US Investing Abroad, A Special Report
March 30, 2009 By Paul A. Renaud. www.thaistocks.com
Investing in Emerging Markets by individual investors based in developed countries.
Buying foreign shares in an emerging country, from within a developed country, is always more expensive commission wise and perhaps otherwise. Many US residents currently know they got to get going internationally, but are understandably naïve on how to implement this. Or have done this but in a less then optimal way. Here below I elaborate on this theme, as seen from the benefits derived as viewed from individual
Transaction fees are not the only consideration:
It is not just buy/sell commissions which count and add up, but even more important is to get all the dividends, stock dividends and rights offerings, i.e. getting all shareholder benefits properly credited. In the past, regardless of what they say to you, US brokers on this have been less then good. I know of Peter Schiff and other such US based self-acclaimed internationalists with their brokerage units,...and they are OK, except its all rather expensive. (Mr. Schiff as one example has gotten on the US$ bashing train long ago -and lately rather wrong).
Open Account directly in the country they are investing:
US, EU or other developed country based true believers in foreign markets, should consider opening a brokerage account directly in the country they are investing.
Even consider visiting the country if they can. Depending on how much capital they plan investing, they may be able to (US) tax deduct the trip even while it’s mostly a holiday.
In this direct way they will likely save much on stock brokerage commissions, which is a continued expense. In Thailand’s case it is possible and not too difficult to open an account through e-mails, faxes and post mail. But you always will need a valid passport!
If there are more US bank failures and more of China uprising calling for a global currency, this might signal the end of the Dollar, as the major global currency. With a trillion or more new dollars printed by the US Fed, it is entirely possible that in a year or 2 the US$ will be debased, as there are too many $ around. Its just another reason why global investors should start having an alternative currency/investments as part of their long term investment plan. ***
Here is how I recently wrote back one US journalist/author John Rubino on this, as he asks me some of the key questions. (John is also a contributing author to the globally prominent “CFO Magazine”.)
By Paul A. Renaud. www.thaistocks.com
It makes sense to directly diversify out of the USA, now more then ever. With this I don't mean foreign stocks traded in USA, but foreign companies trading on foreign exchanges(!). Asian or other foreign stocks trading on US exchanges are expensively valued, pay low dividend rates and rarely if ever, truly represent emerging Asia. 99% of all Asian stocks do not trade in the US as so called ADR’s. So by only looking US listed ADR’s you are choosing to ignore the best values and growth companies in Asia. I much view this as a less effective way to diversify out.
One of the possibilities is a foreign brokerage account.
A foreign (i.e. non US) brokerage account makes sense if you invest more then just a small sum of say around 20,000 US$, as them you benefit from:
1) buy/sell commissions are most certainly going to be lower,
2) you can get some local research from that broker,
3) only you and the foreign broker know about it.
4) you are assured all your dividends, stock splits/dividends and other shareholder sweeteners’, which companies here increasingly and frequently distribute.
In some cases it may require going to that country to in person open just such an account, in many cases it does not. Like in Thailand at least 2-3 solid brokers we know of here, offer to open an on-line broker trading account, thought the e-mail/fax/and normal registered mail. A valid passport is required with a notarized signature along with filling out and signing the brokers new account forms, which are in English language.
Then once this broker account is open and a new acct. number given, you transfer the capital to invest from your individual name, to the brokers’ name. (I would strongly suggest it be in an individual name, not a company name, or the foreign broker may require local capital gains taxes deducted at the source and more paper work). If properly done, repatriation of capital and profits, is never a problem, or no foreigner would ever invest there! For Thailand, there are no capital gains taxes and a 10% tax withholding at the source, on the dividends.
In Thailand's case repatriation has never been an issue, as long as it is repatriated back to the same name as to where it came from. This means its important to transfer the funds directly to the Thai broker, not to a Thai bank and then to the broker.
What is Thaistocks.com?
Thaistocks.com is just an unbiased/objective publisher with 20 years on location experience on our topic, where our income is derived from annual individual memberships and not from cozy deals with companies we review, nor local brokers.
We are not a broker nor a financial advisor, nor receive fees or commissions or other perks from them or from listed companies. Nor do we manage funds for any members. I just share our unprejudiced opinions on long know-how here -and review stocks I like and why, all based on company in-person visits, on location long experience and fundamental analysis.
We have a certain amount of “press power” here, meaning if something goes wrong or a broker complaint is voiced by a member, we put it on our website and/or inform
By Paul A. Renaud. www.thaistocks.com
the regulators directly. But this has rarely if ever been a problem. The key issues once the how is resolved, is were to invest in credible companies, understanding some of the local nuances. I can help with regular ideas and model portfolios and company reviews -and much more. We are very private in the sense that we don't require the real name of any member -and only an e-mail address. Of course, we never use/allow spam or sell our list of members or registered users. We are on location full time in Thailand but have our headquarters in GenevaSwitzerland with its very strong free press/free expression-of-opinion laws.
Here are some questions which often come up:
Is there any kind of insurance or other protection for investors in case of broker insolvency or other problems with access to your accounts? If not, how do potential clients tell the solid, legit foreign brokers from the excessively risky ones?
I can't speak for other countries but this is not an issue in Thailand. I think in general the US investment community has done a good job scaring/freaking investors whom want to go at it directly overseas, as they rather have you invest in their international funds. (See limitations below). Or just want you stay in 'good old USA'. US brokers for the most part don’t know about investing overseas, don’t want to know it and rather have you be the same way. Most Swiss banks are good at investing around the world but their fee structure is a horror.
But to answer this question, in Thailand's case we have the Thai Securities Deposit Center (TSD). Here all customer shares are segregated away, meaning not held by the broker. If a broker were to go bankrupt, all the client shares are held separately and so broker risk is minimized.
Cash balances held by the local brokers do not have this protection, but if this is a concern it can be avoided by opening a separate Thai bank account. Then all trades get settled directly through this bank account. These do not require statements to be sent out anywhere and comes with a convenient globally usable ATM card. This is also a good way to collect the yearly or semi yearly company dividends. However to open a Thai bank account you must visit the country.
Here so, through the ATM bank card, foreign investors can withdraw cash dividends or sales proceeds from stocks from nearly anywhere in the world! People have never lost their Thai bank deposits. There is also the equivalent of an FDIC, where bank deposits are insured. We review all this in full at the web site and with further help as needed, or more related questions by members.
Foreign brokers and companies can in fact be far more conservative then US firms/brokers. There is in general a huge misconception in the US that any foreign (to USA) company is more risky*. This is wrong. In Thailand's case for example there are no different shares issued, say class A or B, where a certain class of shareholders have no or limited dividend/voting rights. Different classes of shares are simple not accepted for listing. Same with the abuses of stock options another financial under reported outrage out of the US. Margin trading or massive short selling is also a
By Paul A. Renaud. www.thaistocks.com
practice tamed away here. Just to site 2 practices/examples/abuses which nurtures mistrust/market instability and so risk profile.
Thai shares are interesting in the current dire times. Year-end 2009 promises to be a recovery time, were a light at the end of the tunnel will be apparent. This will likely be discounted ahead of time with a rally on the local stock market, enhancers could be:
1) A more stable Thai political situation -and along with already a firmer currency.
2) In contrast to China, a far less business reliant climate dependent on now recession plagued USA.**
3) Relatively robust earnings’ resilience on selective stocks, along with still high cash dividends going along with record low valuations.
USA ADR’s vs. the real thing.
One key reason why US/EU/JAPAN resident/investors should get directly involved in some foreign countries stock markets is because the alternatives listed in USA, are by far not equally desirable (yes, far from it) to individual investors, who don’t have the restrictions of large institutional funds.
Foreign companies which list their shares in the US, as ADR's, are relatively very few and at that, are overvalued. Why? These ADR listings are only the largest firms and have high expenses by being listed in the US. Yet, they command a premium p/e's with very low dividends yields.Far from a pure play, often, they simple do not fairly represent the country of origin. They have been westernized overpriced by pure size-and so should be marginalized to any long term rational individual investor.
How about developed country mutual funds, which invest in foreign countries? Here the problem/limitation is two fold:
1) Most such funds have hundreds of millions of dollars under management and many have billions. Hence, they operate with severe limitations in what they can invest in. Their own internal rules restricts’ them to not invest in any company unless it has an average daily trading volume usually in the millions of dollars per day. And so most, including all the fastest growing, are off these investors’ radar screens. Yes, the fastest growing, highest dividend yielding companies are totally excluded from these managed large funds. They may not tell you this, but I just did.
Most emerging countries do not have many stocks at all were daily trading averages in the millions of $, so while these fund state they invests in say, 'hard working Thailand", in fact these funds invests only in the relative few and over-priced large cap. companies. The very ones: which are artificially expensive and overpriced, as they are the few which funds/institutions can invest in. It all feeds on itself.
I have much data at our site showing that if you get beyond those companies, many fast growing "jewels" can be found, at half the p/e ratio's and double the cash dividend rates. They simply "are less filling and taste greater". Besides most have no debt. vs.
By Paul A. Renaud. www.thaistocks.com
large companies which have much more financial leverage. (Debt and financial leverage is much of what got the West into trouble). They have also over time been the true performance stars, and this by a long shot.
2) The second reason is that most Mutual funds have a weakness of mutual fund governance, where the funds themselves are supposed to be managed in the interests of their investors, but instead tend to be dominated by the mutual fund advisor which as fees in mind. There is realcloudiness of fund fee/expense structures. This makes it difficult to know what investors are paying for and then to compare fees for funds in the same asset class. The industry has still not standardized its fee structure, and for their own good reason.
There should be single number showing all fees which should prominently be published in the prospectus -and at the funds advertising brochures. This is lacking and so investors are often in the dark as to what exactly are all the different fees of the fund. Fees, fees, fees which individual investors with their own diversified portfolios would save.
Similarly, ETF's have their serious limitations as well.
Realize is that ETF's have equal serious limitations, in being so big and thereby so index trapped. By definition, the bigger the stock, the more they own of it.
Just consider that the Thai SET index is around the same level as it was around the turn of the century, yet look how my theme of smaller cap stocks outperformed that.
For free registered users at our web site, can see the long performance record here: http://www.thaistocks.com/index.php?module=Pagesetter&func=viewpub&tid=1&pid=928
ETS's would have been huge lagers and will likely continue to be so, due primarily to their size which is their own limitation. In Asia size in a company is not the ideal way of being, meaning so many very successful firms are just not that big for these mammoth size appetited funds.
We individuals can go after the true/blue/real Asian growth stocks, because the rest of the crowd (institutions), must by definition and to their peril ignore these. The key is to have an objective & experienced proven pro on location checking, not playing golf,
and this I have done and in place since 1997.
Paul A. Renaud.
* Thai stocks have double the long term growth rates as compared to the US, double the dividend yields and yet half the p/e ratio's of USA or EU. We also do not have a dysfunctional banking system nor huge D/E ratios, like in the US now has. Company salaries are not even 1/10 then the horror pay-scale of seniors in the US, and we dont' have a litigious society which creates huge backlashes etc..I can go on but you get my point. Of course there are some counter balance points, like the US has a more stable political system.
** Companies here have no exposure whatsoever to the US consumer or housing market. There is no subprime or prime housing mess. No Thai bank of any kind has run into trouble on this, as there is no exposure. In fact Thai banks reported relative impressive 2008 results.
While of course the country is being dragged into it as well, Thailand is just a bystander to the global horror. Tourism and increasingly more export industries are affected, but the others which are only negligibly so. This even while their stocks dropped along with the global sell off. (I recently identified 5-6 “green” listed companies here which should combined have earnings growth this year as well as next.
Vivian adds in Dec. 2014:
We now have another reason to recommend opening a foreign brokerage account. Early this year we wrote up three stocks traded on the London Alternative Investment Market (AIM) which we got brokerage reports and contributor articles about. They were available from my discount brokerage (e-Trade) and others. But late in the summer the AIM reduced the frequency of trading the least liquid shares listed there. Rather than continuous pricing during the London day, the trio of stocks we owned were only available at 4 auctions of which only 2 overlapped with Wall St. E-trade then stopped offering tracking or trading of the stocks we still held,
China Chaintek and Naibu . We had sold the third. Instead, we were being held up by UBS , subject of another special report available here on Swiss banks. It was offering bid-ask quotes with Alpine-to-valley differences. I am looking into whether we cannot deal with a UK brokerage without too much hassle to continue to track and trade AIM shares at a sensible commission. I will report back if a London firm with US principal officers can do this.
*** See for example “Change For America”, page 197. A progressive blueprint for the 44th President". Edited by Mark Green and Michele Jolin Just Published, 2009.