As a Singapore investor, you may sometimes feel tempted to turn your eye for overseas companies for stock investments, especially if you want exposure to sectors that may not be particularly prevalent or present on SGX, including huge technology companies, big pharmaceuticals, or agriculture firms.
While we have previously discussed some benefits of investing in foreign stocks, including potentially higher returns, diversification and greater exposure to larger markets, investing overseas come with their own set of challenges and risks that should be carefully considered.
As an informed investor, here are the 6 important questions to ask yourself before even deciding which stocks to buy.
#1 Are You Investing In An Established, Emerging or Frontier Market?
The type of market the stock belongs to impacts how its price fluctuates. Knowing where the stock belongs to can manage your expectation of its performance, and whether it’s a risk you want to undertake.
In developed markets, stock prices tend to move on a rising trend over the long-term, even if the stock is going through a bearish phase. The United States and Japan are examples of developed markets.
Emerging markets are located in less economically developed countries. Usually, these markets are in the midst of establishing themselves. Stocks from emerging markets tend to carry greater risk, but also hold potential for greater rewards. China, Brazil and South Africa are examples of emerging markets.
Stocks from frontier markets have less established prices. They are more volatile and carry liquidity risk as buyers can suddenly disappear. Botswana and Sri Lanka are two examples of frontier markets.
#2 Do You Understand The Currency Risks?
Investing in overseas stocks also means that you are investing in foreign currency.
Whether the stock price goes up or down will not be your only consideration. You will also have to consider whether the currency the stock is denominated in will go up or down relative to your base currency. For most Singaporeans, the Singapore dollar is the base currency they invest with.
This means that your returns may be eaten up by currency risks if the stock’s denominated currency is weakening. Alternatively, a weakening currency may carry liquid risk, influencing you to hold off from selling your stocks since the value of your returns is dampened.
#3 Do You Know Your Tax Obligations?
Always check the tax obligations of the markets you invest in. In most countries, investments are subject to goods and services taxes and withholding taxes.
If you are investing in US stocks, a W8BEN declaration form needs to be filed to the US tax authority to declare yourself as a foreign beneficiary of income from the US stocks you are investing in.
#4 Are You Aware Of Additional Costs?
Transacting in foreign stocks incurs additional costs that vary according to the country or market on top of the usual brokerage account fees and brokerage commissions.
When you buy foreign stocks, they are most likely held in a broker’s custody account which typically incurs fees of a few dollars per month or quarter.
Buying overseas stocks in Singapore Dollars also incurs a foreign exchange fee –– the cost of converting your local currency to the foreign currency based on the existing exchange rate. This will eat up your returns if the exchange rate is unfavourable at that time.
In some markets, a small transaction fee is applied for each trade. In the US, a small percentage of every trade is paid to the Securities and Exchange Commission.
#5 Are There Any Political Risks?
An investment’s returns can be negatively affected when there are political changes or instability in a country. Instability could arise when political situations escalate or when there are large shifts in the government or policymakers.
For instance, the turbulent political situation in Hong Kong has opened up negative sentiment surrounding Hong Kong’s stock, with its benchmark Hang Sang Index dipping 6.1% since mid-June when the protests began.
#6 What Are The External Market Forces?
Forces that shape a market can work for or against you, so you should keep these external factors in mind when investing, especially for sectors that are particularly susceptible to policy changes.
For example in Malaysia, the government has announced that it will lower the threshold price of RM1 million (S$325,000) to RM600,000 (S$195,000) per condominium unit in view of a large number of unsold apartments in Malaysia’s major cities.
This is great news for property investors and those who invest in property developers. However, it should be noted that this short-term measure could inspire anti-foreigner sentiment because of a potential influx of foreign property investors, and so the policy might be adjusted once the initial goals are met.
Other external forces that could have a large impact on your overseas investment (for better or worse) include extreme weather conditions, such as wildfires or typhoons, or international trade policy.
Remember Why Are You Investing (Outside Of Singapore)
With more uncertainty, currency risks, greater volatility in political environment, investing overseas poses its share of difficulties. It would be prudent to evaluate the pros and cons of investing overseas, compared to investing locally.
If you could achieve the same investment goals or gain similar exposure to growth opportunities locally, then it might make sense to build the foundations of your portfolio right here in Singapore, and seek to supplement it with overseas stocks where necessary.
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