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Foreign Stocks/IPOs Investing Tips

Sep 2, 2007 Investment Opinions, U.S Hot Stocks

BEFORE you start to invest in foreign markets, it’s a good idea first to be comfortable investing in the United States and to build a level of sophistication and understanding of the investment process.

Here are some tips for investors who are ready to send their money abroad:

• Invest for the long term.  Currency fluctuations can wreak havoc on your foreign investments in the short term. However, over the long term, the volatility tends to be reduced. Also, frequent buying and selling of foreign stocks can be very expensive, since the commissions are high and the liquidity low.
• Understand cross-border accounting. Suppose you see that a foreign stocks is selling at a P/E ratio of 4. Sounds cheap, right? The stock may actually be expensive, because the country might have different accounting standards from those of the United States. In 1992, when Brilliance China Automotive Company went public on the New York Stock Exchange, auditors spent 11,000 hours restating the financial data.
• Be wary of economic statistics. In a myriad of foreign nations, there is a thriving underground economy, also known as the black market. Countries may have stiff laws against certain economic transaction or may not allow charging interest on loans. Despite this, private citizens take their activities underground. In many cases, the government statistics do not account for the activities, which can result in faulty economic assumptions.
• Steer clear of conflicts of interest. The laws regarding the duties of senior managers and even brokers in some nations can be lax. For example, some counties allow companies to engage in activities that benefit the senior managers at the expense of shareholders-which is often the case with family-controlled companies (these families may even be part of a royal family). Some countries also allow brokers to buy on their account before they make a purchase for their client, known as front-running. And, of course, political corruption can have a profound effect on a country’s markets. In 1996, Korea’s head securities regulator was arrested for taking bribes from companies seeking approval fro listing on the country’s exchange.

• So before you purchase a foreign IPO, you need to do some homework. It often will take you longer to do the research on a foreign IPO than on a U.S. IPO, but it it is worth the effort.

Conclusion

BECAUSE of the difficulty involved in investing in foreign  markets, individual  investors should consider mutual funds that specialize in overseas companies instead of picking stocks individually. There are no mutual funds that specialize solely in foreign IPOs, but many duns that specialize in global stocks participate in IPOs and have done quite well in the process.

By Tom Taulli

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