How Can Asian Investors Get Exposure To US Stocks?

Investing

How Can Asian Investors Get Exposure To US Stocks?

The US stock market is in the midst of a record-setting rally. Here we examine the reasons behind this rise, and explain how Asian investors can get in on the action.

Published on 18 September 2017

Most investors tend to concentrate their equity investments in their home markets. This can be a sound strategy, as you would likely have first-hand knowledge about the investment opportunities that are available on your local exchange. You would also find it easier to keep abreast of the latest developments in the companies that you hold shares in, given that they are based in the same country as you are.

But the decision to restrict your portfolio to firms listed locally can lead to some distinct disadvantages from an investment strategy standpoint.

Firstly, investing exclusively in your home country’s market limits the degree of diversification in your portfolio. Diversification is an important tool, which can enable you to mitigate risk by providing you exposure to a wide variety of drivers of growth.

Secondly, by investing only locally, your investment opportunities are greatly limited. For example, less than 800 companies are listed on Singapore’s stock exchange and their total market capitalisation is about US$700 billion. By comparison, Hong Kong’s stock exchange has 1,758 companies with a combined market cap of US$3.9 trillion.

The US stock market is even larger with the nearly 2,800 companies listed on the New York Stock Exchange (NYSE) with a combined market cap in excess of US$21 trillion. Nasdaq, the other major exchange in the US, has more than 3,300 listings.

This is why an ever-increasing number of Asian investors are looking to invest in overseas markets in general – and in the US market in particular.

Of course, another important motivation for investing in NYSE or Nasdaq stocks is that the US markets are in the middle of a prolonged boom.

US stocks are hitting record highs

The Dow Jones Industrial Average – an index comprising 30 large stocks traded on the NYSE and Nasdaq – has surged by 20.5% over the past year. With its components including Apple, Coca-Cola, Microsoft, and Wal-Mart, the Dow is representative of the biggest and best-known US companies, and is widely seen as a leading indicator of the overall health of the US equity market and economy.

The S&P 500, a much broader index that includes 500 stocks, has also delivered strong growth, gaining about 16% over the last year.

There are a number of factors that are fuelling this rise in stock prices. The “Trump effect” has played an important part in the current boom: US equity markets have rallied to all-time highs on the basis of promises made by the new American president about reducing taxes and implementing a massive infrastructure plan. Although there has not really been much actual progress on the ground on these initiatives, the “feel-good” factor persists and the market shows no signs of slowing down.

Tech stocks lead the charge

Another reason that the US markets have performed so well over the past years is the meteoric rise in share prices of US tech giants.

Technology companies have traditionally dominated the Nasdaq Composite Index – heavyweights like Apple, Amazon, Facebook, Microsoft, and Google’s parent, Alphabet, are all part of this index. In the last 12 months, the Nasdaq Composite Index has gained about 24% – with a significant portion of these gains coming from the biggest companies in the index.

However, skyrocketing valuations in tech stocks have raised fears that a bubble has formed. The S&P 500 information technology index, which includes the 68 largest US tech companies, recently surpassed the level that it had achieved at the time of the dotcom boom in 2000 – before the bubble burst.

But fears of another tech bubble may be unfounded. In 2000, companies that did not have an established business model or a customer base were valued at astronomical levels. This time around, the most valuable technology firms have hundreds of millions of customers, a global presence, and growing profits.

The mechanics of investing in US markets

As an Asian investor, it is possible to buy shares in a US company through your broker. Most large brokers, especially bank-owned firms, provide facilities for international transactions. But you should be prepared to bear the additional charges that may be involved.

The dealer’s fee that you pay would probably be higher than the fee payable for a local purchase. Additionally, as the shares would have to be paid for in US dollars, you would have to first convert your local currency. An unfavourable conversion rate would increase your acquisition costs.

If you are planning to purchase individual stocks, remember that you are taking on a greater degree of risk as that company’s share price may fluctuate significantly. A safer option may be to buy into a mutual fund. Leaving investment decisions in the hands of professionals is often the preferred strategy for investors who do not have the time to track the markets on a regular basis.

But mutual funds come with one disadvantage. They have high costs and you should be willing to pay at least 1% of the amount that you have invested in annual fees. In some instances, your costs could be much greater.

ETFs are a good option

In recent years, exchange-traded funds (ETFs) that track a particular index have become very popular. According to legendary American investor Warren Buffett, the most prudent way for Americans to invest their retirement money is to put 10% in government bonds and the remaining in a low-cost S&P 500 ETF.

The main selling point of an ETF is that your investment is handled in a passive manner. Instead of carrying out detailed research on which companies to invest in, the investment manager simply purchases shares in a particular ETF. If the index rises, investors register a gain.

The other advantage of an ETF is that it has very low expenses. Take the example of the SPDR S&P 500 ETF. The assets under management (AUM) of this fund are US$241 billion. The expense ratio? A ridiculously small 0.09%. The iShares Core S&P 500 ETF has an AUM of US$122 billion and an expense ratio of only 0.04%.

Investors who bought into these ETFs would have made a gain of almost 16% over the past year.

When will the party end?

The bull market in the US is now in its ninth year. Equity prices have been trending upwards since 2009, rising by a whopping 268%. In the last 70 years, there has only been one period when the stock market maintained a similar upward momentum for a longer duration – during ten years stretching from 1990 to 2000 that coincided with the end of the Cold War.

Is it too late to buy into US equities? If you do not have an exposure to US stocks, you may want to consider investing now. Of course, a new investor should exercise caution, as valuations are already very high. Allocating about 10% to 15% of your portfolio to the US market could provide the benefit of diversification, and also give you the opportunity to make a profit on your investment.

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