prepared by: monisha sinha roll no. – 68 pgdm - ii
TRANSCRIPT
Prepared by:
Monisha
Sinha Roll
no. – 68
PGDM - II
The Top 5 Things to Know About International Investing
International Investing Can Boost Your Returns
Global Diversification Can Reduce Risk
It's Never Been Easier for Small Investors to
Participate
Don't Forget About Currencies
All Investing is Global
1. International Investing Can Boost Your Returns
The U.S. may have the world's biggest stock
market, but it isn't always the top performer. At
any given time, there are plenty of other markets
around the world that are delivering better
returns - and in some cases dramatically better
than the U.S. When a person limits his search to
just one country, he is guaranteed to miss out on
some great investments off the beaten path
2. Global Diversification Can Reduce Risk
A common misconception is that international investing is
"risky". Indeed, putting your retirement savings in say,
Nigerian stocks or Turkish bonds, is a dicey proposition. But
so is betting heavily on a small-cap stock located right in
your hometown. The key is diversification. Numerous
studies show that adding a well-diversified basket of
international stocks to your portfolio can reduce volatility.
The net effect over the long run is a much smoother pattern
of returns.
3. It's Never Been Easier for Small Investors to Participate
Nobody said international investing would be
"easy". As with anything else, one needs to do
plenty of homework before investing a penny. But
international investing has never been more
accessible for individual investors. Thanks to an
explosion of new international funds, exchange
traded funds (ETFs), and American Depositary
Receipts (ADRs) a person can now invest in
countries that were once only available to
professional investors - all with a few clicks of a
mouse.
4. Don't Forget About Currencies
Investing in foreign markets differs in one very important
respect from investments at home: the currency impact.
When a person buys shares of a U.S. company (or wherever
your "home" market may be), that person’s return depends on
the change in the stock price and the dividends he receives, if
any. But if he invests in Japan, he also needs to pay attention
to the value of the Yen. A big change in the exchange rate
can have a positive or negative impact on the performance of
one’s investments, and on one’s portfolio as a whole.
5. All Investing is Global
In the age of globalization, the line between "foreign" and
"domestic" investing has become increasingly blurry. Some classic
American companies, like Coca-Cola and IBM, now generate more
than half of their sales overseas. In some industries, such as
automobiles and pharmaceuticals, many of the biggest players are
located overseas. So even if you choose to invest exclusively in the
U.S., you still need to be aware of what's going on in foreign
markets. The stocks in your portfolio may be American, but chances
are they have some tough competitors abroad. No investment
analysis is complete anymore without looking at the global picture
Benefits of Global Investing
Attractive Opportunities
Diversification Benefits
Diversifying across nations whose economic cycles do
not move in perfect lockstep, investors can achieve a
better risk-return tradeoff.
Risks of Global Investing
Political Risk
Currency Risk
Custody Risk
Liquidity Risk
Market Volatility
Political Risk
It is difficult for investors to understand all the
political, economic, and social factors that
influence foreign markets. These factors provide
diversification, but they also contribute to the risk
of international investing. Many national markets,
particularly emerging markets, are vulnerable to
political risk that may stem from coups,
assassination, social unrest, and so on.
Currency Risk
Exchange rates changes over time. So, global investors have to live
with currency risk. When the exchange rate between the foreign
currency of an international investment and the U.S. dollar changes,
it can increase or reduce your investment return. How does this
work? Foreign companies trade and pay dividends in the currency of
their local market. When you receive dividends or sell your
international investment, you will need to convert the cash you
receive into U.S. dollars. During a period when the foreign currency
is strong compared to the U.S. dollar, this strength your returns
because your foreign earnings translate into currency weakens.
Changes in currency exchange rates increases more dollars. If the
foreign compared to the U.S. dollar, this weakens your returns
because your earnings translate into fewer dollars
Custody Risk
In many countries, domestic investors enjoy a
certain degree of protection against frauds,
bankruptcies, and broker misdeeds. This
protection may not be available to foreign
investors. So, when a person invests in
foreign markets he may be exposed to such
risks.
Liquidity Risk
Foreign markets may have lower trading
volumes and fewer listed companies. They may
only be open a few hours a day. Some countries
restrict the amount or type of stocks that foreign
investors may purchase. You may have to pay
premium prices to buy a foreign security and
have difficulty finding a buyer when you want to
sell.
Market Volatility
Foreign markets like all markets, can experience
dramatic changes in market value. One way to reduce
the impact of these price changes is to invest for
the long term and try to ride out sharp upswings
and downturns in the market. Individual investors
frequently lose money when they try to "time" the
market in the United States and are even less likely to
succeed in a foreign market. When you "time" the
market you have to make two astute decisions --
deciding when to get out before prices fall and when to
get back in before prices rise again.
Measuring the Return and Risk of Foreign Investments
The realized rupee return for an Indian resident in a foreign market depends
on the return in the foreign currency as well as the change in the exchange
rate between the foreign currency and the Indian National Rupee (INR).
The rate of return in INR terms from investing in the ith foreign market is as
follows:
Ri INR = (1+Ri) (1+ei) – 1
= Ri + ei + Riei
where ,
Ri= foreign currency rate of return in the ith foreign market
ei= rate of change in the exchange rate between the foreign currency and the
INR.
Example
Suppose an Indian resident just sold shares of IBM which he
purchased a year ago and earned a rate of return of 14% in
terms of the US dollar (Ri= 0.14). During the same period the US
dollar depreciated 4% against the INR (ei = -0.04). The realized
rate of return in terms of INR from this investment is :
Ri INR = (1+0.14) (1- o.04) -1
= 1.0944 -1 = .0944 or 9.44 %
The risk of foreign investment, measured in terms of variance, is:
Var (Ri INR) = Var (Ri) + Var (ei) + 2 CoV (Ri, ei) + Var
Growing Importance of Global Factors
In recent years, stock markets across the world
seem to have become more closely aligned. Several
factors have contributed to a higher correlation
between changes in stock prices in different
countries.
Increase in cross-border trading
Multiple Listing
Spurt in cross-border mergers and acquisitions
Internet
Where to Invest?
Developed Markets
Buy stocks of domestically-oriented companies in various developed
markets as well as stocks of MNCs such as Coca-Cola, IBM, Toyota, etc
American Depository Receipts (ADRs): ADRs are bought and sold in
US dollars, dividends on ADRs are paid in US dollars.
Yankee Bonds: Dollar denominated bonds issued by non US companies
(as well as governments) in the US bonds. For e.g. bonds issued by Astra
Zeneca ( British firm), Naples (Italian City) trade on the NYSE.
Mutual Funds:
Index Funds
Exchange-traded funds like the World Equity Benchmark Securities (covering
developed markets)
Where to Invest?
Emerging Markets
Mutual Funds:
Close ended mutual funds selling at a significant discount
Open ended index funds like the Vanguard Emerging
Markets Index Fund
Exchange traded funds like the World Equity Benchmark
Securities (covering emerging markets)
How to Invest?
To invest in equities abroad one needs a bank account with a bank
that allows foreign remittances and an account with a domestic
broker who has a tie up with a foreign broker.
Alternatively one must have an account with a foreign broker.
The person have to transfer the investible amount to his brokerage
account by filling up Form A2.
Once the money is transferred, one can buy shares online on his/her
trading screen.
Likewise, he/she can sell shares online and transfer money
electronically to one’s bank account.
Tracking Global Markets
Each country’s stock market has one or more
indices to measure how equities in that country
have performed.
Some of the well known national equity indices are:
Dow Jones Industrial Average of the US
Nikkei 225 of Japan
FTSE 100 of UK
DAX of Germany
Tracking Global Markets
One problem with these domestic indices is that they are not
comparable as they are computed in local currency and computed
in different ways. To address this problem, Morgan Stanley Capital
International(MSCI) compiles indices for individual countries,
regions, developed and emerging markets and the entire world.
The premier MSCI benchmarks used by investment managers are:
The MSCI World Index
The MSCI EAFE (Europe, Australia, Far East) Index
The MSCI Emerging Markets Free Index