Headwinds For Global Investing

One of my strategies in Global-Investing is to buy attractive relatively small company shares listed abroad, because of their growth or yield features. Fund managers who have to buy heavily in liquid, listed stocks, focus on large-caps.

However my strategy is proving ever more difficult lately because of quirks in world market pricing. Market pricing is the sacred cow of modern day investment theory and economic order—and performance.

But it depends on a factor hard to properly evaluate, exchange rates. Most small caps trade heavily on a local market, but often their American Depositary Receipts are obscure and trade rarely. The marketmaker, supposedly making a market in these shares no longer does so, leaving investors with little price guidance except what is happening on the foreign market for the ordinary shares. To actually trade abroad from a US on-line discount brokerage is pricey, with exchange fees, currency fees, and special handling requirements.

The main reason why marketmakers are falling down on the job is the volatility of foreign exchange rates against the US dollar. In one day last month the Japanese Yen, the currency of a major foreign market, jumped 4% in a flash crash. That meant every single Japanese stock on Wall Street was instantly down 4% (because the currency created fewer dollars.)

Particularly annoying is the way this spilled over into Hong Kong, China's market door to the world. The HK$ used to be fixed in stone, but encroaching Beijing pressures led this currency to fluctuate too.

While this is an extreme case it is not unique. ADRs were first created in the 1920s to enable Americans to buy British shares. The back and forth between Britain and EU over British exit causes huge short-term movements in sterling, thereby scaring off marketmakers for the largest ADR market, for British stocks. And Irish or Chilean or Dutch shares listed or co-listed in London are also heavily affected—Irish particularly because the Dublin market is tiny.

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