CONCLUSION
Investing in Emerging Market Stocks
Buying stocks in emerging markets has never been simpler. I recall when I first started investing in these markets. Buying shares in companies like Malaysia’s Sime Darby or Indonesia’s Semen Gresik required a number of phone calls, currency translations, and hefty commissions. But, it was worth it as few investors outside the local countries were buyers and, hence, there was the opportunity to buy long before many had access.
Today, many foreign stocks can be bought through traditional channels as U.S. banks have recognized the demand. Banks have issued depositary receipts (DR), which are a proxy for the shares traded overseas. DRs offer several benefits. They can trade in U.S. dollars if offered on U.S. exchanges, offer a market, pay dividends, and are tradable during market hours. Bank of New York Mellon is a great source for DR information as it is the largest sponsor of the program in the United States. However, there are things that you need to know about investing via DRs that will make the process easier.
If the DR trades on a U.S. exchange, it will say so on the list and will trade either on the New York Stock Exchange, the NASDAQ, the over-the-counter market, or Pink Sheets. If it trades on the NYSE or NASDAQ, a readily available real-time quote will be available. If it trades on the OTC or Pinks, you will have to get a quote from your broker. It’s always a better idea to first get a quote from the local market if it is open and then convert the number to U.S. dollars before placing your order. If the market is closed, the pricing will be based on the previous market close, and you have to be more careful as the bid and offer will have a wider spread to take into account the closed market. This should not dissuade you, however, unless you are trading during a period of volatility. In that case, the spread will be much wider to take into account the possibility of a strong overnight move.
Other DRs trade in financial centers like London or Frankfurt. In such cases, and really in all cases, you need to make sure that you are buying the right security by using what is called a CUSIP number. This is like a unique bar code assigned to every security. Buying stocks that do not trade on any U.S. exchanges will require a call to your broker who will then call his foreign trading desk for a quote. It will cost more in commissions and you will have to pay attention to currency translation. It may also be harder to sell during times of high volatility simply because of the time delay from quote to execution.
The DR as noted below also has a ratio: DR to ORD. This ratio simply means that each DR represents X number of ordinary shares. Ordinary share is the term used for the share on the local exchange. If you are basing your price on the price of the local share, be sure to multiply or divide by the right number to equate the price to the DR.
The Pink Sheets
The Pink Sheets is an over-the-counter (OTC) exchange that is basically a listing of stocks and their prices by active market makers. These are companies that don’t meet Securities and Exchange Commission (SEC) listing requirements. Now, there are some out and out fraudulent listings on the Pinks (they got their name from the color of the paper that the companies and quotes were listed on prior to the electronic market), but there are also some major companies like Nestlé listed on them, as well. While the SEC requires significant listing and regulatory disclosures, many companies like Nestlé believe that there are better places to spend financial resources for listing requirements, such as their home base. This market is often overlooked by investors looking for diversification into foreign securities.
Trading on the Pinks requires some level of due diligence, however. Volume is usually very low and price quotes are often incorrect as trading may not occur in some securities for days. It is critical that you get an accurate price quote before placing a trade. You can do this by looking up the shares on the local exchange and converting back to U.S. dollars. It may take a little bit of time, but it is well worth it for the diversification and exposure.
The Serious Emerging Market Investor
If you truly are seeking to both move some cash offshore and invest like a local in many of these markets, especially Asia, it pays to open a brokerage account offshore. Before doing so, be aware that the account and its holdings must be disclosed to the Internal Revenue Service (IRS). With the recent push toward anti-money laundering, terrorism tracking, and tax avoidance, the IRS has issued very strict guidelines and penalties regarding holding accounts offshore and their disclosure on your tax returns. It is not the responsibility of a foreign broker to do this for you, and in most cases they could not care less about what the IRS thinks and therefore it is incumbent on you to file the disclosures on your tax return. You can learn more about the disclosures and penalties for not disclosing here: www.irs.gov/newsroom/article/0,,id=210027,00.html.
I would caution you to not be scared off by this extra step. If you are a serious investor, this is not a big deal. Just declare your accounts and holdings. It is not illegal to have a foreign account or to trade foreign stocks on local exchanges. The extra time and effort are well worth it, as investing in securities not available to the average investor looking to trade just U.S.-listed stocks can be rewarding.
Going offshore does not mean writing a check or making numerous phone calls to execute a trade. To the contrary, it is a simple process to open and fund an account electronically. A colleague of mine, Jeff Opdyke, has written extensively about investing in emerging markets and penned a great article about opening an offshore account at Boom Securities, based out of Hong Kong, to invest in Asia. As you can see in the following excerpt it contains a wealth of information.
1. Who is Boom Securities and is the firm safe to deal with?
Boom has been around since 1997, being the first online trading firm in Asia.
Boom is fully licensed, regulated, and monitored by the various securities authorities in Hong Kong. And Hong Kong itself is a highly regulated securities market. It’s considered one of the world’s “developed markets,” on par with the United States, London, Tokyo, and so forth.
Boom has a record of zero disciplinary or regulatory actions, according to Hong Kong’s Securities & Futures Commission, the local equivalent of America’s Securities and Exchange Commission. So the firm is safe to deal with.
Private investors in Boom include the founder of San Francisco-based investment banking firm WR Hambrecht & Co. And this past summer, Japanese financial services giant Monex Group bought Boom. So Boom is backed by some big players.
2. How do you open an account with Boom?
This is very easy. All you have to do is direct your Internet browser to www.boom.com. There, at the top of the homepage, you will see a lime-green button with the words “Open an Account” in red. Click on that button and follow the prompts.
You’ll see that you can apply in person (if you happen to be in Hong Kong and want to stop by the office). Or, you can apply by mail; just print the account application form, fill it out, and send it to Boom.
The biggest hurdle in this process—and I use “hurdle” very loosely—is the requirement that you have a copy of your passport and a copy of a recent utility bill notarized.
This is commonplace around the world. Unless you are sitting in front of an account representative, the firm has no clue who you are or where you really live. A notarized copy of your passport is proof that you are who you say you are; and the notarized utility bill is proof that you are a U.S. resident and not a local who’s pretending to live in the United States to evade local taxes.
Setting up your account will take, maybe, two weeks as you collect the necessary documents and get them to Hong Kong so Boom can open the account. Boom will alert you when the account is open, and at that point you can wire money into the account.
Don’t worry about missing the trade recommendations I make during that period. Stocks don’t always move immediately, so you’ll still have the chance to get in. And if the shares do move quickly, they often retreat and regroup before marching higher again, so you’ll have that opportunity as well to initiate your position.
3. Is wiring money overseas safe?
Yes; it’s incredibly safe. And it’s exceedingly simple.
International wire transfers have been around since 1974. They’re how governments, major corporations, and the wealthy move money around the world quickly, efficiently, and safely.
The process is based on so-called SWIFT codes that accurately direct money from one financial institution to another. I’ve personally been wiring money overseas—to places like New Zealand, South Africa, Egypt, Romania . . . and Hong Kong—for years with no problems.
All you do is head to your local bank and tell them you want to wire money to your brokerage account in Hong Kong. You give the bank the wiring instructions that Boom provides. The process takes about 15 or 20 minutes, and the funds transfer itself will take two or three days, depending on the day of week you do it.
Essentially, the wiring instructions first send your money into Boom’s primary account at HSBC Bank in Hong Kong, one of the world’s largest multinational banks. From there, the instructions indicate your personal account, into which Boom will automatically sweep your funds.
Once the money is in your account, you’re free to trade.
And if any hiccups do happen, you’re fine. Your bank will give you an international wire transfer statement that indicates all the important data points regarding SWIFT codes and account numbers. That way, if your transfer somehow misfires—and it likely will not—you can easily trace the funds through your bank and have them returned to your account.
And if the misfire happens on Boom’s end, you can scan a copy of the transfer statement and e-mail it to the firm’s support team ([email protected]) and they will unravel whatever kinks happen to exist.
4. How easy is it to trade through Boom?
Well, how easy is it to trade at Fidelity or E*Trade or Charles Schwab? I’m not asking that question to sound like a smart aleck, but to make the point that trading with Boom is identical to trading online with any brokerage firm in the United States.
You log in to your account (using your own unique username and password), and you place the trade through an online platform. Just as in the United States, the platform requires that you indicate the stock you want to buy, the number of shares you want to trade, and whatever limit price—if any—you want to impose on the trade.
And that’s it.
Once you’re a client, you can sign up for Boom InfoExpress, in which the firm e-mails you updates on companies in your portfolio. So, if you own shares of a particular company that announces a dividend or releases its latest financial report—or whatever—Boom sends you an e-mail with the information so that you remain informed about what’s happening inside your portfolio.
The firm also sends out confirmations every time a dividend lands in your account and every time a trade is settled. Plus, at the end of each month, you receive a note alerting you that your account statement is ready for your perusal.
And, you can go online any time and see your portfolio. You can move funds between several different currencies, including the U.S. dollar, Hong Kong dollar, and the Chinese yuan, among others. You can place trades in 11 different stock markets from Japan to Australia.
Because Boom provides low-cost, online trading across all of Asia (and it’s the only firm doing so), operating through Boom is simply easy.
That said, if you’re still leery and you want to work up to the point where you feel comfortable operating from an overseas brokerage, you can do some of the trading here in the United States.
Another source for emerging markets ETFs is: http://etf.about.com/od/foreignetfs/tp/List_Emerging_Markets_ETFs.htm.
Investing overseas is easy. It is more accessible than it has ever been, thanks to technology. But, if you are still not comfortable with actually going offshore with your cash, you can invest through a myriad of exchange-traded funds in the United States. The problem is that you will not be able to invest in specific ideas, rather more macro ideas spread across various countries. Also, as I mentioned throughout the book, you can use closed-end funds to achieve your goals and possibly at a discount to the underlying assets being held by the funds.
More information on closed-end funds is available on this website: www.closed-endfunds.com/.