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ADR Lift With Investor Return to Equities

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Investor appetite for foreign listed stock remains strong despite the modest decline of 8% in total depository receipt (DR) trading volume worldwide. US market share of this trading was 82%, down but still leading the pack.

Within the U.S., NYSE-listed American Depositary Receipts (ADRs) continued to grow market share in  trading volume. About 84% of ADR trading volume was in NYSE-listed companies in 1st half 2013, up from 77% in 2012 and 73% in 2011. Nasdaq-listed ADR trading volume market share was 11% in 1st half 2013, down from 20% last year and 23% the year before.

Who are the leaders? Brazil which had the most actively traded group of NYSE-listed international companies with ADRs - almost $215 billion worth were traded in 1st half  2013. Brazil’s Vale (VALE) and Petrobras (PBR) were among the world’s most liquid DR programs, in terms of both trading volume and trading value - a notable feat.  In the Latin American region, trading volume leaders included Mexico’s CEMEX (CX), while trading value leaders included Mexico’s America Movil (AMX).

In Europe, the U.K led with over $146 billion in trading value. A mix of companies from the continent were highlighted in terms of volume and value along with UK companies. Trading volume leaders included Finland’s Nokia (NOK), and France’s Alcatel-Lucent (ALU), while trading value leaders included U.K.’s BP (BP) and the Netherlands’ Royal Dutch Shell (RDS.A).

Meanwhile the Asia Pacific leader, China, stood at over $51 billion.  Japan saw the biggest improvement in liquidity, just about doubling in both volume and value, while Mexico welcomed about a 14% rise in volume and over 50% in value. Trading value leaders included Taiwan Semiconductor Manufacturing (TSM).

ADRs traded over-the-counter (OTC) had over 4% market share in the 1st half this year, up from 3% last year as well as the year before that. OTC-traded ADRs are not listed and therefore not supported by any major exchange.

For some companies, the OTC experience may serve as a “test” case before they decide whether or not to expend the resources necessary to becoming a listed company in the U.S. OTC-traded companies that are accepted for listing on NYSE MKT or NYSE can usually benefit from more analyst coverage, more institutional ownership and more trading volume.

We may be on an upswing. Six months ago I wrote about ADR trading volumes, and looked at whether we were on the cusp of the Great Rotation, where investors move money out of bonds and pour it into equities. It was suggested that more likely an overflow of cash was being moved into BOTH bonds and equities. There was no guarantee the Great Rotation would ever arrive, but it seemed just around the corner.

Recent data, however, suggests we may be getting closer to, if not the Great Rotation, then to a substantial rebalancing. Look at the week ended August 7th - the largest outflow from Treasury bond funds on record. In addition,PIMCO, which manages the world’s largest bond fund, suffered large net redemptions from its bond funds in June and July, and at the same time saw money moving into its stock funds. Interestingly, retail clients of Merrill Lynch Bank of America have been moving money from money markets and bonds into equities - but its hedge fund and institutional clients have continued to put money into bonds.

Let’s watch for other investors to dump bonds and buy stocks – their collective behavior should be of interest to companies seeking more ADR liquidity as well as international companies seeking to IPO in the U.S.

For those interested in learning more about ADRs, here are links to the four DR banks:


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