The slump in global markets in early August is a reminder that inefficient execution has a real impact on offshore trading strategies.

The S&P 500 and Nasdaq Composite Index each fell 3% in a single session as Australians slept, with market darlings such as Apple (AAPL), Alphabet (GOOGL) and Tesla (TSLA) all dropping sharply.

The volatility highlighted aspects of direct international trading that can be forgotten as advisers instead focus more on stock selection and asset allocation.

“Advisers should look at an international market intently before trading as there are differences in the way each exchange operates. The time difference with Australia is a crucial consideration for trading strategies,” said Brett Grant, Head of Product, Customer Experience and Marketing at AUSIEX. 

Below are key factors that can make a noticeable difference to the net outcome from a direct global equities portfolio.

FX considerations

Currency movements are an obvious consideration at all times.

Multi-currency wallets can help advisers manage currency risk for clients by allowing them to maintain cash holdings in chosen denominations over time.

“If an adviser establishes a multi-currency wallet, they can use it to fund purchases and to place the proceeds of any share sales. It means they don’t have to exchange currency every time they transact,” said Grant. 

Dividends can also accumulate in the wallet, allowing advisers to be somewhat strategic in terms of precisely when to convert the foreign currency back into Australian dollars.

“You can actually make very distinct decisions around your FX transactions versus a combined share and FX transaction, with both having potential impact on returns” Grant said. 

Investors who hold numerous wallets with different foreign currencies can also transfer cash between them after their initial purchase of foreign currency by using cross currency transactions.

Some platforms also send notifications to advisers using different wallets if there is a better currency to use for a specific transaction. The notification might simply say: “are you sure you want to use Hong Kong dollars for this transaction?”.

Risk management and trading efficiencies through modern trading tech

Unlike Australia, not all global exchanges operate continually through their trading day. Hong Kong’s HKEX, for instance, splits its daily trading into two sessions with a one hour break for lunch at 12 pm (HKT).

“Advisers should be mindful of when markets are open to avoid placing orders or price discovery at a sub-optimal time. This is particularly relevant for Asian markets as they trade mostly in our afternoon,” Grant said.

Conditional orders or other trading triggers can be used to manage the risks of large market moves that may occur when other markets are open. 

Using the various trigger-based order types now commonly available can also deliver operating efficiencies for advisers, who don’t need to be working outside of domestic working hours to monitor price action and place trades.

“It’s possible for advisers to set triggers that generate a notification when a stock has moved by a certain amount. Or they can just automate trading – so if a client is holding Amazon and it goes down by 5% from a specified price, for example, it’s sold automatically. These ‘stop losses’ can trail as well, with the 5% stop tracking the current price, which can prevent unnecessarily deep losses where there is price growth” Grant said.

“This type of execution risk management is really important for advisers and their clients to consider but can often be overlooked.”

Consider extra market-specific costs and administration

Each global market has different costs that should be on advisers’ radars. Canada, for example, charges brokerage on each share traded on a per cents basis. This is particularly pertinent to investors trading low value securities. For example, an order of 10,000 units of a penny dreadful would attract the charge on each of those units.

Other markets charge stamp duty. In the UK, for example, stamp duty may be applied on buy transactions at a rate of 0.5% of the transaction value.

Bureaucracy can also be a pain point for advisers to negotiate before trading international shares directly. It’s important for people to complete all relevant documentation in order to have the appropriate treaty tax rate applied for withholdings tax.

The information collected via a W-8BEN form is crucial for US based transactions.’

Know your market

Many parts of the world have more than one stock exchange, so advisers need to know if a broker provides access to those securities they wish to trade.

“There’s approximately 13 different exchanges in the US, as well as a number of different exchanges in Europe and the UK, and not all of them are readily accessible to Australian residents” Grant said.

“There are also instruments listed in multiple places. Danish health company Novo Nordisk, which makes the highly-publicised weight loss drugs Ozempic and Wegovy, is listed on Nasdaq Copenhagen (NOVO-B.CO) and on the New York Stock Exchange (NYSE: NVO) as American depositary receipts.

“The pricing may be slightly different for such companies and there may be an additional element of foreign exchange depending on the market in which an adviser chooses to transact.”

The overarching message is that advisers should step back and consider the nuances of each market in which they trade before implementing an international trading strategy.