positive news flow from the expected elections in Malaysia.

He said the current resistance level was between 1,560 and 1,570 points while support is between 1,505 and 1,500 points.

Fortress Capital Asset Management chief executive officer Thomas Yong said the rally in the stock market was not only in Malaysia but across regional markets where there was a lot of liquidity.

“Bond yields are currently very low and it is also expensive to invest in bonds. Thus, equities continue to be the preferred instrument at this point of time.

“It is not surprising that the market is going up but it has to do with more than just the expected elections this year,” Yong said.

Investors are moving back into their positions in the market after easing off in the last one month and they are accumulating stocks again.

“Foreign money has been coming in since middle of last year but it is not really huge in terms of large inflows. Certainly, there has been foreign buying but it is more from local investors,” Yong said, adding that commodities-related stocks were favoured by these funds.

It is not easy to judge whether the stock market momentum is sustainable but Yong believes it will sustain in the short term. However, the market is expected to be fairly volatile this year.

On the market risks, Yong pointed out that interest rates were expected to rise later this year and this could affect sentiment.

“Investors expect to see between 15% and 20% growth in corporate earnings in Asia this year. If the growth is not seen in the coming months, market confidence may be affected,” Yong said.

http://biz.thestar.com.my/news/story.asp?file=/2011/1/5/business/7735611&sec=business

FDI for Malaysia dropped 81% for the year 2009

UNCTAD, a UN body has issued its World Investment Report (WIR) 2010 on Foreign Direct Inflows (FDIs) of world countries.

The report on the 2009 FDIs into the Asean region are as follows

Singapore	US$16.1 billion
Malaysia	1.38 billion
Philippines	1.95
Thailand	5.95
Indonesia	4.88
Vietnam	4.56

The FDI for Malaysia in 2008 was US$7.2 billion, which meant that there was a 81% precipitous drop for the year 2009.

Why should you invest in Foreign Stocks?

Posted by David

June 14, 2008

The answer to the title question is: For better returns and diversification purposes.

Simply put, in this age of globalisation it is almost a requirement to invest in foreign countries if ones to make above average returns. It does not mean putting 5 to 10% as most Americans do. it means allocating 30-40% of ones portfolio to foreign equities. An average investor in the US has less than 10% of his portfolio invested in foreign stocks.

Of course there are many risks to investing in foreign stocks.For a brief summary go to the SEC page on International Investing.

Today foreign companies are competing and growing rapidly when compared with US companies. For example, the market capitalization of all the stocks listed in the New York Stock Exchange (NYSE) is about $27.1 Trillion as of December 31,2007. Out of this, 421 foreign companies’ capitalization is $11.4 Trillion. This shows that foreign companies are increasingly becoming more powerful and important in the global market place. On a worldwide basis the US markets constitutes only 45%of the total market capitalization of all companies. In addition to the NYSE there are many more foreign stocks listed in the Amex,Nasdaq and the OTC markets.

In addition to the above reasons, investing in foreign stocks may provide higher returns than investing in US stocks.

The following table and chart compares the Total Return of MCSI EAFE against US Indices for a period of 25 years. The MCSI EAFE Index is the all Non-US major stock markets of the world including Australasia, Europe and the Far East.

Total Return - MCSI EAFE Vs. US Index

Year	All Major Stock Markets outside US	US
1983	25%	22%
1984	8%	6%
1985	57%	33%
1986	70%	18%
1987	25%	4%
1988	29%	16%
1989	11%	31%
1990	-23%	-2%
1991	12%	31%
1992	-12%	7%
1993	33%	10%
1994	8%	2%
1995	12%	38%
1996	6%	24%
1997	2%	34%
1998	20%	31%
1999	27%	22%
2000	-14%	-13%
2001	-21%	-12%
2002	-16%	-23%
2003	39%	29%
2004	21%	11%
2005	14%	6%
2006	27%	15%
2007	12%	6%

Chart: Total Return - MCSI EAFE Vs. US Index

As we see in the above table and chart, in the past 25 calendar years foreign stocks have outperformed US stocks in 15 years.

From the above data, we can also infer the following:

1. In the past 5 years (2003 to 2007), foreign stocks have returned far higher returns than US stocks for each year. The year by year return difference is as follows:

Years 2003 and 2004 - Foreign stocks returned 10% higher than US stocks
Year 2005 - Foreign equities’ return was 8% higher than US stocks
Year 2006 - International stocks returned 12% higher then US stocks
Year 2007 - Foreign stocks returned 6% higher then US stocks

While some portion of this higher returns is due to the dollar depreciation, the majority is due to foreign companies making higher profits than our domestic ones.

2. From 1995 to 1999 during the high tech craze, the US markets outpaced international markets.

So overall foreign stocks performed better in most of the past 25 years. As US economy struggles to recover it may be the right time for US investors to take a fresh look at foreign markets and invest according to their risk appetite.

Question:

What is you portfolio allocation for foreign stocks?. Do you think you need to re-allocate your portfolio now?. Which country/region is your favorite? Post your story on portfolio allocation in the comments section.