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Why You Shouldn’t Fear Investing In Foreign Lands

Over the past 10 years, our local stock market has done fairly well as a whole. In the decade ending 2 Dec 2013, the Straits Times Index (SGX: ^STI) has gained almost 85% to its current level of around 3,189 points.

Within the blue chips, some standout performers include conglomerates Jardine Cycle & Carriage (SGX: C07) and Jardine Matheson Holdings (SGX: J36). Both companies belong to the sprawling Jardine Matheson Group and have had total returns (inclusive of dividends) of 696% and 675% respectively in that period.

Moving out of the big cap universe, spectacular performers among the smaller caps include infrastructure-engineering firm Boustead Singapore (SGX: F9D) and Malay apparel retailer and property-investment firm Second Chance Properties (SGX: 528). Their shares have gained 728% and 501% in the last decade after adjusting for dividends.

What drives market returns?

While they’re involved with different businesses in disparate industries, they do have a common link: all four companies have seen serious growth in their corporate results. Let’s just take profits as an example. The table below shows how it has grown since 2003.

Company Net Income: 2003 Net Income: last 12 months % Change
Jardine C&C US$184m US$828m 348%
JMH US$85m US$1.70b 1895%
Boustead Singapore S$8.6m S$80.6m 839%
Second Chance S$6.02m S$57.1m 849%

Source: S&P Capital IQ

If a business does well, its stock eventually follows”, as Warren Buffett has been quoted as saying. But, what has all that got to do with the title of the article? Well, it’s really used to show that great stock price performance usually follows great corporate results and that’s an important idea to keep in mind for what you’re going to read about below.

Great Indian companies

Sanjay Bakshi, a value investor based in India, talked about four India-listed companies in May this year at the Columbia Business School in the USA. They are Nestle India, Hindustan Unilever, Colgate-Palmolive (India), and Procter & Gamble Hygiene and Health Care. These companies are the subsidiaries of the global consumer franchise giants that many of us are familiar with: Nestle, Unilever, Colgate-Palmolive and Procter & Gamble.

The table below showcases the profits that the Indian companies had earned over the past 10 years:

Company Net Income: 2003 Net Income: last 12 months % Change
Nestle India INR 2.63b INR 11.1b 322%
Hindustan Unilever INR 16.9b INR 38.3b 127%
Colgate-Palmolive (India) INR 1.08b INR 5.29b 390%
Procter & Gamble H&H INR 680m INR 2.13b 213%

Source: S&P Capital IQ and Colgate-Palmolive’s Investor Relations

Given such a backdrop for the Indian companies, and seeing how our local companies had fared over the long-term as their profits ballooned, it seems there’s more than a fair chance that investors in those Indian shares since 2003 would have landed some big winners as well.

But what if I told you that the Indian rupee, the currency that shares of the Indian companies are quoted in, had dropped by almost 30% against the US dollar since Dec 2003 till today -would that factor into your thoughts of how well the Indian shares would have fared for American investors?

Corporate performance versus currency impacts

Turns out, despite the depreciating Indian rupee, the four Indian shares still became massive winners over the past 10 years ended Oct 2013. Here’s part of Bakshi’s table showing the returns of the Indian shares:

Company Global company’s 10 years’ return in USD Indian subsidiary’s 10 years’ return in USD
Nestle 241% 567%
Unilever 157% 197%
Colgate-Palmolive 137% 646%
Procter & Gamble 102% 405%

Source: Sanjay Bakshi’s paper

While those are just the numbers for four different companies in India, out of perhaps thousands of other publicly-listed companies, it does go to show how great corporate performance can deliver great stock price returns that can still triumph negative currency impacts.

Here in Singapore, we’ve had our fair share of big winners, but there are plenty of other companies out there in different parts of the world that may yet turn out to be superb shares too. Don’t fear investing in foreign lands just because of currency risks. Great companies can find a way of overcoming them, as Bakshi has shown.

Foolish Bottom Line

My fellow Fool David Kuo once asked (in a slightly different context), “Is it better to invest in a business with overseas links which exhibits strong fundamentals but with a risk that the currency might fall or invest in a business with poor fundamentals but a chance that the currency may rise?”

David’s answer was unequivocal: “For me, it is always better to try and control something I have control over than to try and control something I can’t. So, focus on companies, not currencies.”

 I can’t know for sure, but I’m thinking Bakshi might just agree with David.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.