Nick Sudbury highlights the dealing services that enable UK investors to buy and sell shares listed on overseas stock markets.

The past couple of years have been a turbulent time for investors, but the collapse in the market has produced plenty of attractive openings. Many of these undervalued stocks are listed outside the UK, so, if investors want to hold such shares directly, rather than through a fund of some description, only those with access to an international share-dealing service can take full advantage.

Having the freedom to invest beyond the confines of the home market might also be a big plus in itself given the long-term structural problems affecting the UK economy. International share dealing was historically quite an expensive process, which is why, in the past, brokers tended to restrict it to premium areas like discretionary accounts. It was the decision in 2001 by the UK settlement service CREST to accept overseas stocks that first made it commercially viable to offer this sort of service on an execution-only basis. 

A sterling job
A number of brokers use services provided by Winterflood Securities to enable their clients to trade European and US shares in sterling. Alexis Johnson, Winterflood’s head of European trading, explains how the system operates:
‘We offer a bespoke service creating a price close to the home market which can be traded electronically. This allows the broker’s client to deal at the sterling, euro or US dollar equivalent with the currency conversion taking place very close to the spot rate.’

One firm that uses this system is Selftrade, which provides access to 19 different exchanges across Europe, North America and Canada. Stephen Barber, Selftrade’s head of research, says that having all the shares traded in sterling is the cheapest and most efficient option for long-term investors. ‘Provided there is enough liquidity, we can normally get a price from the market-maker and the bid-offer spreads will be reasonably close to those on the underlying international exchange.’

There is a slightly more limited choice available from Halifax Share Dealing, where investors can access seven different overseas markets. These comprise the NYSE, NASDAQ and AMEX in the US, as well as the main continental European exchanges, including the Frankfurt XETRA and Euronext. But, as with Selftrade, all the deals are transacted in sterling.

Familiarity breeds interest
In an increasingly interconnected world, it is hardly surprising that investors tend to focus on familiar names, even when dealing on international markets. ‘We tend to see the greatest interest in companies our clients know well and, interestingly, these are American stocks rather than European,’ says Andy Raby, head of customer services at Halifax Share Dealing. This is reflected in our trade volumes, which are ten times larger in the States than they are in continental Europe. We effectively trade direct with the underlying market and have operated this arrangement successfully for the past six years.’

All trades that go through Halifax Share Dealing are executed in the domestic currency of the exchange. The broker then takes the prevailing market price of the stock in US dollars or euros and converts it for settlement in sterling using a competitive exchange rate.

‘This direct process allows us to cover the underlying market opening hours exactly, even on UK bank holidays,’ says Raby. ‘If the US markets are open, then so are we, right through from 2.30pm to the close at 9.00pm. This provides our customers with a simple, efficient and totally transparent trading model which enables easy access to international markets.’

Currency questions
Sterling-denominated accounts are extremely convenient to operate. This is because, with the cash kept in pounds and all the trades taking place in the same currency, there is no need to worry about any FX conversions, as the system does this automatically. However, the one downside is that there is a small spread to pay each time this happens.

Clients of TD Waterhouse, NatWest and Barclays can either trade in sterling or keep a foreign currency account. The latter tends to work out cheaper for those who trade on a frequent basis or in deals of over £20,000. This is because it enables them to keep their cash in whatever denomination they want so it is ready to invest without the need for FX conversion.

And this can be an important consideration if you want to broaden the scope of your international portfolio. For example, TD Waterhouse offers access to 16 exchanges from 11 different countries including the US, Canada, mainland Europe, Asia and Australia. Fourteen of these are available online and by phone, with Sweden and Switzerland being the only two where investors need to ring in their orders. The same range of markets is also available from NatWest Stockbrokers.

Direct access
‘The key difference between ourselves and other brokers is that we route trades directly to the order book on the relevant exchange. This is known as Direct Market Access (DMA),’ explains James Daly from the TD Waterhouse Investor Centre. ‘DMA enables our customers to access the markets directly and benefit from tighter spreads, faster execution and increased liquidity. At the same time, we are able to offer flat rates of commission across all the markets we cover.’

Barclays has a more limited choice, with its foreign dealing account providing access to the major North American and Pacific Basin markets. Clients can deal in sterling or an overseas currency of their choice, but it is a purely telephone-based service with statements sent out every quarter.

Investors who want to concentrate solely on the key American markets also have the option of opening a US Brokerage account at E*TRADE. This dollar-denominated facility allows them to deal online in thousands of stocks and ETFs until the relevant exchanges close at 9pm UK time.

But whichever route people take it is important for them to appreciate that holding overseas shares will always give rise to an implicit foreign currency exposure. This is because the overall return depends on both the stock price performance and the movement in the relevant exchange rate.

Last year, UK investors with money overseas would have benefited from the weakness of the pound, but in recent months it is more likely that the currency markets will have worked against them.

Costs
The way firms charge for these services varies from provider to provider, so it is important that investors work out which offers the best value given how they plan to use it. One saving that applies right across the board is the absence of the half per cent stamp duty that is applied to UK share purchases, though governments like Hong Kong and Singapore levy their own equivalent fees.

TD Waterhouse charges the same level of commission as they do for UK equities (online orders: £12.50 flat rate; telephone deals: £20 to £75 depending on size of order). NatWest also applies the same charging structure as for domestic dealing, but is slightly more expensive. The rates are similar at Halifax Sharedealing, where the commission is £17.50 online and £20 by phone, while at E*TRADE the US bargains cost US$19.99. In all cases, frequent-trader discounts may be available.

It is normally possible to access these overseas share-dealing services via an ISA, so that any gains would be tax free, as the HMRC rules allow people to invest in stocks traded on a recognised exchange anywhere in the world. Similarly, anyone saving for a pension would be able to use their SIPP. Otherwise, it is a case of opening a standard dealing account or a more specialist option, with any broker who offers an overseas dealing service. And those who have to sign up to a new service should check the full terms and conditions, including the imposition of any annual management fees and inactivity fees.