Asubstantial number of foreign companies are quoted on the London Stock Exchange, especially from Europe (eg Volkswagen, Bank of Ireland, Bayer and Ericsson). In addition there are US companies (eg General Electric and Abbott Laboratories), Chinese (Air China), Japanese (Honda, Kawasaki and Mitsubishi), Taiwanese (Acer), South African (SAB Miller), Chilean (Antofagasta) and Russian (Gazprom). Most of them trade in Britain as well so it is possible to get some idea of the business and see stockbroker analysis of the management and figures. Trading in these is pretty much like investing in a major UK company.
The mergers of European stock markets make it easier to get access to markets in other major countries and their shares, especially as there is a large number of rather good internet-based stockbrokers in Germany, France and Holland.
It is theoretically possible to buy overseas shares through a UK broker – in practice only some offer this service so check in advance whether the broker you want does. However, global markets and differential economic performances are producing more opportunities, and the internet and online brokers make it easy. But despite the growth of European traders most of the readily available trade in overseas shares is for US stocks. That looks to change as an ever-growing number of cut- price dealers from Germany and France set up net services in Britain.
As with all such investments, a degree of research and homework are essential. The trouble is that there are added levels of risk in overseas shares. The first is the state of the overseas economy. An investor needs to know whether interest rates are on the verge of change in that country because that might have an immediate effect on share prices, or whether the economy as a whole is about to soar away or is heading for a precipice.
Second, a wise investor gets to know something about the state of a particular sector: one needs to know which is about to be affected by a trade agreement, a reorganization, a spate of mergers and so on.
Third, it is a little harder to keep track of the companies – British newspapers tend not to write about them, stockbrokers do not analyse their figures and one cannot keep an eye on their products and services in the marketplace. There are also local peculiarities, for instance Swiss shares, which are commonly £5,000 each, with some at over £20,000 for a single share. That makes it harder for a small investor to get a range of these stocks – though to be fair there are ways of buying part of a share.
On top of that there is the exchange rate risk: a comfortable profit from trading in the shares might be completely wiped out by the relative movement of sterling. Finally, there are risks in the way the market itself operates. Regulation in major countries like Australia and the United States is pretty comparable with Britain, but ‘emerging’ markets can range from the haphazard to the corrupt. As part of that there may also be erratic recording of deals, ownership records may be variable, and controls wayward.
There are people who can cope with all those dangers, and have done very well from US shares, and even from investing in the budding markets of smaller countries. Mostly they know what they are getting into and know something of the circumstances to manage the risk.
For a novice to the stock markets or someone with a relatively small amount of money to play with, it is probably wiser to buy investment or unit trusts with the sort of overseas profile you fancy. There is such a variety on offer, you can decide whether to opt for Japan, the United States or Germany; for the Pacific Rim, western Europe, or developing countries; and even whether to pick specific industrial sectors within these regions. That not only hands over the decision to professionals on which are the good shares, but also spreads the risk. Another choice is to buy the shares of a UK company that does a lot of trade in the favoured area. Those choices also eliminate the foreign exchange consideration since the dealings are in sterling.
Source: Warren Carl S., Reeve James M., Duchac Jonathan (2013), Corporate Financial Accounting, South-Western College Pub; 12th edition.
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