Individual investing in still Emerging Asia has its advantages.
April 2, 2009 Total of 7 pages. By Paul A. Renaud. www.thaistocks.com
Investing in Emerging Markets as should be favored by individual investors living in developed countries.
Investing in listed shares of an emerging country, from within a developed country, is and has always been more expensive commission wise -and otherwise. Many US resident for example know they got to get going internationally, but are understandably inexperienced on how to implement this. Or have done this already but in a less then optimal way. Below I give my viewpoints with benefits derived as seen from an individual investor standpoint.
Transaction fees are not the only consideration:
It is not just buy/sell stock commissions which count and add up, even more important is to get all the dividends, stock dividends, free warrants and rights offerings, i.e. getting all shareholder benefits properly credited and in time. In the past, regardless of what they say to you, US brokers on this have been less then ideal. I know of Peter Schiff and other such US based self acclaimed internationalist with their brokerage units,...and I don't recommend them. It is all rather expensive along with perhaps even dubious practices? (Mr. Schiff as one example has gotten on the “US Dollar bashing train” long ago -and lately rather wrong.
Open Account directly in the country they are investing:
US, EU and 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 so may be able to (US) tax deduct their trip, even while it’s mostly a holiday.
In this direct way they will save on stock brokerage commissions, a continued expense. In Thailand’s case it is possible and not too difficult to open a Thai broker account through e-mails, faxes and post mail. But beware you always will need a valid passport for proper identification.
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 just too many $ around. Currency diversification is just one more another reason why individual investors (especially in America) should have multi country long term investment plans. ***
Below 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”.)
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 stock exchanges(!). Asian or other foreign (to US) 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 at US listed ADR’s you are simply ignoring the best values and growth companies in Asia. While some institutions may be bound to these, for individuals it is a far less effective way to diversify out of the US.
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 then you benefit from:
1) All buy/sell commissions are most certainly going to be much lower,
2) you can get some local research directly from that broker,
3) only you and the foreign broker know about your account,
4) you are assured all your dividends, stock splits/dividends and other shareholder sweeteners’, which companies here increasingly and frequently distribute,
5) you are assured the local current market price of that stock, not some price priced higher by a market maker in the US.
In some cases it may require going to that country in person so to open just such an account but 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 always required with a notarized signature. Filling out and signing the brokers new account forms of course, which are in English language.
Then once this broker account is open and a new acct. number is given, you transfer the capital to invest from your individual name, to the brokers’ name. (I would strongly suggest its 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, so check before). If properly done, repatriation of capital and profits, is never a problem or no foreigner would ever invest in that country anymore. For Thailand, there are no capital gains taxes and a 10% tax withholding at the source, on the dividends. Repatriation of capital is instant and on the sell settlement date, if/when you want.
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 it is important to transfer the funds directly to the Thai broker, not to a Thai bank and then to the broker.
What/who is Thaistocks.com?
Thaistocks.com is an unbiased/objective publisher with 20 years on location experience on our topic, where our income is derived from annual individual memberships. No 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 these or from listed companies. I just share our unprejudiced opinions on long know-how here. I review stocks I like and state why with basic analysis, all based on company in-person visits, on location long experience know how. I am at heart a fundamental value driven medium to long term professional investor.
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 the regulators directly. But this has rarely been a problem.
I can help with regular research articles/ideas, model portfolios, company visit reviews -and much more. As the key to success, once the how is resolved, is in what credible companies to consider.
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 Geneva Switzerland 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 own international funds. (See limitations below). Or just want you stay in 'good old USA' and invest through their expensive platform. US brokers for the most part do not know much about investing overseas, don’t want to know about 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 and recently much credibility has been lost.
But to answer the 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 segregated (held separately) and so broker risk is minimized.
Cash balances held by 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. Such and account does not require statements to be sent out anywhere and comes with a convenient globally usable ATM cash withdraw 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 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 Thai bank deposits are insured up to a limit. We review all this in full at the web site and with further help as needed, or more related questions by members.
There is in general a huge misconception held in the US that any foreign (to USA) company is more risky*. This is just wrong. In Thailand's case for example there are no different classes of shares issued. Say class A or B, where a certain classes of shareholders have no or limited dividend/voting rights. Different classes of shares are simple not accepted for listing here. Same with the abuses of management stock options another financial underreported outrage out of the US. Margin trading or massive short selling is also a practice tamed here. I here just site 2 practices/examples/abuses which nurtures mistrust/market instability and so risk profile. Reporting requirements with separated approved audited financials, independent directors, corporate governance etc, are all present here. (Most would agree that recently irregularities on this has come too often out of US markets)
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. Thai stocks are priced at half the p/e ratio’s as compared to US or EU markets, and they pay double or more in cash dividends. The “light at the end of the tunnel” to the current world crissis will likely be discounted ahead of time with a solid rally on the local stock market, enhancers here:
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 addition key reason why US/EU/JAPAN resident/investors should get directly involved in some foreign emerging countries stock markets (through a local broker) is because they do not have the same size restrictions limitations such the ever large institutional funds have.
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 of firms. These have very high expenses by being listed in the US.
Yet, they command a premium p/e's (valuation) with very low dividends yields. Far from a pure country play, most 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 mutual funds which invest in emerging 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 consider to invest in. Their own internal rules restricts’ them to not invest in any company unless it has a high average trading volume, usually in the millions of dollars per day. And so most, including all the fastest growing companies, are off these funds’ 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 average trading volume is in the millions of $, so while these fund state they invests in say, 'hard working Asia", in fact these funds invests only in the relative few and over-priced largest capitalized companies. The very ones: which are “artificially” expensive and overpriced as they are among the very few which such funds/institutions can invest in. It all feeds on itself.
I have much data at our web 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". In Thailand these are the real gems, many have no debt. vs. 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 as I show at the website.
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 advisors, which have fees in mind. There is real cloudiness 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 mutual fund industry in the US 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 these funds Fees, fees, fees which individual investors with their own diversified portfolios would entirely save.
Similarly, so called ETF's have these same serious limitations as well.
Realize is that ETF's have equal serious limitations this in being so big and thereby so market index trapped. As by definition, the bigger the stock, the more they own of it. To most individual investors this is just to lame of a way to own that country.
Just consider as one example that the Thai SET benchmark index is around the same level as it was around the turn of this century, yet come and look how my theme of smaller cap stocks outperformed that.
In Asia big 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 appetite funds. In Asia many if not most highly successful companies are by far, not the biggest ones.
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.
Best Regards,
Paul A. Renaud.
* Notes:
* 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.
*** 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.
