Emerging Markets and Chinese stocks

 I’m a big fan of the podcast Money for the Rest of Us. I particularly enjoyed a somewhat recent episode on international investing (I’m always quite a bit behind on publishing these pieces). This is an interview episode, which is not the normal format for Money for the Rest of us. David is interviewing Asha Mehta, Managing Partner & CIO at Global Delta Capita, who I believe focuses on emerging and frontier market investing. 

Here are some of my  takeaways from the episode:

Asha didn’t like investing just in passive international funds, she seems to prefer active international funds. I think there is some self-dealing in that though, as she is an active fund manager ( of course she is going to say her profession is important).

That being said, I think I can see a few reasons why this might be important.

Particularly with international investing there are additional risk considerations. In the episode Asha discusses how country risk is the biggest risk with international investing. So a passive strategy that just looked at market cap or GDP or some simple metric, might totally miss political risk. 

There is also a lot of nuance to international investing, take investing in China for example. 

My understanding is if you buy shares in a Chinese company, you aren’t actually buying shares of the company. Instead, you are buying shares of a shell company, in the example of BABA, a Cayman shell company. what by contract has economically tied itself to a company.   The Cayman shell company is given certain economic rights associated with the Chinese company, and then the shell company is sold in US markets.  (This information might be a little dated now, as BABA has another layer of obfuscation now, as the ticker isn’t directly traded on US markets now and instead is an ADR, see below)

This isn’t phrased very well. Said another way, if push came to shove, if the Chinese government could disallow this structure and all international investors would be left with nothing. My understanding at this point is the Chinese government has not officially opined on this structure.  Leaving themselves open to disallow it at a future time. 

Additionally BABA shares I think were delisted in the US. Instead though, you can still hold a ADR for them. Which is similar, just with an extra step.  In essence though, these ADR has shares that can trade publicly in the US, and in turn, the creator of the ADR holds shares of the underlying stock.  With some stocks, it is difficult to own them if you aren’t a citizen of that country. The ADR in a sense connects a party with the ability to hold shares of a company with people who would like to invest in it, but are unable. 

This wasn’t intended to be an essay on investing in China. All of this is just to say, international investing can be quite complex, and perhaps it does make sense to have some active management, as the details are particularly important.

Often items reporting requirements for foreign stocks are less stringent.  In general in investing, adding more information is a good thing, and a lack of information and disclosure is, well, bad.  There is a trade off of course, at some point it becomes cost prohibitive and not all that much more helpful to provide too much info too quickly. But in general, I think quarterly data is reasonable and less than that is less than ideal. 

In Asha's interview, she also emphasized investing in more than one country, again as country specific risk was the largest risk additionally with international investing. This is a fact I can personally attest to, as my Russia ETFS were all delisted and non tradable after Russia invaded Ukraine. Similarly, my Chinese stocks have not done well either as I mentioned before.

Still I think there is potentially a place in your portfolio for international stocks. The US stock market has been strong for quite a while, but might not always be that way. The Japanese stock market in contrast had periods of great  growth but also great stagnation. It is possible the US market will not continue to grow like it has in the past and may evolve to something more like the Japanese market. I’m not making a prediction here, just sharing what might be the case. As birth rates decline in the US, I see this becoming more of a possibility. So you might consider diversifying your stock portfolio beyond just the US, perhaps looking at other counties.  I think this is one reason I have looked a bit at countries with a high birth  rate, as that could be a future consumer and worker base. International investing is more complex than any single issue, but I think it is important to consider geography while investing.  

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