In early March, the Dow broke through its all-time high as global risks appear to have receded somewhat. Most international markets have rallied along with the U.S. market. For instance, Japan’s Nikkei has risen nearly 20% in 2013, and even many of the developed European nations that are so embroiled in the sovereign debt crisis are solidly in the green as of mid-March.
While U.S. stocks have surged out of the gate—the S&P 500® is up roughly 9% year to date—investors might want to keep an eye on international markets that may be able to provide global growth opportunities.
Investors can be prone to forget that some of the largest, most successful corporations are based all around the world.
Many of these companies—and potentially attractive investing opportunities—that are based outside the United States are major players in the automobile, mining, and telecom industries, just to name a few. Think some of the cars you see on the road, phones that people you know own, and other commonly used products and services that are produced by overseas companies.
For example, in 2012, Japan-based Toyota Motor Corporation (TM) reclaimed its position as the world’s largest car maker from General Motors Company (GM).1 Not only are some foreign-based companies leaders in their respective industries, many domestic investors may already be very familiar with their businesses and products. Having a global mindset when it comes to investing can help expand your universe of options with companies you might already know and be comfortable owning.
Consider the risks
Of course, just as there are benefits to investing abroad, there are risks. Some of the risks to investing in foreign-based companies are:
- Company-specific risk—Like domestic stocks, foreign stocks are subject to the underlying fundamentals of the company. A publicly traded company in Europe, Asia, South America, or any other region is only as successful as its ability to grow earnings and revenues, invest, and manage expenses.
- Different accounting standards—One complication that can arise when trying to assess the underlying factors of a business is that accounting standards may not be uniform across borders. Investors should assign some level of risk to an investment that they may not be able to fully assess—or avoid it altogether.
- Currency movements—Changes in exchange rates can have a significant impact on an investor’s total return. Fluctuation in exchange rates can affect the underlying business’ cash flow as well as an investor’s capital when it is translated back into his or her home currency. Generally speaking, a foreign investment may be adversely affected the more a domestic investor’s home currency (e.g., the U.S. dollar for a U.S. investor) increases against the foreign currency of the foreign stock (e.g., the yen for an investment in Toyota Motor).
- Geopolitical risk—There may be additional risks that are not typically present in more stable, developed markets. These could include heightened concerns in certain emerging markets and unstable regions. Geopolitical risks relate to the environment in which a business operates, and potential disruptions to a company may have significant implications on the investment opportunity.
In addition, a foreign stock investment can be affected by the monetary policy of that country’s central bank, regional stock market trends, and a number of other lesser factors. Before making any type of international investment decision, you should properly weigh the risks of doing so.
Despite the risks, there are a number of advantages to international investing opportunities. One situation where having foreign investing options can be particularly beneficial is a rotation strategy among market leaders.
For example, assume that you believe U.S. stocks will outperform the global market over the short term, and then several months later, you expect Chinese stocks to outperform the global market. Being aware of what foreign stocks—along with global indexes, bonds, and mutual funds—you have access to can facilitate this type of strategy.
Similarly, if you believe that a certain sector is well positioned, you can access international stocks, in addition to domestic stocks, that operate in a particular industry. Assume that you believe the mining and metals industry will outperform the market. Having knowledge of international opportunities can provide you with more options within this industry, as several of the largest mining companies in the world are based in Australia, Brazil, Canada, and the United Kingdom.
Finding international investing opportunities
It is possible to search global markets for opportunities using Fidelity’s screener. The securities of foreign companies may be available to domestic investors, and they show up in the screener, as depository receipts. These types of securities trade similarly to stocks, and enable domestic investors to more easily purchase the shares of a foreign company. Depository receipts represent the publicly traded shares of a foreign company, are issued by a bank, and trade on a local exchange. In the United States, these securities are known as American Depository Receipts (ADRs).
Using the screener, the three largest ADRs by market capitalization, as of March 19, 2013, were:
- Nestle SA (NSRGY)—$233 billion market capitalization
- China Mobile (CHL)—$223 billion market capitalization
- HSBC Holdings (HBC)—$201 billion market capitalization
As you can see, this list represents companies from all over the globe: Swiss-based Nestle SA, China-based China Mobile, and U.K.-based HSBC Holdings. There are a number of other possible filters you can use to narrow down your options. Of large-cap ADRs, the three with the highest dividend yield, as of March 19, 2013, were:
- France Telecom SA (FTE)—16.2% dividend yield
- GDF Suez (GDFZY)—15.8% dividend yield
- Banco Santander SA (SAN)—11.6% dividend yield
A screen of large-cap ADRs with a dividend yield in the top 20% and a PEG (P/E-to-growth) ratio in the lowest 20% (the lower the PEG ratio, the better) produced the following results:
As the screenshot above shows, Banco Santander SA (SAN), Teliasonera AB (TLSNY), Petroleo Brasileiro SA (PBR), Royal Dutch Shell PLC (RDS/B), and GlaxoSmithKline PLC (GSK) meet the criteria. The screener can narrow down your international investing options and serve as a jumping-off point to conduct further research. When constructing your portfolio, consider international investing opportunities.