FOOL ON THE HILL: An Investment Opinion
In recent weeks, three stories have cropped up in various corners of the globe that reinforce once again that Fools wishing to invest outside of the United States should take extra precaution. While the U.S. is stung with its share of penny stock scams, overseas there are instances of government chicanery, political unrest, and currency shocks in China, Indonesia, and Europe, respectively. It all gives additional sauce to the already tricky notion of picking outstanding companies.
We begin our tale of misadventure in the once and perpetual "country of the future" -- China. The Chinese military loaded an estimated $4.4 billion of debt onto a subsidiary that was forcibly removed from it by the government and foisted upon newly listed China Unicom (NYSE: CHU). Staying in the region, Indonesian elements associated with the deposed and still-petulant Suharto family are believed to have planted a bomb at the Jakarta Stock Exchange (JSE), killing 14 people. And lest you believe that international risks are limited to house intrigue and murder, Europe's new plaything, the euro, fell to an all-time low of $0.85 (U.S.), giving huge headaches to European companies and investors as their purchasing power plummeted.
So there you have a tale of three markets: one where a branch of the government is willing to run roughshod over both domestic and international shareholder rights; a market that remains dicey due to political instability; and one rendered anemic by a slumping currency.
Coincidentally, these markets represent the range of overseas investing: Europe is a huge market, China less so, Indonesia rather minor. European regulatory oversight is quite stringent, as by and large each administration has sufficient power of enforcement. Indonesia is typical of Southeast Asian countries demonstrating weaker regulatory control and shareholder rights, and China's regulatory regime remains completely opaque. A look at each of these recent events shows that in each case, the events that took place are completely separate from any individual merit of investments in individual companies.
The People's Liberation Army plays "Hide the debt"
China Unicom, the number two Chinese telecommunications carrier, raised $4.9 billion in its June listing on the New York Stock Exchange, in part to continue the buildout of its wireless network, already the second largest in the fastest-growing communications market in the world. But in the background is one of those events that really could not happen in the United States since our commercial code places heavy restrictions on government ownership of commercial ventures.
In a pair of state directives, the government demanded that China Unicom build a CDMA network, regardless of the commercial sense of doing so. It also finally made good on a 1998 order of the Communist Party, forcing the military out of many commercial ventures by transferring them to other businesses. In this case, China Unicom became the owner of a piecemeal CDMA system called Great Wall. But in the interim of the order and the transfer, the military took the pains to tack billions of unrelated debts into the corporate structure of Great Wall, so that when the transfer was made they could wipe their hands of some significant financial drag on other military-run ventures.
These debts, inasmuch as they are identifiable, are unlikely to remain China Unicom's problem. But the government fiat mandating a current-generation CDMA network incompatible with its existing GSM network makes little economic sense for Unicom. In post-Mao China, government interests remain deeply marbled into most corporate structures, with resultant huge levels of macro-level interference from Beijing. Given the flood of money into China by foreign investors, its motivation to become more shareholder-friendly is also unlikely to improve.
Indonesia: Beset by strife and petulance
Indonesia is another market that had once promised the world to foreign investors, regardless of the sticky fingers of the former leader and his family, who are believed to have skimmed some $20 billion over the years from various projects and companies. Still, a 200 million-person market with huge development potential was too large a prize to pass up, and money poured in. Now the Suharto government has been deposed, and the new government is seeking to find out where all that money went, while at the same time trying to hold together a patchwork country that makes Brooklyn seem homogenous by comparison.
But it seems that there are some elements who don't take too kindly to these efforts, and are willing to strike at the heart of the country's strength to hamper the government's efforts at either bringing justice to bear or holding together some increasingly unwilling regions. And these elements, whomever they may be, have taken to attacking the financial fabric of the country, including last week's cowardly bombing of the JSE.
Those who have not been to Jakarta may have visions of the Jakarta Stock Market being a run-down, second-rate facility. (Insert your stereotype here.) But the JSE is a world-class facility in the midst of the modern concrete and glass jungle that is Jakarta. The bombing casts further doubt throughout the world of the safety of any Indonesian investment. In an economy that depends on foreign investments for much of its liquidity, such perception could become a self-fulfilling prophesy. The Indonesian companies listed overseas, including Telekom Indonesia (NYSE: TLK) and Indosat (NYSE: IIT), may feel the pain as investors look to friendlier climes to park their investments.
The pain of a slumbering euro
But these are Wild West-type markets. What about just investing someplace staid, such as Belgium? The euro story lacks the intrigue of military shenanigans or terrorist acts, but the inability of the European Central Bank (ECB) to halt a year-to-date slide of more than 27% against the dollar undermines the confidence even of European investors in their own economy. According to The Economist, in the last month there was a daily net outflow of $1 billion of investment money from Europe to the United States. And because the central role of governments in protecting a currency has been relegated to the European Central Bank, the response to this slide has been ineffective, as the European countries that are net exporters of goods and services are generally pleased with the lower euro, while net importers are getting slaughtered.
Signs from countries such as France that they will continue to place local populist concerns over the commonweal of the currency union do nothing to reassure investors that the ECB will be able to make a concerted effort to fend off fiscal threats.
None of these things are related to the income statement or balance sheet of companies, and yet they have broad implications to any investment that is based in those countries. While the China Unicom situation is restricted to that company, a government that is so willing to wield a heavy hand in controlling domestic companies is not one where the shareholders' investments are ever fully secure. In Indonesia, the ability of few to destabilize the market should serve as stark warning of the risks associated with investing in lesser-developed countries. And in the case of Europe, we see a currency risk issue that will hurt many of the most investable companies domiciled there, including Alcatel (NYSE: ALA) and Deutsche Telekom (NYSE: DT), and will also create an added drag on earnings and cash flows by giving them a 27% haircut.
Go forth with care, dear Fools. I do not feel that one should explicitly avoid investing overseas, but you can gain significant international exposure by holding Coca-Cola (NYSE: KO), with 66% overseas sales, AIG (NYSE: AIG), with 80%-plus sales coming from international spaces, or even Cisco (Nasdaq: CSCO), which sees much of its revenue growth coming from offshore. But even the best overseas investments come with a different set of rules, varying levels of disclosure, regulatory oversight, accounting, and shareholder rights. You've gotta get a copy of the rule book if you want to play the game. In places like China, that's going to be an awfully difficult thing to do.
Bill Mann, TMFOtter on the Fool Discussion Boards