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Capital Markets

Equity markets depositary receipts: US investors lose out

A shift of depositary receipt issuance to London comes at a time of soaring interest in the asset class in the US.

London’s emergence as the preferred destination for companies seeking a secondary listing is a particular blow to US investors as it coincides with increasing demand in the US for foreign stocks and depositary receipts.

According to JPMorgan, institutional investment in the American depositary receipt market doubled between 2003 and 2006 to reach $600 billion, up from $500 billion in 2005.

The rise in interest has come about as a result of a fundamental shift in behaviour among US investors. Their holdings of non-US equities have increased to a record high of 18%, according to the Federal Reserve. Many leading investment advisers to US investors are now recommending allocations as high as 25% and in some cases as much as 35% to 40% in non-US equities.

"Whilst there has been no increase in new issuance there has been a strong increase in trading and investment in existing ADRs," says James Keane, EMEA region head of depositary receipts at JPMorgan. "Trading and investment in existing ADRs has reached record highs as US investors are allocating more to foreign equities and because ADRs are a very convenient way for them to hold foreign stock. There is also a pool of investors that’s obliged to hold foreign stock in ADR form as they are classed as domestic securities."

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