Americans are sort of accustomed to having things their way. Whether it's actors, musicians, entrepreneurs or what have you, the belief (at least among Americans) has often been that you have to make it in America to really make it. So, what should investors make of the fact that many companies, including well-known names like Samsung, Nestle and Industrial and Commercial Bank Of Japan see no need to have fully-listed shares trading on U.S. exchanges?
Different Levels of Access
To be more precise, there are varying degrees of the extent to which many of these major international companies participate in the U.S. market. Many European and Asian companies (including Nestle, Daimler and Volkswagen) do trade as American depository receipts (ADRs) , and many of these companies do actively engage American investors (including press releases in English and so forth). What's more, while many companies have delisted from U.S. exchanges in recent years, most of those shares remain relatively liquid as sponsored ADRs .
There are many others, though, that are only available as a"F" shares (including Samsung, Hyundai Motors and Rosneft) and these shares are not only illiquid, but may be subject to surcharges from your broker to buy or sell shares. Moreover, information is not so readily available from these companies. Even in the case of sponsored ADR programs, there are differences and eccentricities that investors have to accept – the companies' filling and disclosure rules are different and investors may well have fewer protections and legal options, should management act against investor interests.
This Transition Says Good Things About the World
That many overseas companies feel comfortable ignoring or delisting from the U.S. exchanges, can be seen as a positive in several respects. First of all, it suggests that local/regional markets outside of the U.S. have grown to a point where major corporations believe they can access the capital they need without relying upon U.S. investors.
Avoiding U.S. listings may also be a positive step in regards to corporate governance . For quite a while, a U.S. listing was a mark of prestige for foreign executives. Such a listing proved that the company was large enough to matter and sound enough to meet the regulatory requirements of the U.S. exchanges – requirements that are considerably more demanding than local listing requirements decades ago. Nowadays, though, many foreign companies see U.S. listings as expensive vanity projects and some of the delisting decisions appear to have been driven by sheer pragmatism and the recognition that the benefits of U.S. market access didn't merit the costs.
Not All of This Is Good
There are some decidedly more negative lessons that can be drawn from this evolving trend. For starters, it is well worth asking whether or not the U.S. regulatory burden is making U.S. financial markets less competitive and imposing unnecessary added burdens for U.S. companies. While a company the size of IBM or Apple is going to regard regulatory compliance expenses as little more than rounding error, the costs for smaller companies can be more substantial.
Moreover, as the global credit crisis so ably demonstrated, capital markets are increasingly global and money will flow to its cheapest destination, meaning that the U.S. could be pricing itself out of the market with regulations. It's also worth noting that many companies have replaced listings on U.S. exchanges with listings in London or the Xetra trading system. That implies that they may still see a potential need for capital access outside of their home market, but that the U.S. exchanges are no longer cost-competitive.
There is also a less desirable impact on U.S. investors from this shift. It is true that international trading is easier today than ever before; most retail investors can buy shares on the major global exchanges with online brokerages like Fidelity.com and eTrade. These transactions are more expensive, though, and following stocks listed on foreign exchanges may be more work and inconvenience than many investors want. What's more, not every foreign exchange is available; access to markets like the Korea Stock Exchange , Bovespa or Shanghai Stock Exchange is still fairly limited.
Less investor choice and higher transaction costs are bad things, as they lead investors to holding sub-optimal portfolios that earn less for the risk involved than would otherwise be possible. While that may not seem like such a big problem with so many thousands of stocks available on U.S. exchanges, the demand for foreign stock exchange-traded funds (ETFs) suggests that investors do want this exposure, but have to pay extra (including the ETF management fees) to get it.
The Bottom Line
The ongoing globalization of finance seems like an irresistible force. It would not be surprising if investors today live to see the day when almost every stock in the world is accessible through an electronic exchange/clearing system, with little incremental cost between trading in shares listed in New York, Singapore or London.
In the meantime, American investors may want to consider just what the ongoing trend of de-prioritizing U.S. listings says about the global market. While it is a very good thing that other financial markets are growing and maturing, the implications that U.S. regulations are too burdensome and costly to bother with is good reason to pause. Though many investors may feel that they have all the choices they need, both theory and historical practice have shown that fewer options often means worse-than-necessary performance for investors.
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