Riding the waves in markets abroad


  • Business
  • Saturday, 15 Aug 2009

DON’T put all your eggs in one basket – is probably one of the most-used idiomatic expressions in the context of investing. Essentially, it means don’t risk everything all at once or focus all resources on one thing.

In recent years and especially since the liberalisation of the fund management industry four years ago, Malaysian retail investors have become more interested to ride the waves in markets abroad to tap bigger gains and to reduce the investment risk of solely focusing on the domestic market.

The asset classes are wide-ranging – from equities to bonds, currencies or derivatives such as gold bullion or oil.

“The gradual liberalisation in the capital market has allowed Malaysian residents to invest abroad, thus providing them access to investment opportunities outside of Malaysia. The degree in which these investors invest depends on their risk-return preferences,” says the Securities Commission, in an email reply.

Areca Capital Sdn Bhd chief executive officer Danny Wong says investors have benefited from the regulatory liberalisation which has opened the path for them to invest in sectors or asset classes abroad which are not available in Malaysia.

For example, shares of gold mining companies are not listed in Malaysia but investors can invest in Australia to gain an exposure to that sector.

Almost all the stockbroking outfits in the country offer facilities – online or through a dealer – for investors to trade in overseas markets. And many of them have noted a substantial increase in clientele and spike in trading volume of stocks in overseas markets (by locals) in recent months.

Kenanga Investment Bank has noted a three-fold increase in trading volume in overseas stocks in the past six months.

Similarly, TA Securities Holdings Bhd has seen its number of clients for cross-border investments double in the last two years with foreign orders largely focused on the US, Singapore, Australia and Hong Kong markets.

The stock markets currently hot among Malaysian investors include those in the United States, Hong Kong and Singapore and trailing them are Australia and Europe, while the sector favourites include financial services and oil and gas.

“What attracts local investors is the volatility in some of these overseas counters that can fluctuate between 10% and 30% or more within a short span. If the investor enters at the right time and at the right price, he will make a killing,” says a dealer.

It is easy to appreciate the interest generated by finance stocks abroad considering that most of these counters have plummeted during the peak of the global financial crisis in the first quarter of this year and value is currently emerging for medium to long term investors, particularly on the back of the green shoots of economic recovery.

“About 90% of our orders are for Singapore and Hong Kong while the remaining 10% are spread over the United States, Australia, Germany and Britain.

Investors who traded in foreign shares earlier this year are laughing to the bank,” says a dealer from another broking firm, adding that some clients had bought Citi at 80 cents and sold at US$2.50. “Imagine the kind of profits they had made. But those who trade in such a high volatile environment must have the capacity to hold their positions,” he adds.

It’s almost like a hard-to-resist herd mentality, says the dealer. “When you see your friends making money elsewhere, you tend to want to do the same.”

Wong’s advice for those who do not have deep pockets is to invest abroad through investment funds. “Investors looking abroad should have sufficient capital, such as between US$5mil and US$10mil, to bear the risks involved as some asset classes require higher level of investments.

Lower risk – really?

“If the size is too small, it may be better to put it with an investment fund in Malaysia that offers foreign exposure,” he says, cautioning that the developed markets could be more complex in nature and offer various products that may appear complicated.

Singular Asset Management Sdn Bhd chief investment officer Teoh Kok Lin says the rising number of individual Malaysians investing abroad is a healthy trend to broaden investment scope.

“Global investing allows risk diversification. As long as the individual investor or fund manager understands the markets they are exposed to, they will be able to balance the risks,” he says, adding that some investors prefer to invest via a fund manager who has better access to information.

But even if it is generally perceived that a well-diversified investment portfolio across geographical borders reduces one’s investment risks, there are sceptics who say such a notion may be misdirected given the rising correlation (as well as co-movement) in markets, thanks to globalisation.

If stock markets fluctuate in parallel and there’s a higher correlation between international asset prices, then, they say, it dilutes the opportunities provided by diversification.

But the real numbers tell a different story and proof that diversification, depending on one’s investment horizon, still holds much appeal.

Year-to-date, the Dow Jones Industrial Average has gained 3.2%, while Asian markets like Hong Kong and Singapore surged 38% and 44% respectively. Over that period, the Malaysian stock market’s key barometer has gained 32%.

The rise in cross-border investments has also raised the awareness among Malaysian retail investors to the various instruments in foreign markets that are a lot more actively traded, such as futures and gold bullion.

Further aiding the trend of cross-border investment is Bank Negara’s gradual liberalisation of the Foreign Exchange Administration Rules (refer to table) in the past two years.

Most retail investors who invest abroad belong to the older age group (40 and above) and that’s largely because they have the financial muscle to take on such risks.

But it has also been noted that younger investors are jumping on the bandwagon due to their IT savvy.

Of the close and familiar

In recent months, there has been increased buying activity by Malaysians in shares listed on the Hong Kong Stock Exchange on the back of an anticipation of economic recovery, while in Singapore, a dealer says, Genting International is a favourite given its attractive valuation.

Both the Hong Kong and Singapore markets are readily embraced by Malaysian investors due to their proximity and familiarity, aided by the many cross seminars and road shows held in these countries.

On the other hand, the Jakarta Stock Exchange, despite its proximity, has yet to whet the appetite of Malaysian investors. Observers attribute the lack of exposure to Indonesian stocks among the analyst and fund management fraternity in Malaysia as one big reason.

A retail dealer in Singapore says there is a definite rise in appetite among his Malaysian clients for stocks listed in Singapore. “Most of the time, they trade in stocks that they’re familiar with like Genting International, or commodity-related shares like Wilmar International and Golden Agri-Resources.”

Furthermore, the bourse in Singapore has recovered significantly, therefore providing much opportunity for investors.

“Those who bought into Golden Agri in March, for example, would have made a handsome profit by now,” says the dealer.

Gerald Ambrose, managing director of Aberdeen Asset Management Sdn Bhd, says while diversifying overseas reduces risk in the long term, investors will benefit from picking the right stocks rather than a cross section of a market provided by an exchange traded fund (ETF).

“Now more than ever, there are winners and losers in every market and ETFs do not distinguish between the two,” he says, adding that ETFs do, however, enable a small investor to get exposure to an entire market.

A double-edged sword for cross-border investments is foreign exchange fluctuations.

If the currency moves in favour of the investors, there will be forex returns to be reaped and vice versa.

Wong of Areca says the forex risk is high especially for those trading offshore investments for the short term as the conversion could impact transaction costs and investment value, unless they trade in foreign currency accounts.

Kenanga Investment Bank provides settlement in foreign currency to allow clients to retain their investment proceeds in the respective currency in their trust account, which helps save costs.

“Our clients are required to sign a risk disclosure form to indicate that they understood the type of risks that they’re undertaking. They must be aware that forex movements could work for, or against them,” says a head of dealing from another broking house.

The broking house disallows clients from making contra transactions for foreign trading due to the high volatility, which poses greater risks for both the broker and client.

The dealer says clients must have sufficient funds available in their trust accounts, or back the trading with collaterals.

Typically, investors should have about RM30,000 to RM40,000 in capital for foreign markets investments.

“It’s actually not much in foreign currencies. For example, RM30,000 is almost equivalent to US$8,000 or S$13,600. Translate that into units of stocks, an investor could buy on average of 8,000 shares at US$1 each or 13,600 shares at S$1.36 per share,” he says.

Nevertheless, foreign exchange fluctuation remains a huge consideration for Malaysian investors. “For Singapore stocks, one lot is equivalent to 1,000 shares. Imagine buying shares at S$9 each which amounts to almost RM20,000,” a dealer remarks.

Regulatory framework

But there are risks.

Ambrose points out that product innovation overseas could grow out of control such as collateralised debt obligations (CDOs) and derivatives. CDOs related to mortgage securities were partly the reason for the subprime crisis in the United States two years ago.

Fortunately in Malaysia, Bank Negara has prevented the proliferation of the toxic version of these products by ensuring that product manufacturers’ and investors’ interests remain aligned.

While the SC does not keep tab of offshore investments by Malaysian retail investors, it remains committed to upholding investor protection. In this regard, the regulator encourages investors to exercise due diligence by ensuring they trade via legitimate and licensed brokers, and that they understand the risks involved in trading foreign assets.

On the SC website, investors would find a list of licensed and approved brokers, intermediaries, trustees and funds, as well as an investor alert section, which informs investors of any potential scam and list of unauthorised websites, investment products and companies.

All these guidelines and available information are provided to allow investors to exercise their own check and balance.

Roles and responsibilities of fund managers, meanwhile, are clearly outlined in the Guidelines on Compliance Function for Fund Managers, which are available for download on the SC website.

They are required to report regular performance review, including monthly statement of accounts to investors, monthly statistical returns report to the SC as well as quarterly reports and annual reports to investors.

For unit trust funds, a recognised and valid trustee should be appointed to safeguard the rights and interests of the investors, and for other types of funds, the fund manager is required to appoint a custodian.

Financial muscle

The dealer cautioned that investors must have at least some experience trading in the local market first before venturing abroad.

“If they can’t make money here, how do they plan to make it elsewhere?” he asks.

In addition, currency trading is not as straight-forward as equities. Investors often do not understand what factors drive the movement of currencies.

“Forex trading is a riskier investment, which we do not usually encourage our clients to undertake unless they have a good grasp of the market,” he says.

The authenticity of foreign trading websites is questionable because it’s difficult to ascertain their track record, especially those of smaller broking firms.

“Bigger names like Merrill Lynch or Goldman Sachs may not want accounts with the size of US$8,000. Smaller firms offer cheaper fees but investors take a risk investing with them,” says the dealer.

Kenanga says clients who open a trading account with it could trade in more than eight countries globally and so, save on cost and time to travel to the respective countries to open a trading account.

No doubt, trading foreign stocks is generally more expensive due to brokerage and other fees levied by the counter party foreign brokers.

“But it is still cheaper for clients to invest in foreign shares via the local brokers than trading directly with the foreign ones. It is also more convenient for local investors to deal with the local guys, as the dealers will facilitate the settlement of trades and monitor corporate actions on their behalf,” TA says.

Ultimately, MIDF Asset Management Bhd chief executive officer and chief investment officer Scott Lim says, investors should not diversify their portfolio across the markets simply for the sake of diversifying.

“They must understand the expected returns and risks of various asset classes in foreign markets. For example, diversifying into real estate, currencies and commodities may post even greater risks than equities and fixed income in overseas markets.”

While regulators have allowed foreign fund managers to operate here, so far, the five licensees are only given the green light to manage funds for institutions and not retail investors.

Related Stories: Institutionalising your investments Cashing in on offshore investment Basket of options

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