He never sleeps. He never tires. He roams the far reaches of the earth in search of investments to add to his collection. Rightly or wrongly, he is often blamed for leaving financial market turmoil in his wake and seldom credited for supporting long-term investment and economic growth. As long as savers and investment opportunities remain separated by time and distance, he will always exist. Meet the global investor.
Foreign investors are an integral part of the Stock Exchange of Thailand. Over the past 10 years, they accounted for close to a quarter of the SET’s trading value. The appropriate thing to do for you, the Thai retail investor, is to get to know your neighbours from overseas. After all, you might learn a thing or two from them.
So how well do you know the global investor? While you’re probably not on a first-name basis with him, you and other Thai retail investors probably watched helplessly during the great foreign sell-off during the QE “taper tantrum” during mid-2013 as stock prices plummeted. Welcome to the global economy. Not surprisingly, Thai retail investors have come to identify foreign investors with equity market instability. However, this is a myth.
The sell-off we saw when markets started weighing the implications of stimulus “tapering” by the US Federal Reserve was just one small part in a very big picture. Most foreign holdings still remain and are likely to be long-term.
A large chunk of these consist of holdings by strategic shareholders (i.e. foreign investors holding more than 5% of total shares) in listed companies. My SET colleague Sumitra Tangsomworapong, in her research note on “Thai Listed Companies in the Eyes of Foreign Investors”, found that for the past five years, foreign holdings averaged between 34% and 37% of market capitalisation even during the Lehman crisis, the QE taper tantrum and domestic political turmoil in Thailand.
While it may be tempting to think of foreign investors as a homogeneous crowd of faceless financiers, they are in fact quite diverse and hail from all over the globe. For example, you have your large US and Japanese pension funds, exchange-traded funds (ETFs), asset management funds, hedge funds and Nordic and Middle Eastern sovereign wealth funds.
Even certain central banks such as the Bank of Japan and the Swiss National Bank are taking an interest in equity. Investors’ strategies vary depending on their time horizon and appetite for risk and return. Nevertheless, there are some common themes in their investment strategies.
Here are some key lessons you can learn from foreign investors.
Be selective: Foreign investors are picky. Thailand’s macroeconomic stability and pro-growth economic policies are not enough. More than half of foreign holdings are in listed companies that qualify for the MSCI benchmark indices — largely due to size and liquidity considerations — and boast the highest corporate governance (CG) standards (i.e. 5 stars awarded by the Institute of Directors).
So which consideration actually best reflects foreign investor interest? Not surprisingly, it’s CG (77% of foreign holdings are in firms awarded 5 stars). After all, what matters more for the protection of investors’ interests in the long run, if not CG — the mechanisms by which corporations are controlled so as to align the interests of stakeholders and management?
Invest long-term: Foreign investments are mostly long-term. Amid the daily ups and downs of the stock market, we tend to forget that capital markets are ultimately about financing long-term investments. A good reminder is the world’s oldest surviving closed-end emerging market fund — the highly successful British Foreign and Colonial Investment Trust (FCIT) founded in 1891 — which averages an annual return of 6.9% and, most importantly, requires that investors hold it to maturity (24 years).
Diversify globally: Get out of your comfort zone and invest abroad. The choices are bountiful. Foreign equity funds, rapidly gaining in popularity, can quickly get you broad exposure to Europe, Japan and the US, for example. The Asean Trading Link allows you to trade stocks listed on Bursa Malaysia and Singapore Exchange. Via the Singapore market you can tap into global exchange-traded funds. The Indonesian, Philippine and Vietnamese stock exchanges are expected to join the Asean Trading Link in the near future.
If you plan to follow up on these points, congratulations are in order. You are on your way to becoming a global investor. Just remember to get some sleep (and let your money do the work).
Kiatipong Ariyapruchya heads the Capital Markets Research Institute at the Stock Exchange of Thailand. He holds a PhD in Economics from Columbia University in New York.