Investing in foreign shares

A question that is often asked by clients is "why are you recommending foreign shares for my portfolio?" Admittedly most of my clients are within the 65 to 75 year age range, and undoubtedly there is an element of cultural bias here, evidenced by the fact that my younger clients do not have a problem embracing international markets.

Nonetheless, the question is valid and I will try to address the main reasons here:

  -  It is hard to find good value in traditional 'mature' markets. The general public really took to investing in the stock market in the 1980's, and since then, there has been an abundance of investment periodicals, regular tabloid publications, newsletters online recourses etc. The stockmarket has been de-mystified and there is and abundance of information about most main market companies and many Aim Market companies. Many of the same companies are covered by analysts in several different investment houses - especially the FTSE 100 stocks.

There is a well known theory that states that the share price is always at its 'ideal' because all known information is already factored into that price - this generally is true in mature markets, and so cheap quality shares are very scarce - you are mostly paying a price with not much extra value to be had, in fact, for the most part, UK shares are overvalued. There is, therefore, very good reason to look outside of the UK for quality at a price that gives decent upside potential.

  -  By spreading your portfolio amongst several markets you can hedge against a downturn in your home market - likewise you can protect against depreciation in the value of your own currency, by holding assets in another. It must be added, that the last point certainly works both ways and there are, of course, inherent currency risks associated with holding foreign currency assets. With this in mind, I generally prefer to recommend Euro denominated stocks to my clients, as I personally find that the Euro is always relatively stable, whilst the US$ has more scope for fluctuation, indeed, right now I find the dollar volatile and the US markets overvalued.

  -  Carefully selected foreign stocks generally give a very good dividend and are far more likely to return profits to shareholders in the form of generous 'one off' payments than UK stocks are. Please note that as in the UK, payments are subject to tax at the appropriate rate, however, the EU has reciprocal taxation treaties with the UK, so your broker should pass on any dividends net of tax with no further worry on your part.

At the end of each financial year your broker should provide you with a dividend received certificate, showing dividends received and tax deducted. You will be required by your broker to complete a W-8BEN form if you wish to trade in US shares. This is an IRS form stating that the beneficial owner is not a US citizen. It exempts you from paying US tax on dividends - you will, however, still be liable to pay UK tax. Failure to complete a W-8BEN form will result in you paying both taxes!!

  -  Most foreign markets are well run and well regulated. With the advent of globalisation every country is eager to increase its share of foreign capital flows. To that end, most European bourses are run on pretty much the same model as our own. In the past, people were put off buying foreign shares because they could not find any information about foreign companies or their performance, or could not understand their accounting practices. Like each countries' Bourses, foreign companies also wish to attract fresh investment and to facilitate this, they make a great deal of information available on their websites, with regular updates - it is in their best interests to be as transparent as possible.

With regards to accounting policies, most of Europe has adopted set Financial Reporting Standards (FRS) so you can be assured that certain accounting principals hold true wherever these are used. With these two potential barriers removed, a UK investor can confidently buy abroad - for me, the biggest risk is buying overvalued shares on our own markets.           An advisory word regarding the procedures on some markets……Now, as previously mentioned, most markets operate like our own i.e. instant dealing using the CREST system. The Xetra market (Frankfurt), The VIRTEX (Swiss) and the Paris markets, operate an 'auction' system. Stocks are only bought and sold once or twice daily at set times.

To deal on these markets you must leave an order with your broker together with a maximum price you are willing to go to (NEVER deal at market best price). Buyers are then matched with sellers - note that it is possible not to have your order filled, because a buyer/seller was not available at your set price. If this is the case, you have the option to try again at the next auction (you could, of course, just leave a 'good till cancelled' order with your broker). Now, this is not mentioned to put you off, indeed, I have taken some huge profits from undervalued stocks on these markets and also some very nice dividends and shareholder payouts as well. I only mention this so that you are forewarned as to how these particular markets operate.

Investment in foreign shares should be part of every savvy investors game plan. The risk/reward ratio is far too compelling, and with most brokers now able to cheaply and easily execute your orders and no need for multi currency accounts, as in days past, it has never been easier.

As always, never invest money that you cannot comfortably afford to loose, and if in doubt, consult your financial advisor.