Rules for Investing Abroad
Today, investors are increasingly diversifying their portfolios by investing in foreign markets, and American businesses are finding opportunities overseas. The fastest growth is taking place in emerging markets, but you need to be cautious to make sure that you don’t run afoul of their regulations or get fleeced.
Foreign investment could greatly help both American companies and foreign stakeholders. For example, a U.S. business might see an opportunity to provide needed infrastructure or job training in a place such as India. The company could profit while locals benefit from the business activity. You as an investor could buy shares or debt of this company to personally profit from the foreign business activity.
There are several important things to consider before investing abroad. Here are the most important items to understand:
Know the rules. Not every market is the same and it is important to fully understand the host country’s rules and regulations that apply to foreign investors. Some countries are friendlier to outside investment than others, and it is important to fully understand the legal and regulatory aspects of the market. You can get this information from the websites of foreign governments or by calling their U.S. consulate.
For example, China vigorously controls its currency and doesn’t make it easy for foreigners to invest directly in Chinese-listed stocks or bet on the currency. Except for pre-selected institutional investors, the only way to invest in the renminbi, the currency of mainland China, and get direct exposure to China, is through “dim sum bonds.” These are denominated in renminbi but issued in semi-autonomous Hong Kong, where regulations are less strict.
For strict countries like China, you might be better off buying stocks of U.S. companies with large operations there. Yum Brands (YUM) owns familiar American fast-food chains such as Kentucky Fried Chicken. But a huge chunk of its business is in China. Therefore, buying Yum Brands shares is a good way to make a long bet on Chinese consumers and still benefit from the disclosure and listing regulations that apply to American stocks.
Understand the risk and be prepared to lose. Risk analysis is vital for any investor or enterprise looking to establish operations abroad. Get to know the country and carefully decide whether the potential returns justify the risk.
Investing in developing countries with weak democratic and legal infrastructure is difficult for foreign investors who are used to strong established judicial institutions. It’s inadvisable and sometimes illegal to invest in countries ruled by dictators. Some countries regularly see coups, civil wars and confiscation of foreigners’ property. Even seemingly stable countries like Greece have serious upheavals and investors suffer, as we recently saw.
Nevertheless, some find such markets desirable because they scare off your competitors and investors can demand lucrative returns. Always be prepared to lose some or all of your investment and also have backup plans before going into places like Zimbabwe or Myanmar. It isn’t worth risking your entire personal nest egg on an adventure in an exotic market, so be very careful and keep your assets diversified if you go this route.
Know the currency. Some foreign markets require you to use the local currency. Smaller countries’ currencies might be pegged to reserve currencies like the dollar and euro, and others fluctuate dramatically. If you own bonds, stocks or property priced in a different currency, the value of those assets in dollars might rise or fall considerably.
For example, say you bought a Japanese government bond yielding 1% interest when the yen was worth about 85 to the dollar and held it to maturity when the yen weakened to 100 to the dollar. The 1% interest doesn’t come close to covering your dollar-denominated loss.
Understand the country’s infrastructure and workforce. Whether you do business in a foreign nation or merely buy stocks in its companies, your investment means nothing if your host country does not have the resources to fully develop, ship and sell products. Even if your investment is in currency or bonds, the productivity and resources of a country’s workforce can be different from the markets and industries you are more familiar with.
For instance, an investment a matchstick company driven by inexpensive labor in Africa is useless if the local market has no access to sulfur or the workers have no training or expertise on how to develop sulfur tips for matchsticks.
Find a trustworthy ally. Leave your ego at the door. If you were not born there or didn’t spend a lot of time in a foreign country, you can still miss nuanced cultural or political aspects of its market even after extensive research. If you expand a business, it helps to form a partnership with business owners and other investors in the country.
Make sure that the partner is trustworthy, with extensive experience in dealing with that particular market. If you are just an investor who wants to capitalize on lucrative opportunities abroad, consult your financial advisor for more expert knowledge of the international investment landscape. As long as you are careful, you can benefit greatly from foreign investment.
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Kimberly J. Howard, CFP, CRPC, ADPA is a Certified Financial Planner and the owner of KJH Financial Services, a Fee-Only practice located in Needham, Mass. (781-413-4879). Please visit us atwww.kjhfinancialservices.com or email Kim at email@example.com.
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