Part 8 – How to invest overseas

250210 p24-27 Inv guide
H OW
24/2/10
TO
12:24 pm
Page 24
I NV E S T
H OW
TO
I NV E S T
In partnership with
Part 8 – How to invest overseas
Tom Sieber
A diversified long-term portfolio should not necessarily confine itself to British firms traded on London’s
markets, not least as many farther flung fields offer
the prospect of superior economic growth relative to
the UK. Tom Sieber looks at the benefits – and risks –
of putting your money to work abroad
ast week we concentrated on
the
increasingly
diverse
options open to investors in
terms of how they play the
markets, examining the range of instruments available to track price movements in a number of different underlying assets.
That dealt with the ‘how’ after our
prior detailed look at the ‘why’ and now
we now turn our attention to the
‘where’ of investing, considering how
best to seek exposure to overseas
stocks. After all, the UK does not have a
monopoly on global leaders in their
respective fields and some of the
world’s biggest brands and companies,
such as German electrical engineer
Siemens (SIE:DE), soft drink behemoth
Coca-Cola (KO:NYSE) and
French automaker Renault (RNO.PA),
cannot be traded in London.
To help investors Shares has therefore analysed the fees involved in buying and selling foreign-listed stocks, on
which exchanges it is possible to trade,
and the best service providers who can
enable you put cash to work abroad. We
also examine some of the potential pitfalls investors such be aware of before
getting started, including the impact of
currency movements in particular.
L
Broadening horizons
In general terms it has become easier in
recent years to invest in foreign markets, with a growing number of brokers
Shares’ road map to
investment success
Part 1 (Jan 7):
Part 2 (Jan 14):
Part 3 (Jan 21):
Getting started and the
foundations of portfolio
construction
Stock market fundamentals –
what is a share?
How to choose a broker and how
to trade
How to choose a stock – key
principles of investment analysis
How to value a stock – tried and
tested methods
How to find and use the
best data sources and stock
indicators
How to select the most suitable
trading tools and instruments
How to invest overseas
How to invest in a tax-efficient
way
Summary - Ten Golden Rules
Part 4 (Jan 28):
offering international
dealing services. Cost
Part 5 (Feb 4):
differences
between
buying shares at home
Part 6 (Feb 11):
and abroad have also
narrowed considerably.
Shares has featured
Part 7 (Feb 18):
overseas
markets
prominently in its pages
Part 8 (Feb 25):
in the past, most
Part 9 (Mar 4):
recently with our Year of
the Tiger cover on China
Part 10 (Mar 11):
earlier
this
month
(Shares, 11 Feb 10), and
there is an increasingly
strong argument for having
an investment horizon that extends IBM (IBM:NYSE) all represented.
In addition there are very few options
beyond London.
For a start it offers the opportunity to on the UK market when it comes to
build a more diversified portfolio with investing in industries such as agriculexposure to economies outside the UK. ture. With food inflation continuing to
This has particular appeal at a time be a global issue, this could conceivably
when both public finances and con- be a theme that an investor might want
sumers in this country are under signif- to play.
Aussie-based and listed chemicals
icant pressure.
With more than 50% of FTSE 100 firm Incitec Pivot (IPL:ASX), which
earnings derived from beyond our bor- supplies agricultural fertilisers to both
ders it is not essential to buy overseas Australian and overseas markets, is just
stocks to achieve this exposure. But it is one example of a foreign-listed stock
worth bearing in mind that by doing so operating in this space.
Another potential appeal of overseas
investors are able to buy companies and
sectors which have no real equivalents investing is gaining access to emerging
economies in Latin America and Asia,
listed in London.
Many of the largest technology stocks which offer more rapid growth than
are traded in the USA, with household that forecast for developed economies
names such as Apple (AAPL:NAS- in the West. Although markets in the
DAQ), Google (GOOG:NASDAQ) and US and, to a lesser extent, Europe are
250210 p24-27 Inv guide
T
H OW
24/2/10
12:24 pm
TO
Page 25
I NV E S T
H OW
the easiest for retail investors to
access directly, it is possible to
trade shares listed on some AsiaPacific exchanges.
Dealing costs
Against such a backdrop it is
unsurprising interest in international markets is increasing.
James Daly, Investor Centre representative at TD Waterhouse,
says around 12% of the trades that
go through the execution-only broker’s books involve overseas
stocks, from closer to 2% six or
seven years ago.
Rick Girling, managing director
of Halifax Share Dealing, reports
a similar experience. He says:
‘Trading on the international markets is growing in popularity – we
have seen 32% more international
trades in January 2010 compared
to January 2009.’
With a number of the brokers
that offer international dealing,
buying overseas stocks involves nothing
more complicated than setting up a standard trading account. Foreign-listed
shares can typically be held in Individual
Savings Accounts (Isas) and Self-Invested
Personal Pensions (Sipps) as well.
A further attraction to anyone looking
to dip their toes in international markets is shares in the US and Europe are
exempt from Stamp Duty.
The fees charged by different
providers for international dealing vary
considerably. It is worth bearing in mind
some overseas services are only available through telephone broking, which
is typically more expensive than dealing
online. The USA is comfortably the easiest market for a UK investor to trade
on the web.
Barclays Stockbrokers, the largest
broker in the UK, currently charges a
minimum of £45 for trading North
American stocks and a minimum of
£100 for dealing in European shares.
Overseas share trading is described as
a ‘non-core’ area by Barclays and is only
possible over the telephone, although it
has suggested it may improve its offering in the future.
At the other end of the scale Charles
Schwab, which offers online exposure to
the US, charges just $8.95 a trade.
Halifax Share Dealing, which ran a
zero-commission promotion on trading
overseas stocks online earlier this
Shares | 25 February 2010
month, charges investors the same rate
for dealing overseas, £17.50 for online
trades and £20 for telephone broking, as
it does for dealing UK shares.
And TD Waterhouse also charges the
same level of commission on UK and
international stocks - £12.50 for online
dealing and a minimum of £20 for trading over the phone. People making 10 or
more trades over a three-month period
qualify for frequent trader rates – which
are £9.95 for online and £19.95 for telephone broking. Selftrade charges £12.50
for all trades by whatever method.
Global reach
America remains the most popular market for those looking to gain overseas
exposure. Last month Halifax Share
Dealing’s five most frequently traded
foreign shares were all based across the
pond (see below).
Kully Samra, UK branch director at
Charles Schwab, indicates why investors
The five most traded international stocks by Halifax Share Dealing
customers in January:
Apple (APPL:NASDAQ)
Citigroup (C:NYSE)
Dr Pepper Snapple Group (DPS:NYSE)
Bank of America (BAC:NYSE)
Google (GOOG:NASDAQ)
SOURCE: HALIFAX SHARE DEALING
TO
I NV E S
should consider US-listed stocks:
‘The size and scale of the US market is huge. The market capitalisation of the
London Stock
Exchange (LSE) is around $1.4 trillion while the New York Stock
Exchange (NYSE) totals $9.6 trillion. Even at the market lows last
March we were still seeing a massive increase in business in part
because the US is seen as a safe
haven – with good levels of regulation, liquidity and transparency.’
Samra also points out a much
wider range of products such as
exchange-traded funds (ETFs) are
available in the States – there are
305 ETFs on the LSE compared
with 1,421 ETFs on the NYSE. He
adds it is possible to gain access to
other markets through the US
with a large number of non-US
firms tradeable through American
Depository Receipts (ADRs).
These securities are dollardenominated, but backed by and
related to the underlying stock and are
similar to the global depository receipts
(GDRs) available in London. Investors
can find a complete list of ADRs at
www.adr.com and they can be bought in
the same way as any other US security.
Before investing in US stocks and
shares it is necessary to complete a W8BEN form. These forms are available
through your provider and it can, for
example, be downloaded online at
www.tdwaterhouse.co.uk/invest/internationalstocks.cfm.
As is the case with a number of brokers Charles Schwab currently only
offers the ability to trade on the US
market. As we indicated in the third
part of our investment guide How to
choose a broker and how to trade (Shares,
21 Jan) some brokers will indicate they
offer international dealing when in fact
they only grant access to the LSE’s
European Equity Service (EQS) – on
which only a limited number of overseas shares are traded.
Halifax Share Dealing, while facilitating exposure to the main US exchanges,
the NYSE, Nasdaq and Amex, also
offers access to XETRA Dax in
Frankfurt, the MTA in Milan and the
Euronext
exchanges
in
Paris,
Amsterdam and Brussels.
TD Waterhouse has one of the broadest offerings, with an online and telephone service available on all of the
250210 p24-27 Inv guide
24/2/10
12:24 pm
Page 26
H OW
Award
Winning
Service
TO
I NV E S T
markets discussed above, in addition to the
Toronto Stock Exchange, the Canadian
Venture Exchange, a number of other markets in Europe and three markets in the
Asia-Pacific region: the Australia Stock
Exchange, the Hong Kong Stock Exchange
and the Singapore Stock Exchange.
The SIX Swiss Exchange and the Swedish
stock market are also available but only
through telephone broking. Internaxx,
which is a specialist online broker based in
Luxembourg, offers access to a similar
range of exchanges.
Both Internaxx and TD Waterhouse indicate they are open to the idea of offering
access to other exchanges in the future. TD
Waterhouse’s Daly says Japan is a market
which he is frequently asked about and as
US $ TO UK GBP (GTIS/TR)
1.75
1.70
1.65
1.60
1.55
1.50
1.45
1.40
1.35
F
M
A
M
J
J
A
S
O
N
D
J
F
Source: Thomson Datastream
he acknowledges ‘it is the biggest exchange
that we don’t currently trade’.
‘We always get asked about India and
China as well’, he adds. Although as he
points out government restrictions on outside investment in stock markets in these
two countries makes accessing them problematic. Meanwhile liquidity and transparency could potentially be an issue with
exchanges in the Middle East, Africa and
the Americas.
Gaining currency
A key thing to bear in mind when buying
overseas shares is the impact currency movements can have on your investment return.
Foreign exchange costs do vary but typically, conversions into the local currency
H OW
are done on a deal-by-deal basis. Dividends
are also converted into sterling when they
are received.
As with any exchange of currency a charge
is incurred when converting from one to
another but it is worth taking account of the
fact you are also at the mercy of fluctuations
in exchange rates. This is particularly relevant given the weakness of sterling against
any number of major currencies in recent
months. A fall in sterling would increase the
value of your international holdings when
they are converted back into pounds but if
the UK’s currency rallies – as Shares thinks it
will (Forex, page 45) – their worth to you will
be negatively impacted.
Some brokers, such as Internaxx and TD
Waterhouse give active investors the option
of setting up foreign currency accounts so
proceeds and dividends can be held in the
local currency to avoid the extra cost of converting them back and forth every time.
Internaxx’s managing director Rob
Glaesener says: ‘If you want to invest in the
NYSE, for example, you can exchange your
sterling for dollars and you can go in and out
of that market without facing currency
exchange costs. It is only at the beginning and
then when you want to crystallise your investment, whether that be after six months or
two years, that you get hit on currency.’
In fact it is possible to set up accounts with
multiple currencies allowing you to hold dollars, euros and pounds. This would in theory
make it possible to book profits from a US
stock in euros with the intention of making
your next purchase in mainland Europe.
A key disadvantage when considering
investing in overseas markets is it is potentially more difficult to find out sufficient
information on companies to make an
informed investment decision.
Most lower cost brokers provide executiononly services for overseas shares so investors
are left to conduct their own research. The
internet has at least made this much easier
and price information can be found at sites
such
as
finance.yahoo.com
and
www.google.com/finance. In addition, most
tdwaterhouse.co.uk
0800 531 6696
The value of your investment can go down as well as up. You may not get back all the funds you invest.
Brokerage Services provided by TD Waterhouse Investor Services (Europe) Limited (a subsidiary of The Toronto-Dominion Bank). Registered in England under No. 2101863. Registered office: Exchange Court, Duncombe
Street, Leeds LS1 4AX, UK. Authorised and regulated by the Financial Services Authority (FSA), 25 The North Colonnade, Canary Wharf, London E14 5HS, UK (FSA firm reference number 141282), member of the London
Stock Exchange & the PLUS market. Banking Services provided by TD Waterhouse Bank N.V. Incorporated in the Netherlands & registered as a branch in England & Wales under branch registration number BR006780.
Authorised by the Dutch Central Bank (De Nederlandsche Bank – DNB Institution Number 481) & subject to limited regulation by the Financial Services Authority (FSA firm reference number 216791). Details on the extent
of our regulation by the Financial Services Authority are available from us on request.
T
250210 p24-27 Inv guide
TO
24/2/10
12:24 pm
I NV E S T
Page 27
H OW
large foreign-listed companies have websites
in English offering regulatory news updates
and up-to-date financial reports.
But transparency is a potential issue with
smaller companies, even though most of
the markets available to trade in the UK
have good levels of disclosure.
Daly from TD Waterhouse says, as with
share dealing in the UK, it is extremely
important you understand the business of
the stock you are buying. ‘You need to know
about the company you’re investing in and
from a distance this can be more difficult,
depending on the size of the firm.
‘In the UK, even with a relatively small
company, you can visit the head office and
with overseas groups this obviously isn’t
possible. If you invest in a more exotic market, language can be a barrier too.’
It is also worth bearing in mind the tax set
up in the country your prospective investment is based, particularly when it comes to
dividends. The most widely held foreign
share in the UK is Banco Santander (BNC),
mainly as a result of its takeover of demutualised building societies Alliance &
Leicester and Bradford & Bingley. The
bank’s dividends are subject to Spanish
withholding tax at a rate that increased
from 18% to 19% last month.
A further difficulty with trading overseas
stocks and something it is well worth being
aware of is the different time zones
involved. Clearly this is not a significant
issue with the European exchanges, most of
which open around an hour earlier than
London. The North American markets do
not represent too much of a problem here
either as they close at 9pm UK time. On the
face of it though active trading on the stock
exchanges in the Asia-Pacific region is likely to remain the preserve of insomniacs.
Time zones are not an insurmountable
problem as some brokers allow you to place
orders outside of an exchange’s normal hours
of trading. In addition you can often place a
‘limit order’, where the price you wish to
trade is specified, and it is also possible to
place stop losses on trades. It is worth check-
TO
I N
Opening hours of selected
international markets (UK time)
US: 2.30pm – 9.00pm
Canada: 2.30pm – 9.00pm
France: 8.00am – 4.35pm
Belgium: 8.00am – 4.30pm
Germany: 7.50am – 4.30pm
Australia: 11.00pm – 5.00am
Hong Kong: 2.00am – 8.00am
Singapore: 1.00am – 9.00am
The place
where online
share trading
never stops
SOURCE: LOCAL EXCHANGES
ing with your provider which exchanges these
services are available on as, typically, they are
not obtainable on all markets.
All of the above may look somewhat
daunting to the uninitiated but even relatively fresh investors should not be put off
investing in overseas markets. One option
for newcomers is to buy index trackers or
investment funds which offer international
exposure such as Invesco Perpetual Japan
(Funds, page 40).
Meanwhile providers such as db x-trackers, iShares and Lyxor offer exchange-traded funds (ETFs) that track a number of
international exchanges or offer exposure
to specific economies. Lists of the ETFs
available
can
be
found
at
www.dbxtrackers.co.uk, www.lyxor.com and
www.ishares.com. As we discussed in last
week’s seventh instalment of this ten-part
series these instruments have the added
advantage of being cheap, with fees often
less than 1% a year.
Next week
The first eight parts of this series have been
aimed at helping investors identify, research,
trade and track the most profitable investments best suited to their strategy and risk
appetite. In next week’s guide, we will look at
how your portfolio income is taxed and how
certain products and techniques can be used
to manage your tax liabilities in an entirely
legal and legitimate manner. n
TD Waterhouse provides a broad range of long and short term
investment products for experienced traders or those just starting out.
One of the UK's leading online execution only stockbroking and investment companies,
TD Waterhouse offers access to 17 international markets (15 online) and a range of services
to put you in control of your trading and investing.
Regular updates provided and newsletters to keep you well informed. Plus a secure eservice
that helps you manage your investments online quickly and easily.