Investing strategy: Seeking safety in a dangerous world

Some lesser-developed countries look attractive. But investing abroad exposes you to considerable risks. So your strategic investment objectives should include finding safer ways to profit. One is to buy the high-quality global stocks of multinational companies. Another is to buy high-quality alternative investments such as American Depositary Receipts (ADRs).

Many investors in the developed world have invested overseas in recent years. That’s because some lesser-developed countries look promising.

One positive trend is that industrialization has lifted hundreds of million of people out of poverty. This is particularly true in the Pacific Rim, outside of Japan. These countries have growing middle classes able to afford things that were formerly out of reach.

A second plus is that many lesser-developed countries have young populations. This suggests that they will provide services and goods that aging people in the developed world will need.

But, while investing overseas may be a critical component of your long term strategic investment plan, doing so can expose you to considerable risks. For instance, it’s harder to keep track of companies that operate far away.

A second risk is that some countries lack a rule of law. In Russia, for example, it’s said that profitable businesses can be taken away by the barrels of guns of kleptocrats. How do you enforce your property rights in a country rife with corruption?

Most recently, China’s leaders went to extraordinary lengths to keep the stock market high. That is, they want a market with a sort of ‘ratchet’ effect, where stocks can only go up, but not down.

In the year to June, Chinese stocks doubled in price. The ChiNext price-to-earnings ratio hit 147 times. This was unsustainable, of course.

To keep the stock market high, trading in over 90 per cent of Chinese stocks was suspended or halted. IPOs (Initial Public Offerings) were suspended. That is, entrepreneurs with goods ideas could not get financing from the markets. Large shareholders were forbidden from selling. Interest rates and margin lending rules were watered down. Leaders pushed brokers to buy stocks backed by cash from the central bank.

We suspect that such desperate measures reflect Chinese leaders’ own strategic investment objectives in the market. You don’t want to get stuck in a stock market like this, where capricious leaders repeatedly and quickly change the rules without warnings.

The fact is, we live in a dangerous world. That’s why we advise you to seek relative safety.

One way is to invest in high-quality, successful, dividend paying multinational corporations. U.S. global stocks such as Procter & Gamble, Johnson & Johnson, FedEx, General Electric, IBM and McDonald’s operate around the world. They are all on The Investment Reporter’s Key Stocks list and let you participate in fast-growing developing countries without the risks of going it alone.

A second way to raise your safety is to buy ADRs (American Depositary Receipts). They give you ownership of many high-quality, successful global stocks of companies headquartered abroad that trade under U.S. investment rules. The Investment Reporter regularly monitors Canon, Ericsson, Korea Electric Power, New Oriental, Taiwan Semiconductor and WPP Group among others in its regular reports on ADRs.

The 46 ADRs followed by The Investment Reporter include companies from Belgium, China, Denmark, Finland, France, Germany, Holland, Israel, India, Italy, Japan, Mexico, South Korea, Spain, Sweden, Switzerland, Taiwan and the United Kingdom. 

 

The Investment Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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