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Multinational Risks

September 16, 2011 Leave a comment Go to comments

It’s now becoming commonplace to buy stocks in one country and get exposure to many others due to large multinational companies that are increasing their sales and profits outside their home countries. This is a good thing, although we have to be careful not to assume our investment is exposed only to one country. But are there some risks that come with it?

In recent months we have been reminded of the lack of transparency from popular companies in China, and in recent years we have seen British savers lose money that they put in Iceland’s banks because the laws they were used to didn’t reach that far. Getting accurate information and being protected by ownership and contract laws is something we take for granted but for many people it’s not the way things work.

Although these cases all relate to companies that clearly went too far, it’s also widely known that many large and stable companies are increasingly holding assets outside of developed countries to minimize their taxes. There is certainly some chance that this reduces transparency and increases property risk, and not just for Canadian miners that keep having their assets nationalized in South America. The risks could affect the companies themselves, if managers have greater opportunities for fraud in less-regulated countries, or investors if they just can’t figure out what the company actually has.

It wouldn’t be surprising to see more cases of this coming up in the future. Hopefully it remains isolated so we can reduce the risks by not concentrating our investments in a few companies. But the right opportunities and incentives for taking advantage of corporations could turn it into a much larger risk that affects all investors at some point.

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