As the bull market in stocks ages, US investors are rolling over their investments from a focus on growth to a focus on value. They are also looking offshore for foreign investment opportunities. Some choose to combine the two approaches, but how do you find value investments offshore? CNBC reports that Morgan Stanley is looking offshore for value and where to put your money for the next year and they specifically suggest Brazil, Thailand, Indonesia, India, Peru, and Poland.
Underpinning the bank’s preference for stocks in emerging markets is an expected stabilization in growth in those economies in 2019, while expansion in the U.S. is expected to slow.
The projected turnaround for emerging markets is one reason why the investment bank prefers stocks in those economies over that of the U.S. next year. Morgan Stanley said it upgraded emerging market stocks from “underweight” to “overweight” for 2019, while U.S. equities were downgraded to “underweight.”
So, if you too think that the US bull market has largely run its course and that the emerging market bear market has likewise stopped going down, why aren’t you investing offshore?
How to Find Value Investments Offshore: American Depositary Receipts
Unless you have specific knowledge and experience in foreign markets and with foreign investments, you may not know where to start. And, for that matter, you may not have the time to evaluate specific investments in specific countries. You can follow the advice of folks like Morgan Stanley, but what stocks to you look for in Brazil, Thailand, Indonesia, India, Peru, and Poland?
Once you have decided that a certain country is socially, politically, and economically stable, how do you pick stocks or other investments? One useful approach is to look at American Depositary Receipts or ADRs from any of these nations. Investopedia defines ADR.
An American depositary receipt (ADR) is a negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock traded on a U.S. exchange.
ADR holders do not have to transact in foreign currencies, because ADRs trade in U.S. dollars and clear through U.S. settlement systems. The U.S. banks require that the foreign companies provide them with detailed financial information, making it easier for investors to assess the company’s financial health compared to a foreign company that only transacts on international exchanges.
Because ADRs come with financial reports similar to those for US stocks, it is possible to make an intelligent decision regarding the financial strength of the company. As such this is logical way to find value investments offshore.
How to Find Value Investments Offshore: International Stock ETFs
Exchange traded funds or ETFs that include foreign stocks are also a viable route to take if you do not have a specific stock or country in mind. And when you do not have the time or expertise to find and evaluate specific investment opportunities you can look at ETFs that fit your needs. US News offers International Stock ETF rankings.
U.S. News has identified exchange-traded funds best suited for long-term investors seeking low-cost, diversified portfolios. Our rankings compare the cost and structure of hundreds of ETFs using our comprehensive methodology.
They group the international ETFs as follows:
- China Region
- Diversified Emerging Markets
- Diversified Pacific/Asia
- Europe Stock
- Foreign Large Blend
- Foreign Large Growth
- Foreign Large Value
- Foreign Small/Mid Blend
- Foreign Small/Mid Value
- Global Real Estate
- India Equity
- Japan Stock
- Latin America Stock
- Miscellaneous Region
- Pacific/Asia ex-Japan Stock
- World Large Stock
- World Small/Mid Stock
Each of the groupings has two or three options. You can look at their methodology to see how they make their picks.
Since all ETFs are intended to track an underlying index (for a variety of equities, or the price of a commodity, for example), we aim to identify large, liquid funds that perform reliably and could function well as part of an investor’s long-term asset allocation plan. We also compare funds’ costs, both those contained in commonly published expense ratios and implied by trading spreads, as well as a fund’s level of diversification and success in tracking its index.
In this case you are not so interested in evaluating specific stocks as you are in knowing how well the fund is run, how well it tracks its basket of equities, and how well they control costs so that profits are passed on to you and not sucked up by the fund’s management. This is a reasonable approach to finding value investments offshore.
How to Find Value Investments Offshore: Country Risk and other Issues
Although one can find spectacular profits in foreign investments, one can also invest offshore and lose everything when the government confiscates private assets, descends into civil strife, or otherwise damages your investment. How to evaluate a country for investment starts as simply as looking it up on Google Maps!
The World Bank is an excellent source of information for investing offshore. Whether you are thinking about foreign direct investment or buying ADRs, the World Bank has lots of great information to help you evaluate a country for investments. The World Bank business project lookes at the ease of doing business index. This is a ranking from one to 189 of all nations for how easy or how hard it is to do business there listed by several factors.
If you go to the World Bank links make sure to navigate to the most recent reports. Another useful source of general information about any given country is the CIA Factbook. This source will not give you specific information for specific investments but it will give you a good sense of the country, its economy, and the safety or risk of investing there.
How to Find Value Investments Offshore: Short or Long Term?
A few years ago everyone wanted to invest in Brazil. The markets collapsed for commodities and Brazil’s economy went with it. Both in the USA and offshore there are investments that look great and then they don’t. We wrote some time back about the resource curse of boom and bust cycles. If you believe that you can time the markets, some of these investments can be very profitable. But, if you simply want offshore investments that will grow over time and allow you to sleep at night, look for stocks and ETFs with long and stable track records.