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.   

There are incredible opportunities in International Investing.

1. There are 16,000 public companies based in the United States.
2. There are 49,000 public companies listed outside of the United States.  
3. The American economy is the largest, most diverse on earth.  
4. The American legal and regulatory regimes offer the most protection for minority shareholders.  
5. Also, the U.S. market is less prone to wild swings than most foreign markets.
6. The refusal to consider international companies makes about as much sense today as investing only in companies with two syllables in their names. 
7. There are incredible opportunities in international investing.
8. Many overseas markets, including the growing monsters of China and India, have improved their regulatory oversight by leaps and bounds.
9. There are also markets with all the legal framework that are out dated, to be sure too.  Those tend to be obvious and better avoided.
10. Besides, the increasing globalization of markets, and the explosion in individual company cross-listings and exchange-traded funds (ETFs), have made buying foreign shares easier than ever before.
11. In fact, international investing can be as easy as picking a foreign country and buying an index fund based on the performance of its market.  Indonesia?  Check.  Brazil? Check.  Japanese small caps? Check.  European bonds?  You get the idea.
12. To buy foreign equities, you have to understand some additional considerations and challenges.
13. In the six months after October 2007, the Shanghai Composite Index lost nearly 50% of its value, wiping away $2 trillion in wealth for investors.
14. This wasn't suppose to happen - the ascendancy of China is considered inevitable.  
15. Only investors extremely familiar with the Chinese economy had a hope of knowing the right answer. 
16. Point being, an investing thesis constructed on a skin-deep understanding of a country is likely to end with a suboptimal outcome.  And we try to avoid suboptimal outcomes.
17. Investing overseas is not just a means of diversification.
18. The one and only purpose to invest in companies overseas is far less complicated:  the opportunities beyond our borders are too good to pass up.
19. You want your long-term savings tied to the best companies with the best prospects.  
20. You would miss out on many great stocks by imposing an arbitrary geographical limitation on your investments.
21. It's unlikely that the best investments are all going to be just in your own country.  
22. The U.S. has the potential to do quite well.
23. The U.S. represents 5% of the population of the world and 24% of its gross product.
24. The U.S. had her days as the greatest growth economy in the world.
25. In 2007, the U.S. economy grew at a rate of 2.2%.  
26. But, many other countries outside the U.S. have economies that grew at higher rates, and when these are measured in depreciating dollars, these economies are growing even faster.
27. Your approach to international investing remains the same:  bottoms-up, business-focused.
28. The only key difference is not the how, it's the where.
29. The approach encompasses small caps and fast growers and dividend payers and value stocks.
30. When we disregard borders in our search, there is almost no difference between international and domestic stocks.  
31. The scorecard for foreign stocks is still based on their ability to turn profits.  
32. Economies around the world are growing quickly.
33. That's why international investing works.
34. You have an opportunity to examine mature industries domestically and find those same industries in their high-growth phases elsewhere.
35. Diversification, while important, is not the goal of investing.  
36. The goal is you want 100% of your money invested in companies that don't suck, and 0% in companies that do - and that's regardless of where the company is located.  
37. International investing is not about exposure to a particular sector or style.
38. International investing is about opening up all the doors available for your portfolio: it broadens frontiers.

Relative USD Returns of US, Developed and Emerging Markets

Nazir: Retail investors moving offshore to expand investment options

Written by Bernama
Wednesday, 07 July 2010 16:37


KUALA LUMPUR: Retail investors are moving towards investing offshore as part of their strategies to grow investment options, CIMB Group Holdings Bhd group chief executive, Datuk Seri Nazir Razak, said.

He said for the past 18 months, retail investors had been investing offshore through many networks, including CIMB.

"That's a growth area. It may not make Bursa Malaysia terribly happy but at the end, retail investors are growing their investment options.

"The United States and Asean had been the top offshore destinations," he told reporters after delivering the keynote address at the CIMB Private Banking Second Annual Investment Conference here on Wednesday, July 7.

Nazir was commenting on the lack of participation by retail investors in the local bourse.

A recent Bursa Malaysia's report, "Rethink Retail", showed that 61% of the potential retail investors did not know how to invest in equity markets.

Furthermore, 48% of non-investors cited high risks as the main reason for their non-participation in the stock market.

Nazir said through the revival of CIMB Securities brand, the group was growing the number of remisiers to 1,000 across the region as part of its strategy to encourage more retail investor participation in the local bourse.

On the private banking potential, he said, the group, which currently has RM7 billion worth of asset under management (AUM), would grow it to RM10 billion within five years.

"The group is currently in the process of integrating its private banking capabilities across the region," he said.

At the same event, Nazir also announced that CIMB Group's automated teller machine (ATM) users could withdraw cash via its ATMs in Malaysia, Indonesia, Singapore and Thailand for free immediately.

On another note, Nazir said the bank was concerned with the recent development of SJ Asset Management (SJAM), which was currently being examined by the Securities Commission (SC) due to irregularities in its accounts.

"SJAM is one of the approved fund managers for our private bankers to recommend to our clients, so therefore, by extension, clients will have some money invested in," he said.

On CIMB's level of exposure in SJAM, Nazir said: "Even one sen will concern me because this is our clients' money in SJAM ... this is something that we are monitoring and engaging with SC closely."

According to newsreports, a number of banks' clients may have financial exposure to SJAM. - Bernama

http://www.theedgemalaysia.com/business-news/169431-nazir-retail-investors-moving-offshore-to-expand-investment-options.html

Economic Impact of Interest Rates and the Japanese Economy

Economic Impact of Interest Rates
There is a tendency to forget that for every borrower there is a lender and that interest rates work both ways. Less interest paid by borrowers means less interest received by lenders. When interest rates rise or fall, total disposable income doesn’t change; it simply redistributes.

Effect of rising interest rates on consumers
1. Consumer demand declines because the forced reduction in consumption by the greater number of borrowers is greater than the increased consumption of the lesser number of lenders.
2. Reduced demand is said to dampen inflationary impact of rising prices.
3. Budget-strapped families are forced to work extra hours or family member to seek part-time work.
4. The subsequent increase in availability of labour reduces pressure on wage demands.


Effect of interest rates rise on highly leveraged businesses
1. Profitability of highly leveraged businesses is reduced by their high cost of debt. Main impact on profitability is felt by exporters.
2. More foreign capital inflows are attracted by the higher interest rates which increases the exchange rate, consequently reducing the value of exports in the domestic currency.
3. Lower export output means reduced demand for labour and consequent further restraint on wage increases.
4. Higher exchange rate also means that the lower cost of imports will reduce prices
5. Reduced labour demand in industries competing with imported goods stabilizes costs by again increasing the availability of labour.


Effect of falling interest rates
1. Debtors are rewarded and more inclined to be financially irresponsible.
2. Those who have been prudent in accumulating savings in interest-bearing securities are penalized and less inclined to be prudent in the future. (Given the impact of a 40 percent tax rate and 3 percent inflation on an interest rate of 5 percent, the zero return (5 percent x 60 percent – 3 percent) provides zero incentive for prudence.)
3. Although serving short-term political objectives and rescuing overleveraged debtors, the longer-term effects of artificially low interest rates have proven to be undesirable.

Low Interest rates and The Japanese Economy
Any doubt about the effectiveness of low interest rates to stimulate the real economy should have been dispelled by the well-publicised Japanese experience. In spite of having interest rates close to zero and the government running a huge annual deficit, thus leaving more disposable income in the hands of the consumers, Japan has suffered a lingering recession since 1990.


The Nikkei 225 index’s loss of one-third of its value in the past 20 years can only be attributed to the low profitability of Japan’s corporations. Even with the leverage of close to zero interest rates, the ROE of Japan’s large nonfinancial firms fell from 8.2 percent in 1988 to an average of 3.1 percent between 1992 and 1999. It has since recovered to roughly 10 percent in 2007, but still lags a long way behind higher-interest-rate countries.


The real determinant of economic viability, ROFE (Returns on Funds Employed), would obviously be considerably lower than the quoted ROEs. When debt servicing is of no concern, inefficiencies creep into the business and the economic viability of capex becomes less important.
The prices of those wonderful products we buy from Japan are subsidized by shareholders of Japanese corporations. Little wonder that Buffett, when asked about investing in Japan in 2007, wryly commented that the profitability of Japanese companies was too low for Berkshire’s liking.


Although Japanese corporate profitability is improving, by Western standards most of its major corporations have not been economically viable in the past, and if required to pay equitable rates of interest, would be in serious financial difficulty.


The high Nikkei index PE ratio in 2007 of 18 (price-to-book value of 1.9) on average ROEs of 10 percent is influenced by the meager average dividend yield of 1.1 percent still being better than leaving money in the bank.


With so little incentive to invest and debt so cheap, it is not surprising that in 2005 Japan was the world’s largest consumer of luxury goods, accounting for 41 percent. Rather than working in favour of Japanese investors, low interest rates over the past 20 years have decimated their funds. Although low domestic rates persist, demand for Japanese stocks will remain high and they will therefore continue to be grossly overpriced.

The reason Japan keeps rates so low is to encourage an outflow of capital to dampen the yen exchange rate to help its exporters. In other words, domestic employment is the prime motivation. If Japan’s trade surplus were repatriated, rather than being left abroad, the US dollar would crumble and the yen appreciate to a level that would make life even tougher, perhaps impossible, for many Japanese exporters.

Here is a simple question to see whether you have been following the argument.
Given a Nikkei index figure of 16,500 and the abovementioned ROE (10 percent) and price to book value (1.9), what would the Nikkei index need to be to achieve a 10 percent return from an index fund that replicated it? Answer: 8684

When ROE and RR (Rate of Return) are equal, value is equal to book value. Therefore, 16,500 / 1.9 (price to book value) = 8684.

These are the sorts of things to consider when thinking about investing in international funds.


Related article: 20.11.2008 - KLSE MARKET PE

Major overseas market falls sharply, should we sell our shares?

Question: When a major overseas market falls sharply, should we sell our shares (in panic)?

The crux of the issue is to always bear in mind that generally each stock market has its own trend. The problems and environment defer from country to country.

Thus, the peculiarity of the stock market may not necessarily affect the other.

Instead, the rise or fall of a stock market tends to depend on how investors perceive the particular situation say, in 6 months to 1 year. That is the future prospect of the country.


However, some may argue that the above view is erroneous.

Take for example, the October 1987 Wall Street Crash which rocked the stock markets of the world. To this, one needs to understand that the Oct 1987 crisis was due to a fear of a worldwide recession due to the insurmountable trade deficit in the US.

On the contrary, the even that caused the Hong Kong Hang Seng to plunge 633.85 points in 3 days on 11.3.93, 12.3.93 and 15.3.93 was attributed to the political issue between Hong Kong and China over the handling over of Hong Kong to China in 1997. Despite the drastic fall of the Hong Kong Hang Seng Index, the ST Industrial Index of Singapore remained firm. Therefore, if you had panicked and sold off your stocks, you would stand to lose out.


Each country has its own problems, economic or political.
Therefore, each country's stock market trend defers one from the other.
EXCEPTION: Worldwide fear could have a down effect.


Ref: Making Mistakes in the Stock Market by Wong Yee

Comments:
What about the present crisis?
How will this play out?
My opinion is the financial markets are not decoupled.
But what of the individual economies? Likewise too.
But let us not despair.
History has shown that after each crisis, the world rebounded back to higher levels of growth.
It is only a matter of when this crisis will be over.
You should have invested in a manner to be in a position to take advantage of the crisis.
For others, surviving the crisis unscathed maybe challenging.

Ref: Consequences must dominate Probabilities