Emerging market companies
Companies operating in emerging
Not all companies listed on Australian share exchanges operate
in Australia. Over 700 companies listed on the Australian
Securities Exchange (ASX) have business operations or assets
These companies can sometimes offer attractive returns; but it
pays to find out where the company carries on business and whether
this can increase the risk of losing some or all of your
What are emerging market
Some of the ASX-listed companies that operate overseas are
well-known and do business in established markets such as the
United States or Japan.
However, others operate in less established markets such
- Asia (other than Hong Kong and Japan)
- The Pacific (other than New Zealand)
- Central or South America
- Eastern Europe
- The Middle East
Companies operating in these areas are known as 'emerging market
Emerging market companies may:
- Have significant assets, operations and revenue streams based
in an emerging market
- Have directors and senior management based overseas
- Engage an overseas auditor
- Be listed on a foreign exchange as well as the ASX
While many emerging market companies are well-managed, there can
be risks associated with distance, cultural differences and
variations in legal and political systems that may not affect
The risks will be different for each company.
For example, a company:
- May need to operate across several languages, currencies, and
cultural systems, which can lead to miscommunication or loss of
funds due to poor currency management
- May have complex corporate structures to facilitate business,
due to restrictions on foreign ownership
- May rely too much on the guidance and connections of one key
person located overseas, which can make it difficult to access
reliable information or lead to that person receiving substantial
- May have inadequate risk management and internal controls which
may result in financial loss
- May not provide or be able to access reliable information on
its operation and performance for auditing purposes. This may mean
that financial reports do not accurately reflect the company's
It's also important to remember that emerging market companies
are not always subject to the same regulatory supervision as
For example, if a company is registered in a country other than
Australia, it may not have to comply with the Corporations Act. As
a shareholder, this may mean your investment has less protection
than it would have if the company was registered in Australia,
under our laws.
If you already own shares in a company and it's the target of a
takeover bid, you should carefully read the bidder's statement to
see if the offer is for shares in a company with operations or
assets overseas. See takeovers for more information about
assessing a takeover offer.
Case study: Kristen invests in an emerging market
Kristen has a share portfolio that she manages herself so she
likes to keep up to date with different investment
She recently read that some companies are being set up overseas
to take advantage of developing economies. She was particularly
interested in a mining company in an emerging economy.Mining
companies in Australia had been doing really well, and the company
was listed on the ASX, so she thought it would be a good
investment. But when she received the first annual report, she was
surprised to see that the company had suffered a substantial loss
due to the payment of a fraudulent invoice.
There were legal proceedings underway to recover the money, but
because the mining company operated under different laws and
regulations, it was likely to be difficult for the company to get
the money back.
Before you invest
Before you invest in or vote on a takeover offer from a company
operating in an emerging market, read the prospectus, annual reports and / or the
bidder's statement, and consider the following:
- Where are the major assets or operations of the company
- Are the assets held directly or indirectly through a foreign
- Where are the directors and management located?
- Does the company rely on an individual or key person to
facilitate their overseas dealings or operations and how much
control does that person have?
- Does the board contain independent directors?
- Is the company's structure so complex that it is hard to
understand where the assets are held or who has control over
Regulation & reporting
- What is the regulatory regime in which the entity operates and
is it similar to Australia?
- Is the jurisdiction where the company is based or operating
from volatile or risky (for example, does the company need
regulatory approvals from a government under an unstable political
- Who are the company's auditors, what is their reputation, where
are they located and what did they say in their audit opinion?
- Can you see evidence of substantial loans to and from parties
related to the company? Look for any 'related party contracts' or
'material contracts' listed in the prospectus.
Use these questions as prompts to help you consider the
particular management and operational challenges that may arise
more often for emerging market companies, than for companies
operating in Australia.
See prospectuses and annual reports
for tips on assessing whether you should invest in a company.
Before you invest, make sure you're aware of and
comfortable with the risks of investing in or accepting a takeover
offer from a company operating in an emerging market. If you are
unsure whether the investment is right for you, speak to your
stockbroker or see a licensed financial adviser.
Last updated: 18 Aug 2015