Investing overseas: What you need to know

Saturday, 26 March 2016

BY YAP MING HIU MONEYandYOU

WITH the ringgit weakening over the past year or so, those of you who haven’t already, are probably starting to toy with the idea of investing overseas.

Diversification across markets, asset classes and currencies is one of the basic tenets of investing. Those who follow this strategy religiously would likely have seen their investment portfolios perform better than those who remained entrenched in the local market.

What used to be considered fairly robust returns – such as ASB dividends of 8% per annum and EPF dividends of 6.5% per annum – now seem menial if you take into account the 30% drop in the value of our ringgit.

It is no surprise then that by now, many Malaysians have accepted the fact that the ringgit may not bounce back to RM3.20 to US$1 anytime soon, and that it is time to diversify their assets by means of foreign investments.

This is good. But before putting your money into foreign investments, you need to know what you are getting yourself into, and carefully consider your decisions before making your moves.

Firstly, how much of your investable assets should you allocate to foreign investments?

The rule of thumb is to allocate not more than 30% of your investable assets into foreign currency investments. The reason for this is that your daily life still revolves around the Malaysian currency, and your foreign investment is merely a means of bolstering your net worth.

Besides, if the US currency weakens, you run the risk of losing a significant amount of money if your primary invested assets were in US dollars. In recent months, anyone who bought into the pessimistic view out of fear that the ringgit would touch RM5 to US$1 would have seen the value of their foreign investment shrink owing to the strengthening of the Malaysian currency. Therefore, putting more than 30% of investable assets into foreign investments would be over-investing, not to mention highly risky.

The second point to consider is, how do foreign investment markets fare in comparison to Malaysia?

If you have not had any experience investing overseas, you may be in for a big surprise. Many Malaysians assume that the investment market overseas works more or less the same way as it does locally. However, this is not the case.

Unlike Malaysia, foreign investment markets such as US, Singapore and Hong Kong are far more open and have fewer regulatory restrictions. There’s also less government support for their market. As such, while these markets enjoy higher levels of global portfolio fund flows, they also experience higher levels of volatility and price fluctuations.

Let us take the example of bonds. In Malaysia, bond investments behave almost like a fixed deposit type of investment – steadily up and predictable (partly due to the accreting value of bond coupons recognised by the fund over time). However, the same can’t be said in other countries.

In the graph, you can see that a Malaysian bond fund (Fund A) moved up steadily over the period of comparison whereas the US (Fund B) and European (Fund C) bond funds experienced higher levels of price volatility and underperformed Fund A. All three funds invest in somewhat similar investment grade papers, only that they invest in different markets. This is mind blowing for most Malaysian investors.

In fact, I had a client who once lost up to 20% of his investment in an Asian bond fund domiciled in Singapore. What made him very upset was that he wasn’t properly advised by the banker of the risk exposure of such a fund. Had he done a little more due diligence or consulted an independent financial advisor before investing into the fund, he would not have been caught off-guard and suffered such a significant loss.

The same applies to equity investment overseas. Many investors would have a hard time trying to adapt to markets that are more volatile than our FTSE Bursa Malaysia KL Composite Index.

The next point to consider is this: How safe is your capital when investing in foreign products? If things are not going well, will you be able to retain your capital at the least?

Let me highlight the example of an offshore commodity product that I once came across. This product focused on physical trading of commodities like timber, metals, aquaculture, rice, plant-based oil, crude oil and biofuel. It supposedly had an attractive track record, yielding double-digit annualised returns for more than two years since its inception. It targets to provide investors with a fixed 2.25% quarterly distribution (i.e. a total of 9% per year).

One of the most common mistakes made by Malaysian investors, however, is the tendency to look at foreign investments through the lenses of their local perspective and experience. At first glance, you might think this investment is no different than any other equity unit trust funds available in Malaysia – a credible alternative investment with good diversification credentials worthy of consideration.

However, the product turned out to be a scam and the investors lost all their money. This is not an isolated case. Due to their limited knowledge and experience, many Malaysian investors fail to differentiate genuine investments from scams. That costs them a lot of money.

Cashflow needs

Thus when investing in foreign markets, it is always better to stick to licensed and reputable fund managers that invest in regulated investments and markets. Lastly, before putting your money into foreign investments, you should thoroughly assess your cashflow needs in order to maximise the holding power of your investments.

A good cashflow management practice is to establish one’s ideal cash reserve before dabbling in investments. For working adults, this emergency fund should be able to cover six months of one’s cashflow needs such as living expenses, loan repayments and any other lump sum cash requirements over the next three years. I recall an incident where a client of mine underestimated the amount of cash he would need to execute his plans of building a bungalow on a plot of land he owned.

Only midway through the construction process did he realise that he was short of cash, after having invested the remainder of his liquid assets in foreign investments. In the end, in order to complete his dream home, he was forced to withdraw his foreign investments at a loss.

A situation like this could have been easily avoided with a little bit more cashflow planning and foresight. Make the necessary provisions for your short-term cashflow needs and you will position yourself to better withstand any unexpected investment market volatility.

Diversification of investments across markets, asset classes and currencies is a recommended risk management strategy for any investor and should be diligently pursued. However, never assume that investing overseas is similar to investing in your home ground. In the case of Malaysia’s relatively stable investment environment, entering into foreign investment markets could be akin to stepping into rough sea from a calm bay – it might come as a shock if you are unprepared.

Conduct your research thoroughly – find out more about the investment environment, the country’s regulations, and study the investment product carefully. Consult a professional if required, such as an independent financial advisor, to address any concerns you may have. Once you’ve considered the above and decided to invest, make sure that you monitor the performance of your investment closely.

The more volatile a market, the faster you’ll need to take action on your profits or losses. Park your profits somewhere safe to prevent losing it to the fluctuating market. If your investment is making a loss, then act fast with a contingency plan at hand.

Remember, the more prepared you are, the more likely you are to succeed. All the best!

Yap Ming Hui (yapmh@whitman.com.my) is a bestselling author, TV personality, columnist and coach on money optimisation. He heads Whitman Independent Advisors, a licensed independent financial advisory firm. For more information, please visit his website at www.whitman.com.my

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.

Three great US stocks on sale

Scott Phillips

August 3, 2011 - 1:58PM

With Aussie dollar riding high, there may never be a better time to buy American shares.

Whole bookshelves of research have been conducted to pin down the exact reasons for currency movements, with only moderate success. Broadly, the economic growth of a country and that country's interest rates (again, relative to others) are widely accepted as two of the key inputs.

Whatever the reasons, the dollar is now sitting well above parity. For many, this has the effect of making shopping and travelling overseas much more attractive. It's little wonder the growth of online retailing has been so strong.

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Just as the Australian dollar's appreciation has made buying clothes and books from overseas more attractive, the same should be said of shares. The dollar has appreciated by over 20 per cent from around $US0.90 in the space of a year. You can now buy 20 per cent more shares in a company listed on the New York Stock Exchange than you could this time last year.

Of course, that only applies if the share price is the same as it was 12 months ago. The broader point is that if today's price represents good value in US dollars, you're buying at a discount relative to that same valuation a year ago.

Buy shares like clothes – on sale

Many a value investor uses the analogy of clothes prices to explain their approach to buying shares. When the price of a shirt is reduced, you're likely to buy more, not less. While share price drops can be unnerving, they often provide an opportunity to buy great businesses 'on sale'. Rather than fearing the drop, you should be excited by the opportunity.

A cursory look at some household names on the NYSE and Nasdaq exchanges suggests that some of these companies may well be on sale.

An opportunity to buy?

Microsoft needs no introduction. The maker of the ubiquitous Windows operating system and Office productivity software as well as the must-have X-Box gaming console is trading at around the same price – in US dollars – as it was 5 years ago, while earnings per share (EPS) has grown 92 per cent. Microsoft is now selling for a price that implies little or no growth, at a price-earnings ratio of a touch over 10.

In December 2008, shares of US-based The Coca-Cola Company were trading at around US$63. Two and a half years later, they trade at a little less than 10 per cent more, despite EPS doubling since that time. Coke has a trailing P/E of only 12.6 times earnings.

Branding agency Interbrand ranked Apple as the 17th most valuable brand in the world in 2010. Unsurprisingly, given the success Apple has had with the iPod, iPhone and iPad, the share price has more than doubled in the past three years. Despite that meteoric rise, profits have grown at a faster pace – tripling in the last three completed financial years. While a price-earnings ratio of 15.7 isn't traditionally cheap, Apple's growth trajectory may well make today's price look inexpensive.

Foolish take-away

Great businesses with wonderful economics and significant competitive advantages should be at the top of every investor's watchlist. A United States-based investor has the opportunity to invest in these companies at what history may well deem undemanding multiples.

An investor with Australian dollars to deploy has the same opportunity, but with cash that today buys many more US dollars than this time last year.

Investing in shares overseas has rarely been easier for Australian investors. Many Australian and US-based brokerages offer access to US and European exchanges – just make sure you shop around for a good deal.

This article contains general investment advice only (under AFSL 400691).

Scott Phillips is The Motley Fool's feature columnist. Scott owns shares in Microsoft and Coca-Cola. The Motley Fool's purpose is to educate, amuse and enrich investors.

Read more: http://www.smh.com.au/business/three-great-us-stocks-on-sale-20110803-1iax2.html#ixzz1TwRjap00

Dollar hits global gains

May 11, 2011

Downside of strong dollar...global shares produced an average annual return of minus 4 per cent in the past decade.

Blame the terrible returns on international shares during the past decade on the Australian dollar. There was a dramatic dip in the value of the Australian dollar in 2008 and into early 2009, when sentiment about world economic growth was at its gloomiest, but otherwise it's been on a steady rise during those 10 years.

Most people access international shares through managed funds that allow the currency effects to flow through to investors.

The dollar's rise has more than sliced away the gains on overseas sharemarkets, leaving investors in the red.

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During the 10 years to the end of March this year, international shares have produced an average annual return of minus 4 per cent.

With losses compounding during such a long time, the original sum invested 10 years ago would be worth about half today, after accounting for inflation.

But the same portfolio, hedged or protected from exchange-rate fluctuations, has produced an average annual return of about 3 per cent during the same period. The difference between hedged and unhedged is 7 percentage points each year.

Investors could be excused for thinking they had invested in a foreign exchange fund rather than an international share fund.

About half the typical portfolio will be invested in US-listed shares, as the US makes up about half of capitalisation of developed-word sharemarkets. That means the US dollar is the currency exchange rate with the biggest impact on the returns of the unhedged portfolio of international shares. A decade ago, one Australian dollar was buying about US50¢. Last week it was buying more than $US1.10.

After 10 years of losses, many investors will be wondering what they should do now. Assuming they still want the diversification benefits of global shares, should they switch to a fund that removes the currency effects on their returns? During the next few years you would think the Australian dollar will stay high because of the resources boom keeping commodities prices high and Australian interest rates relatively high. Given the Australian dollar is so highly valued now, if there was to be a change in the value of our dollar, it is much more likely to be down than up.

If that is right, there may be nothing to gain from being in an international shares fund that removes the currency risk. There may be more to gain from leaving the international shares exposure unhedged to benefit from any dips in the value of the Australian dollar.

Another approach may be to include more exposure to emerging markets. The typical global shares fund has only a small exposure to emerging markets. But shares listed in China and India and other emerging countries are likely to keep doing well. Perhaps the best option is to consider managers who actively manage the currency risk, have a decent exposure to emerging markets and are not afraid to invest differently to their peers. This approach is more likely to be found among, but not limited to, boutique fund managers who specialise in managing global shares funds.

http://www.smh.com.au/money/super-and-funds/dollar-hits-global-gains-20110510-1eg2y.html

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

2010 Investment Outlook

2010 Investment Outlook
Advice for next year: Go global
By Peter Coy

December 28, 2009

After a long, hard day of conquering the world, Chinese industrialists toast deals with Scotch whisky. This is an opportunity for London-based Diageo (DEO), the world's largest distiller. In 2007 it introduced Johnnie Walker Blue Label George V Edition at $600 per crystal decanter. Sales in Asia were so strong that Diageo topped itself this year with The John Walker at a suggested retail price of $3,000. It's "performing very well," the company says.

Investors looking ahead to 2010 can learn from Diageo. Figure out where wealth is being produced in the world and grab a piece of it, whether that's in China or Brazil or the U.S. Don't count on a robust economic recovery to lift the stocks of run-of-the-mill companies, because most economists expect a weakish rebound.

We predicted in this space one year ago, when blood was running in the streets, that investors would "do well by buying what's out of favor," such as high-yield bonds. Did they ever: Through November in the global markets, junk bonds returned 58%, followed by commodities (36%), gold (34%), stocks (29%), and investment-grade corporate bonds (23%). Bringing up the rear in returns was the safe choice, government debt (8%). But the easy money from amping up risk is over. Now it's time to choose safer plays in stocks, bonds, and commodities that will thrive even as the U.S. economy continues its struggle to get back to good health.

In that light, going global is a good, sensible theme for 2010. It's one of the few things that passive and active investors can agree on, even though they have opposite reasons. Passive investors believe that you can't beat the market, so they favor a little-bit-of-everything approach to reduce the risk from any one investment going bad. By their philosophy, the maximum diversification comes from spreading your bets all over the globe, not just in your home country. Ideally, the passive investing camp says, Americans' investment in U.S. stocks should be no higher than U.S. stocks' share of global market capitalization. That share has fallen from 70% in 1970 to 48% in 2009, according to MSCI Barra (MXB), which calculates market indexes.

You can even argue that Americans should underweight U.S. stocks to offset their heavy exposure to the U.S. through the homes they own on American soil. Not many Americans are that internationally diversified. A typical 401(k) in the U.S. has about five times as much invested in U.S. stocks as in foreign stocks, according to a survey by Hewitt Associates (HEW).

Active investors are also exploring investments abroad, but not just for diversification. In contrast to index-fund investors, they believe you can beat the market—and many happen to think that some of the best bargains for 2010 lie outside the U.S., in markets that have been less picked over by professionals. An investor who miraculously managed to select the top 10 stocks in the world in each market sector each year for the eight years through December 2008 would have had a cumulative return of almost 7,000%, says MFS Investment Management, the Boston-based fund manager. In contrast, MFS adds, an equally foresighted investor who was restricted to the top-performing stocks in the Standard & Poor's 500-stock index would have had a cumulative return of just under 1,500%. In other words, if you have any faith in your stockpicking, you will want to roam the world for candidates.

Whatever their motivation, many Americans are likely to intensify their search for investments abroad in the coming year. An online investors' survey for Bloomberg BusinessWeek in early December found that 40% of American investors plan to increase their exposure to international stocks over the next five years, up from 22% a year ago.

The survey included 770 Americans as well as 158 international investors who had been recruited to participate in periodic online polls by Bloomberg BusinessWeek Research Services. Some things don't change quickly, though: Asked which stock market would produce the best returns over the next year, Americans were still more likely to pick the U.S. than any other country. Among foreign investors surveyed, the U.S. came in fourth after China, India, and Brazil.

Those non-U.S. investors may be on to something. In comparison with the outlook in the recuperating U.S., prospects for growth are much stronger in Asia and in resource-rich nations such as Brazil, Canada, and Australia, where business confidence recently reached its highest level in seven years. "The U.S. economy, with all due respect, is not such a dominant part of the global economy as it used to be. We're going to have decoupling" of other countries from the U.S. in terms of economic performance, says Oded Shenkar, a professor at Ohio State University's Fisher College of Business. The case for going global is even stronger if you believe that the dollar will sink in 2010. Returns on foreign stocks and bonds are worth more to Americans when the dollar falls against other currencies. The Federal Reserve has vowed to keep short-term interest rates extremely low until the U.S. economy gains strength, which may not be until summer or later. Low U.S. rates put downward pressure on the currency.

Buying multinationals is an easy way to bet on global growth without mucking about in names you've never heard of. Not just any multinational will do, though. Makers of consumer staples that serve the growing markets of Asia and Latin America are a good bet for 2010, says Rajiv Jain, head of international equities for Vontobel Asset Management in New York. Diageo is one, of course. Others include Coca-Cola (KO), Nestlé, McDonald's (MCD), and BAT (BTI) (if owning a tobacco company doesn't bother you). Many of these companies have handsome dividend yields as well as price-earnings multiples that are historically low in comparison with those of growth stocks, Jain says.

If you want even more exposure to growth in the developing world, try a company like Nestlé India—not a multinational, of course—which has had 11 consecutive quarters of strong revenue growth. "If you look at their numbers, you would never know there was a recession," says Jain.

In contrast, this is not the best year to go all-in on an industrial renaissance. There is still massive overcapacity in manufacturing in the U.S. despite plant shutdowns and layoffs. China made its own excess of productive capacity worse when it staved off an economic slump by building plants, equipment, infrastructure, and housing.

The tech sector should do somewhat better than general manufacturing because it enjoys shorter product cycles: If customers have any money at all, they tend to replace their computers and communications gear when the stuff becomes obsolete. Worldwide semiconductor sales rebounded more than 50% from their February 2009 lows through October, notes economist Edward Yardeni of Yardeni Research in Great Neck, N.Y. But tech stocks have risen a lot from their nadirs, so they're no great bargains at current prices.

Banks and other financial companies don't look like good deals, either. They continue to be weighed down by weak loans and investments that were made during the go-go years. And the off-balance-sheet financing they once used to juice up their returns is now pretty much off limits, says Wasif Latif, an equity portfolio manager and a member of the asset allocation team of USAA, the San Antonio-based financial-services firm for the armed forces and veterans. Plus, financial stocks have risen a lot from their priced-for-Armageddon lows.

It's been a crazy year. Somewhere out there is a hapless investor who stayed fully invested all through the crash, then finally capitulated and sold in early March, only to watch from the sidelines in horror as the Standard & Poor's 500 rebounded 65% through mid-December. To make sure that's not you in 2010, think hard about your investment choices so you can have the courage of your convictions. Make an investing plan and stick to it, advises Eileen Rominger, chief investment officer of Goldman Sachs Asset Management (GS) in New York, which oversees about $850 billion of investments. "You need a solid foundation of knowing what you own and why you own it," Rominger says. "In this volatile environment, the temptation for investors to do the wrong thing at exactly the wrong point in time is tremendous."

That's especially good advice if you're venturing for the first time into unfamiliar territory such as foreign stocks and bonds. It's a big world, with lots of opportunities. Don't let the strangeness frighten you away.

Coy is BusinessWeek's Economics editor.



http://www.businessweek.com/magazine/content/09_52/b4161045147139.htm

Diversifying your investment overseas

Which country/countries to invest in?

Take your pick:  Vietnam, China, Indonesia, Thailand, Singapore, Hong Kong, Australia, US or UK.

Consider the 3 drivers in any stock markets:

1.  Re-rating by analysts
2.  Currency strengthening
3.  Earnings re-rating

How to screen overseas stocks

Wednesday August 12, 2009
How to screen overseas stocks
Personal Investing - By ooi Kok Hwa


Four criteria to look at when choosing counters that are suitable for long-term investment


LATELY, interest has grown in overseas stock investment. Given the foreign markets’ relatively high volatility of returns compared with the local market, a lot of retail investors find it more exciting to invest in overseas stocks.

However, a common problem most investors face is how to filter, from among all the listed companies in the respective markets, the right stocks that are suitable for long-term investment.

Market capitalisation

One of the most important selection criteria is buying stocks with big market capitalisation. The market cap of a listed company can be computed by multiplying the number of its outstanding shares with the current share price.

In general, we should buy stocks with big market cap because they are normally well-established blue-chip stocks with higher turnover and widely-accepted products and services.

Even though some academic research shows that buying into small market cap stocks can provide higher returns compared with big market cap companies, unless we are quite familiar with the stocks available in those overseas markets, it is safer to put our money into bigger market cap stocks.


It is not difficult to find out which companies have the largest market cap in any stock exchange.

Such information is available in most major newspapers in that particular country or the stock exchanges themselves.

For example, if we intend to buy some Singapore stocks, we should pay attention to companies that are ranked in the top 30 in terms of market cap. One can get the rankings by market cap for the Singapore Exchange in StarBiz monthly.

Price/earnings ratio

Once we have filtered out the blue-chip stocks, the next selection criteria is the price/earnings ratio (PER), which should be lower than the overall market PER. This is computed by dividing the current stock price by the earnings per share (EPS) of the company. It represents the number of years that we need to get back our money, assuming the company maintains identical earnings throughout the period.

Even though some published PER may use historical audited EPS compared with forecast EPS, given that our key objective is to do stock screening, the PER testing will provide us with a quick check on the top 30 companies – whether they are profitable and selling at reasonable PER compared with the overall market PER.

If we cannot get access to the overall market PER, we may want to consider Benjamin Graham’s suggestion of buying stocks with PER of lower than 15 times.

Dividend yield

A good company should pay dividends. We strongly believe that this is one of the most important ways for the investors to get any returns from the companies that they invest in.

Our rule of thumb is that a good company should have a dividend yield that at least equals or is higher than the risk-free return, which is usually based on the fixed deposit rates.

The dividend yield is computed by dividing the dividend per share by the current share price. In general, most blue-chip stocks do have a fixed dividend payout policy and reward investors with a consistent and growing dividend returns.

Based on our observation, most smaller companies may not be able to pay good dividends as they may need the capital for future expansion programmes.

Price-to-book ratio

Most investors would like to invest at a market price lower than the owners’ costs in the company. The book value of a company represents the owners’ costs invested in it.

In a normal business environment, unless the company has some problems that the general public may not be aware of, it is quite difficult to find stocks selling at a price lower than the book value of the company.

As a result, we may need to purchase at a market price higher than the book value. According to Graham, the maximum price one should pay for any stock is the price which gives a price-to-book ratio no greater than 1.5 times. This means that we should not pay more than 1.5 times the owners’ costs invested in the company.

Lastly, the above four selection criteria are merely a preliminary quick stock screening process. Even though investors may be able to find stocks that fit the criteria, we suggest investors check further the fundamentals of the company, such as the balance sheet strength, its gearing, future business prospects and the quality of the management before deciding to invest.

● Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.

From The Star newspaper

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.


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