How to Invest in International Markets

Investing
How to Invest in International Market

I read a lot of personal finance sites and blogs.  The majority of them are from writers in North America who in most cases provides good overall investment and life advice. The majority or articles and posts are written in an interesting tone, where most people foresee a reasonable amount of stability in their investments going forward. Don’t get me wrong people are very wary of the next US stock market crash. But in most cases the macroeconomic environment from a currency, inflation and interest rates perspective aren’t taken into consideration when making investment decisions. This is quite natural as the environment in developed countries normally remains stable over the long term.

This is however not the case in South Africa. If the last 10 years have taught me something it is that things will happen and when they do, they happen fast. Yes South Africa’s local currency is one of the most volatile in the world (affecting inflation and interest rates) and the country’s economy is not that mature yet. But it’s better to plan for the worst, than not plan at all. As a South African resident it is my belief is you should diversify your investments not just across industries and asset classes but internationally as well. This has become easier over the last couple of years with many international ETF’s listing. In most cases these are good products with low TER’s (Total Expense Ratio) for long term investors. But what happens if you want to own a share in Apple (AAPL) or want your investment to be foreign currency denominated?

In this post I will provide a guide on how to achieve this. Please remember this is not financial advice and should be taken for what it is. I have been investing this way for a while and it does become a lot easier over time. Again this should not be your only investment strategy. I will also go through some Pros and Cons of doing this. Investing in international markets will also differ widely between countries, although I believe the products used will be available and pretty similar everywhere. For this article it will be very South African focussed as it is based on my experience.

What to Do?

First of all you will need to open a stock broking account through a platform provided by a bank or accredited financial services provider. In South Africa most of the local banks offer a platform to perform international share trading on; ABSA, FNB, Nedbank, Standard Bank. I use my bank’s platform which is basically a front end for Saxo Bank’s platform, which is actually present in more than 180 countries and one of the global companies which enables this.

Naturally there are many document requirements to complete from a personal perspective in order to open such an account. Once this is done you must ensure that all your tax clearances are done, which will then allow you to transfer money to the account. In the case of South Africans you can transfer up to ZAR 1 million annually under your personal discretionary allowance before further tax clearance is required.

Now that you can transfer funds into the account you need to ensure you have certain information available.

  • Firstly you need to have the account- and IBAN number of the account you will be transferring the funds into available (IBAN is only required for EU payments). This is normally a trust account which is already denominated in the foreign currency of your choice. If your goal was to physically convert money from one currency to another you have now done so successfully.
  • There are different methods of payment; I prefer to do a SWIFT payment. In this case, ensure you have the beneficiary’s SWIFT address available. You will also need your unique reference which is used to identify your specific trade account.
  • Previously I had to visit my bank branch in order to do these payments by filling out forms, now this can be done with internet banking. If you are a South African and you are still under your ZAR 1 million annual limit you must choose a code/description which catergorises the payment. I normally use 512-04: Foreign investment by a resident individual in respect of the investment allowance.

After the transfer is complete the funds should show in your trading account within a couple of days and voila, you can start trading international shares.

What to look out for?

As with all things in life there are some snags and things to keep an eye on. As you are transferring and converting money into a foreign currency there are many costs involved. These are the costs related to the transfer of the funds; I have also added an indicative percentage cost based on transferring ZAR 100,000:

  • Commission on the exchange, unfortunately the exchange rate will be higher than the one you see on your cellphone app. Ask for multiple quotes and take the best one (0.8% – 2%).
  • There will also be a flat commission amount (0.46%).
  • SWIFT costs (0.06%)
  • Overseas bank levy (0.46%).
  • VAT (Sales Tax which is due to change) at (0.14%)

As you can see there is already a cost of 2% to 3% where a TER of 1.5% is considered high and most ETF’s are below 1%. This is however a one-time cost which should be amortised over the timeframe of your investment. Remember the same costs would be applicable if you would like to repatriate the money.

Now that you can trade how much does this cost? There are various commission structures depending on the market/exchange you trade in. ABSA has a nice summary of their rate schedule but basically you must look out for the following:

  • Each trade has a commission of approximately 25 to 30 basis points (bps) or a minimum amount of around $20. I work on a rule of thumb of $20 per trade and try to minimise the impact of that amount as a percentage of the trade. For example $20 equals 1% of a $2000 trade, while at $4000 it is 0.5%. The bigger the trade the smaller the commission from a percentage perspective, if you are a buy and hold investor like me you should try and buy quality stocks/ETF’s for the long term which minimises this impact.
  • Trades done into other currencies for example USD to GBP will have a conversion fee.
  • There is also a custody fee of around 10 bps p.a. based on the value of your investments.

Can there even be more fees and costs? Off course there can, did you forget about taxes? Depending on how long you hold your investments before cashing in different taxes will apply on the profits. Long term will be capital gains tax and short term will be seen as income tax (South African rule of thumb as a cut-off is around 3 years). The one I learned about the hard way is dividend taxes. Check with your bank/service provider if you can be registered as a local resident trader (meaning you are trading as a person of your nationality). Otherwise make sure you find out about the tax treaties between your residing country and the country you are acquiring the shares in. An example of this is that the US will charge 30% tax on dividends to foreign investors. This amount will automatically be deducted from the dividend pay-out if you could not be registered as a resident trader (I could not get this right). But South Africa has a tax treaty with the US and the maximum dividend tax in South Africa is 20%. That means that this should be stated on your annual tax return in order to receive the 10% rebate from the local tax authorities. Your bank/service provider should be able to provide a statement of these dividends and taxes.

So be sure to check that as you would not want to be seen as over paying taxes, would you?

Is all of this worth it?

By this time I can hear you asking the question, “Why did you not just buy a local S&P 500 ETF?” And that is a very good question; but there is some method to the madness. Below I will go through some of the basic Pros and Cons to doing this, how this resonates with you will be a personal preference thing :

Pros

  • Your investment is denominated in the currency of your choice and can from here be transferred to any account registered in your name. This is good risk mitigation strategy if your country potentially goes the Venezuela route (although I do not wish this upon anyone).
  • You have access to all the shares and ETF’s (like Vanguard ETF’s that is not available in South Africa) on the major global stock exchanges.
  • It is an easy tool to diversify from a country, currency and industry perspective.
  • In South Africa this forms part of your foreign discretionary allowance and an easy way to use a portion or all of it on an annual basis.
  • It is exciting; buying a share still gets my heart racing.

Cons

  • The fees applicable to start trading are high.
  • Fees on trades are high forcing larger trades to be made which creates a barrier to entry and counters diversification.
  • Many of these products can now be bought locally, for example an S&P 500 ETF (normally local currency denominated).
  • It is a lot of administration from a setup, book keeping and tax perspective.
  • Buying individual shares can be daunting; I would also recommend having at least an understanding of some trading basics, for example order types. If this stresses you out go for a passive strategy or use your financial advisor.
  • In most cases passive investing like an S&P 500 ETF out performs stock picking over the long term, so why bother?
  • You are your own advisor and must live with your own decisions on this.

In summary I believe this can be one part of a larger array of investing tools used. It is however more intensive that the average person would want in his personal finance life. I hope this assists anyone considering this. What are your thoughts on investing directly in international stock markets?

Always grow your wealth for tomorrow while being content with your wealth today.

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