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Two things came together that became my inspiration for this post.
- Emerging markets have been in a slump recently.
- When I first emailed Hayley she suggested I write about something that pertains to American, Canadian, and British audiences. Since these are all English speaking countries, the cultures are similar (although differences do exist).
Thus I got the idea to write about investing in overseas stock markets (primarily emerging markets). You see, countries on the other side of the world are culturally very different from us (as any traveller would know!). The way they think and the way they view certain issues would be very different from how Americans, Canadians, and Brits think and see things. The stock market is really a reflection of:
- A nation’s economy and power in this world.
- The psychology of the market participants (aka investors in those countries).
In this post, I’m going to talk about a few things you should note before investing in overseas stocks.
Living in rather liberal countries such as the U.S., Canada, and Britain, we do not see a lot of government regulation in the economy (tell that to the Texans in the good ole’ U.S. of A). Thus, when investing in our domestic stocks we do not really need to seriously consider how government policy might affect stocks.
In emerging markets, however, this is not the case. In countries such as China, the government plays a role in directing the economy. This is because governments in those countries know that their economy needs to do a lot just to catch up with developed nations. Thus, those governments play a big role in the economy. (For an interesting post on government regulation and intervention, feel free to read The Economist’s article on Preisdent Xi Jin Ping resurrecting the Chinese Dream.)
As such, you need to know how the political system works in the overseas market that you’re investing in. Here’s a really simply example. China is now moving from an industrialized nation to a more service and consumption (and hopefully innovation) driven nation. Thus, the Chinese government wants economic growth to slow down so that the rich-poor gap narrows. What does this government intervention in the economy mean? Slower economic growth! And slower economic growth leads to a less profitable stock market.
In addition, did you know that China has Class A and Class B stocks? Class A is for Chinese citizens and Class B is for foreigners.
The lesson of this story: know what their government system is like and how it can impact stocks.
Understanding their cultures and traditions
Here in the U.S. Canada and Britain, we have what is called the “Santa Claus Rally”. Generally speaking, stock prices tend to go up during the last 2 weeks of December. This is generally attributed to investors jubilant emotions during the holiday season. For a foreigner (ie a Nigerian) to invest in Canadian or American stocks without being aware of the Santa Claus Rally is just plain stupid. He’ll miss out on easy profits!
Cultures and traditions impact stock prices in other countries too. An easy to understand example is Chinese New Year. Chinese stocks tend to go up during Chinese New Year. Anyone investor who is not Chinese must know that this event occurs or else he / she is missing out on easy profits!
Here in the U.S. we’re so used to the “dollar” that “dollar” has become synonymous with “money” (ie ask a kid what the currency of France is and they’ll reply “the French dollar?”) When you invest in foreign stocks, it’s easy to forget that foreign stocks are valued in foreign currency! Japanese stocks are listed in Yen, Chinese stocks are listed in Yuan, European stocks are listed in Euros, etc.
This poses a problem. By investing in foreign stocks you’re susceptible to 2 different types of losses:
- Capital gains loss (ie the value of stock XYZ sinks from 50 euros to 40 euros)
- Currency exchange loss (ie the value of the foreign nation’s currency sinks, thereby making your investment worth a lot less money in your own native currency).
Anyone who reads the financial news knows that emerging countries don’t exactly have the strictest account standards. Thus, a company that’s “making $5 billion a year” might actually be losing $2 billion. As emerging economies develop, accounting standards will become more strict. But for the time, being, watch out. There are no international accounting standards. Hey, even in the U.S. we “massage” the numbers to fit our needs (think back to Enron).
Investing in overseas stock markets is quite a challenge. Unless you really have the expertise and time, it’s best if you leave those stock markets to people living in those countries. You may hear about that “Brazillian stock that quadrupled in 1 year”, but you don’t hear about those thousands of fly-by-night companies that crash the next day.
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Image sourced by Troy – image from ETF Trends.