Investing overseas

One of the direct consequence of the 2008 bear market is the establishment of facility by various stockbrokers for their customers to buy stocks overseas. There are some stories making the round where some very fortunate investors had made 200-300% return after investing in Citigroup (Code: C) at less than USD1.00. This in turn has galvanized such excitement that small retailers are beginning to demand for a piece of the action. However, sad stories are conspicuously absent. Who can recall those who have bought into AIG (Code: AIG) at USD5 apiece and are sitting on losses of 60-70%.

I must admit that I have serious misgiving about clients buying stocks in overseas markets. On the one hand, I do not want to prevent an investment that could potentially generate handsome return many years down the road. At the same time, the risk accompanying such investment is not insignificant. Some may say "It is only USD1.00! In the worst-case scenario, all that I would lose is USD1.00!" OK, that's fine, except they are not buying 1,000 or 2,000 units. Some will start telling you that they have saving of RM50,000 & can afford to buy 10,000 units (if the price is at USD1.00... again)! This is what I would call rear-view investing.


Chart 1: C's daily chart as at 16/4/2009 (Source: Stockcharts)

If you really want to crack your head on a real "on-going" case, take a look at General Motor (Code: GM). The news is out there that GM is likely to file for bankruptcy after it failed to secure a USD13.4 billion loan package from the US government. It has debts totaling USD47 billion and burning through USD1 billion cash every three weeks. In the last two years, it reported losses totaling USD69 billion and its shareholders' funds is negative USD86 billion. It is struggling with high wages & unexciting cars line-up.

And, yet its share price closed at USD1.94 yesterday, which is substantially higher than the low of USD1.26 on March 6th. What's happening? Are investors thinking that a deal could be struck whereby every stakeholder would take a cut and GM would be able to pull through as a smaller & leaner automaker. That should be the best-case scenario. What if the unions refused to agree to the demand for lower wages? If the unions would not agree to any concession, could we expect the creditors to agree to a haircut? Obama has a lot riding this. Politically, he cannot walk away from GM after splurging so much to save Wall Street. But, what if Obama stood firm? Then, we may see the worst-case scenario of GM actually filing for bankruptcy. That's brinkmanship, at its best or worst. You must be wondering what all this got to do with buying Citigroup? That's what happened in Citigroup in early March. Fearing bankruptcy or collapse or nationalization, some investors folded first? Or, was it last? That someone could have been you.


Chart 2: GM's daily chart as at 16/4/2009 (Source: Stockcharts)

I am not against buying overseas stocks. My preferred vehicles are ETFs or Exchange Traded Funds. Say, you are interested in banking stocks in US. Then, you may want to buy PowerShares Dynamic Banking Sector (ETF), instead of Citigroup. This may not give you a 200-300% return, but it will definitely be less volatile. One should not have to invest in stocks and forego his sleep.