Is it any wonder that many Canadians shy away from investing in foreign stocks? After all, studying up on unfamiliar markets can soak up precious Sunday afternoons, as can tracking down and deciphering foreign financial statements. On top of that, there are the risks–from political dangers to corporate governance concerns–that need to be carefully weighed before financially taking the plunge. So why bother?
One big reason: to reduce risk. Stock markets around the world don't move in sync, for the most part. So when you choose to spread your investments across countries, losses from a downward trend in the TSX can be offset by gains from an upward swing in the London Stock Exchange. “This allows the international investor to reduce their risk while still receiving the same return,” says Calgary-based fund manager Gerald Cooper-Key of the Mawer World Investment Fund.
The benefits of international diversification get even bigger if you currently own a combination of strictly Canadian and American equities–which, by the way, is a real foreign-stock faux pas. Last year, the appreciation of the loonie against the greenback took a bite out of Canadians' returns on U.S. equities. But over the same period, our buck barely budged against the euro, leaving our stock gains in euros entirely intact. Put another way, a stock portfolio exposed to a variety of currencies, rather than just two, lowers the impact of exchange rates on your returns.
Another perhaps more intuitive advantage is the option to cherry-pick from a larger selection of potentially profitable investments. The Canadian market accounts for only about 1% of all global equities. What's more, Canadian stocks and their American counterparts are among the priciest–from a price-to-earnings perspective–in the world. So finding bargains can be easier if you look beyond our borders.
Owning foreign stocks also lets your returns hitch rides on economies growing much faster than ours. China's, of course, is a good example. Its speedy GDP growth is likely to slow but will still continue to leave Canada's in its dust.
But companies in countries without stellar economic stats shouldn't be overlooked. Dublin-based fund manager John Arnold of the AGF European Equity Class fund says the profits of European companies are moving along at a good pace despite the continent's slow economy. The reason, he says, is that European managers have finally caught on to an established North American way to increase earnings: cost-cutting.
When it comes to actually picking foreign stocks, narrowing down the thousands of companies to a handful of reasonably priced hopefuls is half the battle. To give you a hand with this, we've enlisted the help of some of Canada's top international equity fund managers: Mawer's Cooper-Key, Frank Chiang of the Clarington Asia Pacific Fund, Edward Loeb of the AGF International Value Fund, Patricia Perez-Coutts of the AGF Emerging Markets Value Fund and Robert Tattersall of the Saxon World Growth fund. What follows are some of their picks–something to mull over on those leisurely Sunday afternoons. C.L.
Samsung Electronics
Location: South Korea
Recent Price: KRW435,000
P/E Ratio: 12
P/B Ratio: 2.1
Dividend Yield: 2.3%
Samsung Electronics Co. Ltd. gets an enthusiastic thumbs-up from three fund managers we spoke to, including Frank Chiang, who considers it a “must-have” in his fund. Why all the buzz? For starters, Samsung dominates the global memory chip and colour television segments, while its sense of style and technology makes it one of the top three cellphone manufacturers in the world. Plus, the stock is reasonably priced. The shares suffered when shrinking margins on its bread-and-butter memory chip business began slipping midway through last year. One short-term factor, though, played a major role: a downturn in the IT sector. Still, Samsung may also need to make comebacks on its cellphone and liquid crystal display margins before investors really get excited about it again. That will take some marketing savvy. But given Samsung's status as one of the world's best brands, the managers we talked to think the company is up to the task. C.L.
Hutchison Whampoa
Location: Hong Kong
Recent Price: HK$71
P/E Ratio: 21.1
P/B Ratio: 1.2
Dividend Yield: 2.4%
Li Ka-shing became one of the world's wealthiest men by making smart, well-timed investments. The Hong Kong tycoon thinks he has a winner with 3G–the next-generation cellphone technology that lets you make video calls, watch the news and download MTV music videos on your handset. Li's firm Hutchison Whampoa Ltd., a multinational conglomerate, proclaims 3G will be “as significant as the birth of television after a generation of radio.” The company has definitely put its money–$27 billion and counting–where its mouth is. But despite the hype, investors seem unimpressed. The stock has tumbled to slightly more than half its value of five years ago, a fall perhaps too steep given the quietly improving performance of the firm's other businesses. Its property and hotels division, which, among other things, collects rent on its 15.7 million square feet of property, and its retail and manufacturing arm, with more than 4,600 stores mostly in Europe, climbed out of the red in 2002 and 2003, respectively. And its port facilities, a network of 35 lucrative operations spanning the globe from Hong Kong to Buenos Aires, continues to profitably chug along. Nevertheless, many question whether 3G, which launched in March 2003, will ultimately pay off, and results have been mixed so far. But one thing's for sure: Hutchison's other businesses will buy it time to see just how big 3G can be. C.L.
China Overseas Land & Investment
Location: Hong Kong
Recent Price: HK$1.93
P/E Ratio: 15.2
P/B Ratio: 1.3
Dividend Yield: 2.6%
The word “Zhonghai” may draw blank stares from Canadians, but the Chinese recognize it as the brand of one of that country's most famous and well respected property developers. That builder's corporate identity is China Overseas Land & Investment Ltd., a company whose fundamentals are as rock-solid as its workmanship. The 51% state-owned COLI, whose profits soared 74% to $63.2 million in the first half of 2004, boasts a clean balance sheet–cash and cash equivalents alone could cover all outstanding debt. The company is also sitting on 77.5 million square feet of undeveloped land in 10 cities spread across mainland China, including Beijing, the country's capital and the site of the 2008 Olympics, and Shanghai, one of the nation's trendiest and most populous centres. Its busy pipeline of projects also looks promising. All this and it barely trades above book value. Nevertheless, a couple of clouds loom nearby. Many speculate Shanghai real estate, which has reportedly surged more than 20% per year since 2002, is due for a correction. If that happens, COLI will likely say goodbye to some of its residential properties' highest margins. A Chinese economy that stalls abruptly rather than slowing gradually could also deal a mighty blow. Still, a strong financial foundation may allow COLI and its Zhonghai brand to weather even such storms. C.L.
DSM NV
Location: The Netherlands
Recent Price: Û46.67
P/E Ratio: 13.7
P/B Ratio: 0.9
Dividend Yield: 3.7%
DSM NV counts a staggering number of human beings among its customers. Set up in 1902 to operate the Dutch government's coal mines, it's now one of the world's leading makers of chemicals used in the consumer and industrial products that are the mainstay of modern life. DSM is so vast and pervasive that it's become practically invisible–which is what now makes it such a potential bargain. Outside of the handful of elite European institutions–mainly insurance companies and banks–that hold roughly one-third of its stock, DSM has simply been too big and too complex for shareholders to grasp what it does, let alone that a corporate restructuring launched in 2000 is about to bear fruit. The company is in the process of emerging from a five-year strategic plan aimed at moving it up the value chain. Slowly but surely, it's been reducing its reliance on bulk commodities, while plowing capital into higher-margin specialized chemical and pharmaceutical operations such as Swiss vitamins, antioxidant food additives, technology for flat-screen TVs and, most recently, a leading European environmentally friendly water-based resin maker. Even in the midst of a major battle to maintain penicillin margins and a fight to hang on to its share of emerging antibiotic markets in China and India, DSM is expected to report 2004 and 2005 earnings growth that's far ahead of its industry and sector. The share price has been on the move since late 2004, but there could still be upside. K.N.
Lloyds TSB Group
Location: United Kingdom
Recent Price: £475.13
P/E Ratio: 12.7
P/B Ratio: 2.75
Dividend Yield: 7.2%
Dividend, dividend, dividend. For much of the past decade, that's been the beginning, middle and end of the Lloyds TSB Group investment story. One of the U.K.'s largest savings banks, Lloyds' has maintained its big fat payout ratio through good times and bad. Granted, the bank had little choice if it wanted to hold on to investors. A plethora of problems–ranging from the cost of a 1990s buying binge to the financial fallout arising from aggressive sales of high-risk bonds to unsophisticated investors–has had a negative impact on the firm's earnings and stock price. But this might not be the case for much longer. Citibank veteran Eric Daniels, who took over as Lloyds' CEO in mid-2003 vowing to put the bank's domestic assets to work, is beginning to make a difference. In the past two years, Lloyds has purged top executives; shut down inefficient operations; sold assets in France, Brazil and New Zealand; made a large investment in leading-edge communications technology; introduced innovative sales products and practices at its 2,500 branches; and outsourced 2,500 jobs to India. Value fund managers now identify Lloyds TSB as offering potential for capital appreciation as well as yield, and third-quarter numbers, released in mid-December, prompted praise from London bank analysts who as recently as a year ago had nothing but scorn for the prospects facing this company. K.N.
ANZ Bank
Location: Australia
Recent Price: AU$20.40
P/E Ratio: 13.6
P/B Ratio: 2.2
Dividend Yield: 5.0%
Remember back in the '80s, when Crocodile Dundee was a hit on movie screens and suddenly the western world was scrambling for all things Aussie? Last year saw a glimpse of a flashback, albeit a more sensible one. Australia had everything going for it in 2004, and while the outlook for 2005 is not quite so robust–GDP growth is expected to slow to 3.2%–there's still time to throw another shrimp on that barbie and cash in on what's nonetheless expected to be a productive, profitable year. Investors shopping for a stable stock with decent upside should take a look at Australia and New Zealand Bank–an old-style diversified financial services company with an enticing dividend and well-balanced exposure to key segments of the booming Asia-Pacific economies. ANZ is about as conservative as banks come; nobody can remember the last time this company did anything remotely inventive. But it earned a 21% total return for investors canny enough to buy its stock a year ago, despite the fact that financial services lagged behind most other sectors. Will they make up for it in the year ahead? Fund managers say, “No worries.” Much depends on what happens to the price of gold, and the Chinese economy. Not a bad combination to bet on, particularly while raking in a 5% dividend. K.N.
