Investing in Emerging-Market Banks - dummies

Investing in Emerging-Market Banks

By Ann C. Logue

You can provide cash to banks in emerging markets and get a shot at a good return by opening a deposit account directly, investing in funds that invest in deposit accounts, or buying stock in the bank itself.

Opening a savings account

Depending on the laws in an emerging market, you may be able to open a bank account to take advantage of interest rates that are higher than you can receive at home and to pick up currency exposure. Do an Internet search for major banks in the country you’re interested in and look for information on account-opening procedures (you can contact the bank directly as well).

It’s not unusual to have to submit certified copies of your passport, photographs, and tax records when opening a savings account with an overseas bank — the bank wants to know that you’re who you say you are.

International depositors aren’t always eligible for government deposit insurance programs. If the bank fails, you could lose your investment.

Another option is to open an account at the bank’s office in your home country. Many large banks in emerging markets operate offices in the world’s financial centers. However, some of these branches may not offer deposit insurance or be regulated by your nation’s authority.

Purchasing currency mutual funds

A currency mutual fund is a pool of money collected from thousands of investors that allows investors to build a more diversified portfolio than they may otherwise be able to build. An exchange-traded fund (ETF) is an investment similar to a mutual fund that’s designed to track the performance of a particular index or commodity and allows for intra-day trading. Many investors like these funds because of their diversification and professional management, and also because they require a relatively small initial investment.

Two of the many companies that offer currency funds with emerging-market holdings are Merk and CurrencyShares. These funds are priced in U.S. dollars, so your return reflects real-time exchange-rate fluctuations.

Buying equity in the bank

The easiest way to invest in a bank overseas is to buy stock in it. Your broker has already done the work of verifying that you exist, so you don’t have to submit any photographs or legal documents. You just place the order and off you go!

When you look at the assets and liabilities of different banks and consider their potential for growth in their markets, you may find some that would be good investments. Banks tend to be among the largest firms in almost every country, so they have enough shares for investors to buy and sell easily. They’re economically sensitive, so they grow when the economy is growing — and a key reason to invest in emerging markets is that their economies are growing faster than the economies of developed countries. And banks tend to have less risk than other types of businesses, although they do have some risk.

Another reason to consider investing in a bank over investing in other emerging-market industries is because banks everywhere are highly regulated, and the reporting requirements that come with being publicly traded are a piece of cake, relatively speaking. You may well be able to buy shares or depository receipts that are listed in your home market, in your own currency, no matter what brokerage firm you use.