Saudi Arabia is to open access to its stock market to foreigner investors for the first time, wealth manager Brewin Dolphin highlights the higher risks associated with holding direct investments overseas.
"Investing directly in a company overseas can give you exposure to a particular geography or investment theme which may not be achievable in your home market, such as a pure play e-cigarette maker or a large cap-fracker," explains Elaine Coverley, Head of Equity Research at Brewin Dolphin.
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"But don’t forget that London (along with the US and Europe) has some of the highest standards of regulation and corporate governance in the world, and you may not be protected in this way when directly investing in other, less developed, markets. Holding a stock directly does have its benefits, but also consider gaining exposure via a managed fund or ETF to help manage risk."
Brewin Dolphin has compiled the following points to consider before investing directly into overseas equities:
- Don’t forget that the FTSE 100 provides significant exposure to markets other than the UK, with around 75% exposure to overseas earnings. Your current investments may be more geographically diversified than you realise
- Major international markets tend to be highly correlated, which means that if the UK market falls you may suffer similar losses on overseas equities
- Be aware of country risk, including political, social or economic instability which could impact long and short term equity performance. Note that it can be more difficult keeping up to speed on macroeconomic and company news when dealing in a foreign market
- Exchange rate fluctuations can pose a risk to the value of your equities in your home currency, with FX movements potentially undermining any returns made through the company’s performance alone. That said, overseas holdings can be a hedge in the case of a depreciation in the pound
- Many overseas companies have dual listings, both in their home market and another (often London) offering greater liquidity, so consider which share class you buy to reap the benefits of a particular exchange
- The UK is renowned for its strict corporate governance requirements, but not all markets will be so stringent. For instance, a company operating in a market with lax governance may not be run in the best interests of all shareholders, and may not adhere to particularly meticulous reporting standards or tax regulation
- The London Stock Exchange requires that all companies have a free float of at least 25%. Other markets may have a lower requirement, paving the way for a much lower free float if, for example, a company’s founder kept a majority holding after listing or is largely family owned. This potentially exposes other investors to greater risk
- Differing withholding taxes for different jurisdictions means you may not always receive all of the dividend income you expect
- Psychologically, most investors feel much more secure investing in their home markets. Do not invest in anything where you do not understand the risks or investment thesis behind it and get advice!
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