After 3 years of strong returns for the S&P 500 many value investors are casting their gaze over international markets, where gains have been more modest and valuations look more reasonable. The gain in the dollar versus other currencies has made the divergence even starker, as the chart here shows:
European markets look attractive due to cheaper valuations, while Asian markets offer some exciting growth opportunities. However, investing in international markets, particularly emerging ones, can be fraught with danger and there are a number of issues that require careful consideration. There was a time in the 1990s when investing in emerging markets was practically a sackable offence in the fund management industry. EM investing is much more in vogue now, although a healthy dose of skepticism is just as necessary.
Attitude to Shareholders
We often take it for granted that management will maximize value for shareholders over all else. Sometimes they focus excessively on the short-term and sometimes management gets power hungry, but the abuse of power is kept in check by strong corporate governance and pressure from shareholders.
A culture of “working for shareholders” doesn't always exist in other parts of the world. Management tends to be more entrenched, and will often prioritize their own personal ambition over the company. Shareholder activism is simply not a feature of most markets and corporate governance may be weaker. Often management will know to “make the right noises” to shareholders, but the reality does not always match up with the rhetoric. Sometimes they don't even bother to hide their true intentions. At one meeting I had with an Eastern European bank CFO, when I asked about strategy he thumped his fist on the desk as he said “We aim to be…BIG”.
Particular issues exist where a company is still part-owned by the state or is dominated by a founding family. In these cases, management may view the company with a very different perspective to shareholders – as an extension of state power or as a local employment provider. Wendelin Wiedeking, CEO of Porche, said in an interview:
