Post on 30-Dec-2015
description
transcript
1
Evaluate international economies and growth rates. Differentiate between developed and emerging markets. List the pros and cons of investing in foreign companies
listed on U.S. exchanges and ADRs. List the benefits of investing in international funds. List the pros and cons of international bonds as
compared to domestic bonds. Evaluate international investments using:
◦ Economic growth rates◦ Political risk◦ Currency risk◦ Index performance◦ Industry analysis◦ Correlation with U.S. investments
Locate and download information to evaluate international investments from internet sources.
2
How many countries are there in the world? 250 according to the CIA How many have stock markets? 52 large ones counted in the World Stock
Exchange Federation What is the value of the stock exchanges? $50 trillion in 2006 – US is less than $20 T
3
4
Lots of economic activity and growth outside of the U.S.
5
Canada Spain South Korea Russia Indonesia
6
7
Americas End 2006 End 2005 American SE 282,801.0 201,403.0 40.4%Bermuda SE 2,703.5 2,124.8 27.2%Buenos Aires SE 51,240.1 47,590.3 7.7%Colombia SE 56,204.3 50,500.8 11.3%Lima SE 40,021.6 24,139.7 65.8%Mexican Exchange 348,345.1 239,128.0 45.7%Nasdaq 3,865,003.6 3,603,984.9 7.2%NYSE Group 15,421,167.9 13,632,303.0R 13.1%Santiago SE 174,418.8 136,493.3 27.8%Sao Paulo SE 710,247.4 474,646.9 49.6%TSX Group 1,700,708.1 1,482,184.6 14.7%
Total region 22,652,861.5 19,894,499.2 13.9%
Source: World Federation of Exchangeshttp://www.world-exchanges.org/WFE/home.Asp
8
Asia - Pacific End 2006 End 2005 Australian SE 1,095,858.0 804,014.8 36.3%Bombay SE 818,878.6 553,073.7 48.1%Bursa Malaysia 235,580.9 180,517.5 30.5%Colombo SE 7,768.9 5,720.0 35.8%Hong Kong Exchanges 1,714,953.3 1,054,999.3 62.6%Jakarta SE 138,886.4 81,428.1 70.6%Korea Exchange 834,404.3 718,010.7 16.2%National Stock Exchange India 774,115.6 515,972.5 50.0%New Zealand Exchange 44,816.5 40,592.5 10.4%Osaka SE 181,754.2 191,969.0 -5.3%Philippine SE 67,851.7 39,817.8 70.4%Shanghai SE 917,507.5 286,190.3 220.6%Shenzhen SE 227,947.3 115,661.9 97.1%Singapore Exchange 384,286.4 257,340.6 49.3%Taiwan SE Corp. 594,659.4 476,018.0 24.9%Thailand SE 140,161.3 123,885.0 13.1%Tokyo SE 4,614,068.8 4,572,901.0 0.9%
Total region 1 11,837,629.1 9,310,171.3 27.1%
9
Europe - Africa - Middle East End 2006 End 2005 Athens Exchange 208,256.1 145,120.7 43.5%BME Spanish Exchanges 1,322,915.3 959,910.4 37.8%Borsa Italiana 1,026,504.2 798,072.9 28.6%Budapest SE 41,784.1 32,575.7 28.3%Cairo & Alexandria SEs 93,496.4 79,508.9 17.6%Cyprus SE 16,157.8 6,581.6 145.5%Deutsche Börse 1,637,609.8 1,221,106.1 34.1%Euronext 3,708,150.1 2,706,803.5 37.0%Irish SE 163,269.5 114,086.2 43.1%Istanbul SE 162,398.9 161,537.6 0.5%JSE 711,232.3 549,310.3 29.5%Ljubljana SE 15,181.7 7,898.9 92.2%London SE 3,794,310.3 3,058,182.4 24.1%Luxembourg SE 79,513.6 51,248.4 55.2%Malta SE 4,503.5 4,097.5 9.9%Mauritius SE 4,958.5 2,330.0 112.8%OMX 1,122,705.0 802,561.4 39.9%Oslo Børs 279,910.4 190,952.1 46.6%Swiss Exchange 1,212,308.4 935,448.3 29.6%Tehran SE 36,314.6 36,440.2 -0.3%Tel Aviv SE 161,731.7 122,577.9 31.9%Warsaw SE 148,775.1 93,602.2 58.9%Wiener Börse 192,770.3 126,251.5 52.7%
Total region 16,144,757.5 12,206,204.5 32.3%
10
In emerging market winners one year---
11
were losers the last year.
12
How International Investments Do Risk Return 1990s
-10%
-5%
0%
5%
10%
15%
20%
0% 5% 10% 15% 20% 25%
Risk (Standard Deviation)
Re
turn
(A
ve
rag
e A
nn
ua
l Re
turn
)
Japan
Europe
U.S.
Source: Global Financial Data, www.globalfindata.com
13
Changes in International Investments Risk Returns 1980s and 1990s
-10%
-5%
0%
5%
10%
15%
20%
25%
0% 5% 10% 15% 20% 25% 30%
Risk (Standard Deviation)
Re
turn
(A
nn
ua
l Re
turn
on
Ind
ex
)
Europe 1990's
U.S. 1990's
Japan 1990's
Europe 1980's
Japan 1980's
U.S. 1980's
Source: Global Financial Data, www.globalfindata.com
Country Region Developed
or Emerging markets
14
15
Annual Returns Developed Market Indexes (1960-2000)
-100%
-50%
0%
50%
100%
150%
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
Japan
Europe
U.S.
World Excluding U.S.
Source: Global Financial Data
Large economies.
High GDP per capita.
Sophisticated markets.
Categorized as U.S., Japan, and Europe.
16
Malaysia Portugal TurkeyMexico Japan Hong KongUnited Kingdom Israel ChinaChile Hungary
17
Annual Return Emerging Markets Indexes (1968-1999)
-100%
-50%
0%
50%
100%
150%
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
U.S.
Latin America
Emerging Asia
Source: Global Financial Data, www.globalfindata.com
Rest of Asia, Latin America, Middle East, South Africa,Central and Eastern Europe.
High risk - Spectacular gains and losses.
Emerging markets become developed markets.
18
Risk Return International Indexes(1995-2000)
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0%
Risk (Standard Deviation)
Re
turn
(A
vera
ge
Mo
nth
ly R
etu
rn)
Finland
Brazil
Spain
ThailandPhilippines
Chile
MalaysiaJapan
Peru
Singapore
Hong Kong
TaiwanPortugal
MexicoItaly
S. Korea
Sweden
Norway
Netherlands
Germany
Canada
Denmark
Australia
New Zealand
AustriaArgentina
19
Buying investments in foreign countries is not easy
Many options exist here in the U.S.
20
How Foreign Stocks Are Traded
Traded on Foreign Markets
57%
Traded on U.S. Markets
29%
Traded as ADRs14%
Source: U.S. Treasury based on 1997
Over 800 foreign stocks listed on U.S. exchanges.
Must meet U.S. requirements.
21
Investing in Foreign Stocks - Top Countries
0
50
100
150
200
250
300
350
400
UK
Japa
n
Fran
ce
Nether
land
s
German
y
Cana
da
Swed
en
Switz
erland
Italy
Hong
Kon
g
Mex
ico
Spain
Source: U.S. Treasury
($ B)
Foreign shares are put in deposit with a bank the the U.S. The bank issues ADRs.
ADRs are listed on U.S. exchanges.
Close to $900 B in ADRs are traded.
22
Vodafone Airtouch Royal Dutch Petroleum Nokia Unilever Sony Novartis
23
10% of all mutual fund assets.
Fund takes care of buying, selling, and foreign requirements.
Higher fees than other funds.
24
About $15 T in foreign bonds is outstanding. Half issued by governments and half are
private.
25
Investing in Foreign Bonds - Top Countries
0
20
40
60
80
100
120
Canada UK Germany Mexico Argentina Japan Brazil Australia Italy
Source: U.S. Treasury
($ B)
26
Growth in economy is important◦ Look at growth in GDP and GDP per capita
Inflation needs to be under control Industries
◦ One or two industries may dominate the country’s market
27
Czech Republic $12,289 Kazakhstan $4,480 Russia $6,339 Indonesia $2,639 Nigeria $749 Kenya $975
28
For the following countries, compile information on GDP, GDP growth rate, GDP per capita, inflation rate, and government debt. Which one looks like the best investment prospect? Check out the www.cia.gov World Factbook, a great source of country information.
29
Italy
Germany
South Korea
Mexico
Stability Corruption Economic policies Debt level
30
31
Countries have different currency that are exchanged at market rates.
Major currencies are U.S. dollar, euro, and Japanese yen.
32
Fluctuation in currency rates is a source of risk.
Economic factors of country relative to others.
33
Monthly Change in Value Relative to U.S. Dollar
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
19
91
19
91
19
91
19
91
19
92
19
92
19
92
19
92
19
93
19
93
19
93
19
93
19
94
19
94
19
94
19
94
19
95
19
95
19
95
19
95
19
96
19
96
19
96
19
96
19
97
19
97
19
97
19
97
19
98
19
98
Euro
J apanese Yen
Check out http://pacific.commerce.ubc.ca/xr/ and use the service to plot the following currencies against the U.S. dollar. (Hint: You can add additional currencies on the same chart by holding down Ctrl when selecting a currency.)
Hong Kong dollar Thai baht Indonesian rupiah Japanese yen South Korean won
34
Need to factor in the effect of currency fluctuations to your return on an international investment
35
36
The Effect on Currency Risk J apan
0
50
100
150
200
250
300
Bought stockfor 2500 yen or $10 per share
Sold stockfor 2500 yen or$25 per share
100 yen/$1
250 yen/$1
Yen/$U.S.
37
The Effect of Currency Risk Euro
0.6
0.7
0.8
0.9
1
1.1
1.2
1.3
Ja
n 1
99
5
Ju
l 19
95
Ja
n 1
99
6
Ju
l 19
96
Ja
n 1
99
7
Ju
l 19
97
Ja
n 1
99
8
Ju
l 19
98
Ja
n 1
99
9
Ju
l 19
99
Ja
n 2
00
0
Ju
l 20
00
Ja
n 2
00
1
Ju
l 20
01
Eu
ro p
er
U.S
. $
1
Bought German stock at 80 euros or $100 per share.
0.80 euro per $1
Sold German stock at 80 euros or
$72.72 per share.
1.1 euro per $1
You invest in Canada in 1981 at an exchange rate of $1.20 Canadian dollars to $1 U.S. dollar and cashed out in mid-2000 at an exchange rate of $1.492 Canadian dollars to $1 U.S. dollar. Your Canadian investment returned nothing over the years.
You invested in a European stock in 1993 with an exchange rate of 0.82 euro to $1 U.S. dollar and cashed out in mid-2000 at an exchange rate of 1.11 euro to $1 U.S. dollar. Your investment returns 15% over the years.
You invested in the U.K. in 1985 with an exchange rate of 0.915 pound to $1 U.S. dollar and cashed out in mid-2000 at an exchange rate of 0.657 pound to $1 U.S. dollar. Your U.K. investment returns 25% over the years.
You invest in Switzerland in 1984 with an exchange rate of 2.52 Swiss francs to $1 U.S. dollar and cash out in mid-2000 at an exchange rate of 1.72 Swiss francs to $1 U.S. dollar. Your Swiss investment returns -10% over the years.
38
Economists try to predict where currencies will go by looking at what it costs for buy the same thing in many countries.
Which currencies are over-valued? Which currencies are under-valued? The Big Mac index
◦ http://www.economist.com/markets/bigmac/
39
40
41
Correlation Between Japanese and U.S. Stocks (Nikkei 225 and S&P 500 - 5 years ending 2/2001
-20%
-15%
-10%
-5%
0%
5%
10%
15%
-20% -15% -10% -5% 0% 5% 10% 15%
S&P 500 MonthlyReturn
Nik
kei 2
25 M
onth
ly R
eturn
Correlation = .52
Correlation Between U.K. and U.S. Stocks (FT 100 and the S&P 500 - 5 years ending 2/2001)
-15%
-10%
-5%
0%
5%
10%
-20% -15% -10% -5% 0% 5% 10% 15%
S&P 500 Monthly Return
FT
10
0 M
on
thly
Re
turn
Correlation = .73
42
The AmericasCorrelation With Standard and Poor's 500 (Five Years Ending 2/2001)
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
Argentina
Brazil
Canada
Chile
Mexico
Peru
Venezula
Note: Some indexes had less than five years of data.
43
European Indexes Correlation with Standard and Poor's 500 (Five years ending 2/2001)
-10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
Austria
Belgium
Czechoslovakia
Denmark
Finland
France
Germany
Greece
Netherlands
Norway
Portugal
Russia
Slovakia
Spain
Sweden
Switzerland
Turkey
U.K.
Note: Some indexes had less than five years of data.
44
Asia and Australia Correlation with the Standard and Poor's 500 (Five Years ending 2/2001)
-10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
Australia
New Zealand
Shanghai
Hong Kong
India
Indonesia
Japan
Malaysia
Pakistan
Philippines
Singapore
S. Korea
Sri Lanka
Thailand
Taiwan
Note: Some indexes had less than five years of data.
The following shows how foreign stock markets have correlated with the U.S. market. (60 monthly returns were used.) Based on correlation alone, if your goal is to diversify, which country would you choose to invest in?
45
Country Correlation with U.S.Market
Sweden .54Spain .47Finland .62Germany .65
Look at the following data on correlation, return, and standard deviation for countries in the Americas. The Standard and Poor’s 500 had an average monthly return of 1.2% and standard deviation of 4.8% in the same period. Based on this information, which market presents the best investment opportunity?
46
Argentina
Brazil Canada Chile Mexico Peru Venezuela
AverageMonthlyReturn
0.2% 2.9% 1.0% -0.5% 1.7% -0.7% 1.9%
StandardDeviation
11.6% 11.7% 5.6% 8.5% 9.3% 9.0% 15.4%
CorrelationWith U.S.
48% 61% 78% 62% 67% 32% 29%
International investments need to be monitored very closely.
Country factors can change very quickly and very drastically.
Monitor credit ratings for international bonds.
Use the appropriate indexes: ◦ Morgan Stanley World - Developed markets
including U.S.◦ EAFE - World developed markets excluding U.S.◦ Europe - European developed markets◦ Emerging Markets
47