Want to hold Apple or Google shares? It’s getting easier with more information available and new synthetic shares that offer a bigger bite of the international equities pie.
One of the last investment brick walls – buying offshore-listed stocks directly – will fall in the next few years as it becomes even easier to buy them via the Australian Securities Exchange and as local researchers and the media publish more information on companies such as Apple, Google and Xtrata.
Savvy investors know to allocate part of their portfolio to international equities to improve diversification and capitalise on opportunities in multinational companies. But that exposure is mostly via international equity managed funds and, increasingly, ASX-listed exchanged-traded funds.
Holding foreign-listed stocks directly is less common. Overseas shares made up less than 1 per cent of all assets with self-managed superannuation funds (SMSFs) at December 2011, Australian Taxation Office data shows. The proportion of SMSFs that held shares listed on overseas exchanges fell from 12 per cent in 2008 to 3 per cent in 2010, according to the latest ASX share ownership study.
A reluctance to hold international equities directly is understandable. For one thing, overseas shares have badly underperformed. They had the lowest return of any asset class over 10 years to December 31, 2011, returning minus 3.1 per cent annually (unhedged for currency movements), according to the June 2012 Russell Investments/ASX Long-Term Investing report. Even cash returned 3.8 per cent a year over 10 years.
Then there are tax, currency and corporate action complications, such as participating in capital raisings and receiving dividend payments, when holding foreign stocks directly. Time zones are another consideration for traders who buy and sell offshore stocks directly. Yet for all the challenges, more investors will hold foreign shares directly in coming years and there will be a stronger culture of scanning globally for stocks. Better online investing tools, more information and product innovation are making it easier to buy offshore.
Earlier this year, the ASX announced plans for unsponsored depositary receipts (UDRs) to trade on its market, pending regulatory clearance. Simply put, UDRs will let investors gain exposure to global equities via the ASX, in Australian dollars, and settle transactions through the ASX’s CHESS system. UDRs are created when a broker buys a company’s shares on its home exchange, delivers them to a depositary bank’s local custodian, and instructs the depositary bank to issue UDRs via the ASX. The first two UDRs are expected to be over the London-listed versions of BHP Billiton and Rio Tinto. Over time, UDRs over Apple, Google, Microsoft, GE and several of the world’s best companies could feature.
Investors who cannot wait for UDRs can use exchange traded international securities (ETIS) issued by the Royal Bank of Scotland. The underlying shares provide exposure to a range of household name global companies but ETIS investors do not have any voting rights, or rights to dividends or distributions. Currency movements also affect returns.
Accompanying these product innovations is better information on offshore companies. The Australian Financial Review now publishes two pages of Financial Times articles daily and The Australian runs Wall Street Journal content. Pay TV channels, such as CNBC and Bloomberg, and various smartphone applications provide plenty of quality information on offshore stocks.
Local researchers are also paying greater attention to this trend. The leading value-investor newsletter, Intelligent Investor, has done excellent research this year on global market trends and offshore stock recommendations. It was an early bear on China but is generally bullish on buying high-quality offshore-listed stocks because of valuation and the Australian dollar’s buying power.
“We are analysing more stocks listed overseas as protection against a sharp downturn in China,” says Intelligent Investor research director Nathan Bell. “It has never been cheaper or easier and you can buy much higher-quality businesses than you can in Australia at decent prices while the Aussie dollar is at near-record levels.”
Bell’s favoured US-listed stocks include Oracle, Halliburton and Joy Global. Nasdaq-listed Oracle supplies software and hardware to some of the world’s largest corporations, has about 22 per cent of its market value in cash and is a “sticky business” with high switching costs if customers decide to leave. A forecast P/E of about 15 times 2012 earnings is undemanding.
Oil and gas giant Halliburton has almost doubled its revenue since 2009 and tripled its earnings per share but its share price has halved since July 2011 amid fears of a glut in natural gas in the US, lower oil prices and a large potential legal payout for the 2010 Deepwater Horizon disaster in the Gulf of Mexico. Halliburton looks undervalued on a P/E of about nine times 2012 earnings.
The lesser-known Joy Global makes coal and surface-mining equipment for BHP Billiton and other global miners. Its stock plunged during the global financial crisis and concerns about falling long-term demand for coal, as more natural gas is used, has been another headwind. Bell likes Joy Global’s strong industry position, valuation and potential as a takeover target.
Tony Featherstone is consulting editor of the ASX Investor Update e-newsletter.
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