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Look beyond the troubles in the West and there is a world of investment opportunity to exploit. Better yet, CFDs offer ideal access to these resource rich countries and companies. Helen Castell reveals all

When your home market goes wobbly, and the foreign markets you’re most familiar with are the cause of half the mess, it’s logical to look further afield. But how safe is it to trade CFDs on far-flung and emerging markets, which are easily accessible and where is the most money to be made?

CFDs are a good way of gaining overseas exposure, especially in markets where buying physical shares is hard for retail investors, says Robert Gray, head of institutional UK at Saxo Bank. ‘If you’re doing a market-made CFD you can take advantage of the liquidity of your broker and it gives you more flexibility.’

And as the number of overseas shares and indices offered by CFD providers – stretching as far afield as South Africa, Australia, Mexico and the Far East – continues to climb, there has never with so much choice.

With commodities on a big bull run – and demand from China and the Far East continuing to push up prices – natural resources are a theme behind many of today’s CFD strategies. So if you’re itching to get direct overseas exposure, looking at which countries and companies are rich in resources can be a good start.

South Africa’s dependence on mining is clearly illustrated in its stock market, with the benchmark FTSE/JSE Top 40 Index being weighted heavily in favour of Anglo American and BHP Billiton, says Martin Slaney, head of spread betting at GFT Global Markets UK.

‘As a result, we have seen this index attracting a growing number of traders looking for alternative ways to play the volatile metals markets,’ he says.

‘This growth pattern follows that seen in so-called “hot money” – foreign money looking for a quick in-out return on the South African cash share and bond markets.

‘Combined with the ongoing M&A, which this sector has enjoyed, a lively political arena and interest rates at 11%, this market has been particularly volatile, rallying nearly 30% [by end February] from its low just a matter of weeks ago in January, when gold had retraced back to $850,’ Slaney continues. ‘Gold then followed platinum up and the Top 40 index moved in tandem with them. Our customers also like the fact that this is a highly priced index, approaching the thirty thousand level, and on the 100:1 leverage offered on this by GFT there is potential for significant leverage opportunities.’

‘One of the best markets that’s taken off – it is booming now after its recent budget – is South Africa,’ agrees Saxo Bank’s Gray.

Boom town

In its February budget, South Africa announced a further dismantling of exchange controls, allowing South African banks and pension funds to invest overseas 40% and 20% respectively of their retail asset base.

The move also swiped away what had until now been a big deterrent to foreign investment in South Africa, opening up appetite among UK investors, says Gray.

‘South Africa is a good place to invest as a whole,’ he adds. ‘They’re going to get the World Cup in 2010, there’s a lot more emphasis on bringing the crime down in that country, the resources there are fantastic, and China and the Far East are having to buy those resources.’

With its well known companies and good transparency, South Africa is also a fairly safe place to trade CFDs on individual stocks, says Gray. A number of big names such as BHP Billiton and Old Mutual are dual-listed on the London Stock Exchange, meaning investors can buy exposure to the companies in Johannesburg and then hedge them on the LSE if they wish, he says.

‘There’s certainly been more interest in South Africa,’ says Richard Cunningham, managing director at City Index Advisory. And current weakness in the rand also makes CFDs on shares there a more attractive buy. ‘If you think the currency’s going to start to improve in the coming months, or even years, then that’s another reason to be buying South African equities,’ he says.

The Mexican IPC Index – which GFT believes it is the only CFD provider in the UK to offer – is another market driven by resource prices, says Slaney. Industrias Penoles SAB, which is listed on the index, is one of world’s biggest silver producers, he notes, and rising copper prices have also supported the index, contributing to near 20% gains between January and end-February.

‘Despite this, the majority of GFT’s customers are shorting this index, presumably in the belief that the global credit problems would lead to less funds being allocated to riskier emerging markets,’ says Slaney.

Investing in Australian stocks via CFDs is another good strategy now, says Gray. Again driven by Far Eastern demand for natural resources, the Australian economy is strong and one that UK investors are very familiar with, he says.

Decent exposure

Natural resources aside, a further strategy for trading CFDs on overseas stocks is to start with a sector you’re already comfortable in your home market, and then build on that knowledge to choose foreign shares.

E*Trade has seen a pick-up of interest in German property for example, at the very time when uncertainty in UK property markets – a sector that many investors will have dedicated a lot of time to – is on the rise.

Wherever your overseas bounty hunting takes you, there is one thing that most brokers agree on – trading CFDs on indices is a safer bet than stock picking.

‘An index is perhaps the best way to get a broad exposure to an economic region,’ says Andrew Gibson, head of strategy at Galvan Research and Trading.

Decoupling theories – which argue that Asia has developed its own momentum, becoming largely immune to troubles in the US – combined with a lack of liquidity on mainland Chinese indices, have fuelled interest in Hong Kong’s Hang Seng, he says.

The Dow Jones remains popular, although the correlation between Germany’s DAXX and France’s CAC indices with the FTSE is often too high to interest investors looking for alternative exposures.

Retail investors often feel comfortable investing in a company that’s active in their own country – the big names crop up on the evening news, you sometimes buy its products or services and it may even have a presence on your high street. But choosing a stock to trade overseas is far more complex.

Unless you have a strong knowledge of a market – for example you have family connections, previous working experience or have bought property there – trading CFDs on indices is in many cases a safer strategy, says Gray. ‘If you’re looking overseas, picking out individual stocks in illiquid markets can be a little dangerous.’

Indices are easier to track and to manage, especially for investors who are not comfortable trading volatility or don’t have the time to follow a firm’s fortunes closely, says Tony Celentano, head of sales and business development, UK at E*Trade.

It’s easier to take a decision on where a whole market is going than an individual stock, he explains. Instead, investors can follow the bigger macro picture, and time their trading strategy around key economic indicators, such as a country’s unemployment reports or interest-rate predictions.

Typically far less volatile than individual stocks, in quiet times indices can offer limited trading opportunities, adds Celentano. But in today’s jittery markets, they are moving just enough to offer good returns, but still less than the sometimes violent swings experienced in individual stocks, he explains.

Keep it simple

There is a fine line between too much and too little volatility, and the amount investors can stomach will depend on their experience and trading strategy, he notes.

Some overseas indices also have a much better track record than those at home. ‘If you look at the Hang Seng as a chart you’ll see that, although it’s got a broad correlation, it massively outperforms the American and European markets,’ says Galvan’s Gibson.

‘When you have a look at the way it reacted after the first wobble in the summer of 2007, it exploded to the upside and jumped another 50% in about three months. You’re not going to get the western markets having that kind of percentage move.’

Ultimately though, for investors who want exposure to overseas markets, most don’t realise how much of it they’re sitting on at home, Gibson argues.

‘In this age of global capitalism, direct investment abroad is only one option. People don’t realise when they buy shares in a lot of the FTSE 100 companies that they’re really making a play on the global economy anyway.’

A slew of FTSE firms offer more exposure to foreign markets than they do the UK, he notes. HSBC for example generates just 8% of its earnings in the UK – meaning 92% is fully exposed to foreign markets. Standard Chartered’s earnings are 100% generated overseas.

‘I think you’ll find even the likes of Warren Buffet for example are buying stakes in US companies with big foreign earnings as a way of protecting themselves against a slide in the US dollar.’

Investing in UK-listed mining stocks is a good way to gain indirect exposure to Chinese demand, he says. And an increasing number of overseas resource firms – including former Soviet Bloc giants – are also opting for second listings in London, he notes.

‘You don’t have to go and trade something on Moscow’s stock exchange to get exposure to that part of the world,’ he says. ‘A lot of these big themes can actually be played out on your doorstep – through the traditional London or US markets.

‘Rather than trying to call up some broker you’ve never heard, and setting up some account to trade some obscure stock you’ve never heard of, you name your theme and I’ll find you a dozen companies that are listed on the main indices that you can trade that with.’ Keeping it simple, he argues, may be the way to go.