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U.S. Firms Have Had Few Options When it Came to Investing in Companies Overseas, Until Now

Global is where it's at. The balance of trade, interest rates, economic growth and global expansion all are sending payments from high-wage Western countries to lower-wage emerging markets and Eastern countries.

Global is where it's at. The balance of trade, interest rates, economic growth and global expansion all are sending payments from high-wage Western countries to lower-wage emerging markets and Eastern countries.

Few firms aren't outsourcing technology and/or operations to some far flung country, such as India, Sri Lanka, China, Russia or the Philippines. And what happens with that money? It gets pumped into local economies, creating larger business and greater opportunities for companies providing products and services into these markets.

Creating and funding these companies isn't easy. They need markets for their products, talent to run their operations and expansion capital. This need for capital drives financial markets, which drive investment and investing. But how do investors invest in these emerging markets?

Traditionally, investing in overseas markets has been left to the professionals. Stamp duties, withholding laws, and lack of transparency and retail-based multicurrency processing systems have left the U.S.-based retail investor few options to invest overseas except through Depository Receipts, mutual funds, ETFs and other institutionally based investment products.

But E-Trade now is offering retail-based access to six global markets (Canada, France, Germany, Hong Kong, Japan and the U.K.), which could eventually be expanded to 42 markets. While access to global markets is nothing new for Europeans, Canadians and other less-geographically challenged economies, this is an interesting development for Americans and not completely risk-free.

To offer access to global markets, a broker needs a multicurrency back office, limited FX trading, currency risk management and multicurrency P&L, multicurrency statements, and either a front end or a broker-network/call center that understands the nuances in selling, executing and processing foreign transactions. And that does not include providing investors with the research, quotes, insight and access to markets (such as Japan) that are completely countercyclical (open when we are closed) to U.S. markets. This certainly is not a cakewalk.

However, with risk comes rewards. Over the past few years, U.S. markets have vastly underperformed against most foreign markets -- and not by a little. For example, the S&P 500 over the past two years has returned approximately 20 percent while the Bombay Sensex Index has returned more than 110 percent and the FTSE/Xinhua China 25 Index returned approximately 90 percent.

Institutional investors have seen this trend, and many portfolio managers, buy-side traders and hedge funds are moving full steam ahead into these foreign waters. Merrill Lynch just stated that it expects to see almost 75 percent of its banking revenues generated overseas within five years. The NYSE has acquired Euronext and is looking to be the first global securities exchange. Even the city of New York is concerned about this trend as Mayor Bloomberg commissioned McKinsey to investigate these challenges in a look at the competitiveness of New York as a global financial center. And while all of these trends may not bode well for the U.S. being the global financial power of yore, they all point toward the opportunities in investing overseas.

Investors and brokers need to move with caution, however, as all markets, all economies and all governments are not alike -- and they're certainly not like the U.S. So while providing global investing access to retail investors is a great thing, it is not immediately for the faint of heart. Be prepared for tax, withholding, regulatory and accounting challenges that will make overseas investing a little different than buying 100 shares of IBM. <<< Larry Tabb is the founder and CEO of TABB Group, the financial markets' research and strategic advisory firm focused exclusively on capital markets. Founded in 2003 and based on the interview-based research methodology of "first-person knowledge" he developed, TABB Group ... View Full Bio

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