Transcript personal.bellevuecollege.edu

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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:
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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.
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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
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US Mutual Fund Assets
Hybrid Funds
6%
2005
Money Market
Funds
23%
Domestic Stock
Funds
46%
Bond Funds
15%
International
Stock Funds
10%
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Lots of economic
activity and growth
outside of the U.S.
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Canada
Spain
South Korea
Russia
Indonesia
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Americas
American SE
Bermuda SE
Buenos Aires SE
Colombia SE
Lima SE
Mexican Exchange
Nasdaq
NYSE Group
Santiago SE
Sao Paulo SE
TSX Group
Total region
End 2006
End 2005
282,801.0
201,403.0
2,703.5
2,124.8
51,240.1
47,590.3
56,204.3
50,500.8
40,021.6
24,139.7
348,345.1
239,128.0
3,865,003.6 3,603,984.9
15,421,167.9 13,632,303.0R
174,418.8
136,493.3
710,247.4
474,646.9
1,700,708.1 1,482,184.6
22,652,861.5 19,894,499.2
40.4%
27.2%
7.7%
11.3%
65.8%
45.7%
7.2%
13.1%
27.8%
49.6%
14.7%
13.9%
Source: World Federation of Exchanges
http://www.world-exchanges.org/WFE/home.Asp
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Asia - Pacific
Australian SE
Bombay SE
Bursa Malaysia
Colombo SE
Hong Kong Exchanges
Jakarta SE
Korea Exchange
National Stock Exchange
India
New Zealand Exchange
Osaka SE
Philippine SE
Shanghai SE
Shenzhen SE
Singapore Exchange
Taiwan SE Corp.
Thailand SE
Tokyo SE
Total region 1
End 2006
End 2005
1,095,858.0
804,014.8
818,878.6
553,073.7
235,580.9
180,517.5
7,768.9
5,720.0
1,714,953.3 1,054,999.3
138,886.4
81,428.1
834,404.3
718,010.7
36.3%
48.1%
30.5%
35.8%
62.6%
70.6%
16.2%
774,115.6
515,972.5
44,816.5
40,592.5
181,754.2
191,969.0
67,851.7
39,817.8
917,507.5
286,190.3
227,947.3
115,661.9
384,286.4
257,340.6
594,659.4
476,018.0
140,161.3
123,885.0
4,614,068.8 4,572,901.0
11,837,629.1 9,310,171.3
50.0%
10.4%
-5.3%
70.4%
220.6%
97.1%
49.3%
24.9%
13.1%
0.9%
27.1%
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Europe - Africa - Middle
East
Athens Exchange
BME Spanish Exchanges
Borsa Italiana
Budapest SE
Cairo & Alexandria SEs
Cyprus SE
Deutsche Börse
Euronext
Irish SE
Istanbul SE
JSE
Ljubljana SE
London SE
Luxembourg SE
Malta SE
Mauritius SE
OMX
Oslo Børs
Swiss Exchange
Tehran SE
Tel Aviv SE
Warsaw SE
Wiener Börse
Total region
End 2006
208,256.1
1,322,915.3
1,026,504.2
41,784.1
93,496.4
16,157.8
1,637,609.8
3,708,150.1
163,269.5
162,398.9
711,232.3
15,181.7
3,794,310.3
79,513.6
4,503.5
4,958.5
1,122,705.0
279,910.4
1,212,308.4
36,314.6
161,731.7
148,775.1
192,770.3
16,144,757.5
End 2005
145,120.7
959,910.4
798,072.9
32,575.7
79,508.9
6,581.6
1,221,106.1
2,706,803.5
114,086.2
161,537.6
549,310.3
7,898.9
3,058,182.4
51,248.4
4,097.5
2,330.0
802,561.4
190,952.1
935,448.3
36,440.2
122,577.9
93,602.2
126,251.5
12,206,204.5
43.5%
37.8%
28.6%
28.3%
17.6%
145.5%
34.1%
37.0%
43.1%
0.5%
29.5%
92.2%
24.1%
55.2%
9.9%
112.8%
39.9%
46.6%
29.6%
-0.3%
31.9%
58.9%
52.7%
32.3%
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Change in market value from 2005
- 2006
-10.0%
Shanghai SE
Cyprus SE
Mauritius SE
Shenzhen SE
Ljubljana SE
Jakarta SE
Philippine SE
Lima SE
Hong Kong Exchanges
Warsaw SE
Luxembourg SE
Wiener Börse
National Stock Exchange India
Sao Paulo SE
Singapore Exchange
Bombay SE
Oslo Børs
Mexican Exchange
Athens Exchange
Irish SE
American SE
OMX
BME Spanish Exchanges
Euronext
Australian SE
Colombo SE
Deutsche Börse
Tel Aviv SE
Bursa Malaysia
Swiss Exchange
JSE
Borsa Italiana
Budapest SE
Santiago SE
Bermuda SE
Taiwan SE Corp.
London SE
Cairo & Alexandria SEs
Korea Exchange
TSX Group
Thailand SE
NYSE Group
Colombia SE
New Zealand Exchange
Malta SE
Buenos Aires SE
Nasdaq
Tokyo SE
Istanbul SE
Tehran SE
Osaka SE
40.0%
90.0%
140.0% 190.0% 240.0%
In emerging
market winners
one year---
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Change in Market Value 2004-2005
-40.0%-20.0% 0.0% 20.0% 40.0% 60.0% 80.0%100.0%120.0%
Cairo & Alexandria SEs
Colombia SE
Korea Exchange
Istanbul SE
Colombo SE
Malta SE
Wiener Börse
Sao Paulo SE
Bombay SE
National Stock Exchange India
Philippine SE
Mexican Exchange
Tel Aviv SE
Cyprus SE
Oslo Børs
Lima SE
Warsaw SE
Osaka SE
Tokyo SE
TSX Group
JSE
Hong Kong Exchanges
Athens Exchange
Singapore Exchange
Buenos Aires SE
Santiago SE
Budapest SE
Bermuda SE
Swiss Exchange
Jakarta SE
Euronext
Mauritius SE
OMX
Taiwan SE Corp.
Thailand SE
London SE
NYSE
American SE
Australian SE
Deutsche Börse
Luxembourg SE
BME Spanish Exchanges
Nasdaq
Borsa Italiana
Irish SE
Bursa Malaysia
New Zealand Exchange
Shanghai SE
Shenzhen SE
Tehran SE
Ljubljana SE
were losers the
last year.
Source: www.world-exchanges.org
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How International Investments Do
Risk Return 1990s
20%
U.S.
Return (Average Annual Return)
15%
Europe
10%
5%
0%
0%
5%
10%
15%
20%
25%
Japan
-5%
-10%
Source: Global Financial Data, w w w .globalfindata.com
Risk (Standard Deviation)
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Changes in International Investments
Risk Returns 1980s and 1990s
25%
Japan 1980's
Return (Annual Return on Index)
20%
U.S. 1990's
Europe 1980's
15%
U.S. 1980's
Europe 1990's
10%
5%
0%
0%
5%
10%
15%
-5%
20%
25%
30%
Japan 1990's
-10%
Risk (Standard Deviation)
Source: Global Financial Data, www.globalfindata.com
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Country
Region
Developed
or Emerging
markets
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Annual Returns Developed Market Indexes
Large
economies.
(1960-2000)
150%
Japan
Europe
100%
High GDP per
capita.
U.S.
World Excluding U.S.
50%
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
0%
Sophisticated
markets.
Categorized as
U.S., Japan,
and Europe.
-50%
-100%
Source: Global Financial Data
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Malaysia
Mexico
United Kingdom
Chile
Portugal
Japan
Israel
Hungary
Turkey
Hong Kong
China
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Annual Return Emerging Markets Indexes
(1968-1999)
150%
U.S.
100%
Latin America
Emerging Asia
50%
0%
68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99
19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19
-50%
-100%
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.
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Risk Return International Indexes
(1995-2000)
6.0%
Finland
5.0%
Return (Average Monthly Return)
4.0%
Brazil
3.0%
Italy
Netherlands
Mexico
Denmark
Sweden
2.0%
Germany
Canada
1.0%
Australia
Japan
New Zealand
0.0%
0.0%
-1.0%
2.0%
4.0%
S. Korea
Hong Kong
Spain
Austria
Singapore
Portugal
Taiwan
Peru
Norway
6.0%
8.0%
10.0%
Malaysia
Argentina
12.0%
14.0%
Philippines
16.0%
18.0%
Thailand
Chile
-2.0%
Risk (Standard Deviation)
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50%
45%
Brazil
Mexico
Return (Average Annual Return)
40%
35%
Spain
30%
Emerging Markets
25%
Australia
20%
Germany
UK
15%
Japan
Hong Kong
10%
5%
Taiwan
0%
0%
5%
10%
15%
20%
25%
30%
35%
Risk (Standard Deviation)
Source: Morningstar.com (3 years of data ending Nov 2006)
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Buying investments in foreign countries is not
easy
Many options exist here in the U.S.
How Foreign Stocks Are Traded
Traded on U.S.
Markets
29%
Traded on Foreign
Markets
57%
Traded as ADRs
14%
Source: U.S. Treasury based on 1997
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400
Over 800 foreign stocks listed on U.S.
exchanges.
Investing in Foreign Stocks - Top Countries
Must meet U.S. requirements.
350
($ B)
300
250
200
150
100
50
n
ai
Sp
ic
o
M
ex
g
ly
Ko
n
Ho
ng
er
la
itz
Sw
Ita
nd
en
ed
Sw
Ca
na
da
s
an
y
G
er
m
rla
nd
ce
Ne
th
e
an
Fr
an
Ja
p
UK
0
Source: U.S. Treasury
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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.
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Vodafone Airtouch
Royal Dutch Petroleum
Nokia
Unilever
Sony
Novartis
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10% of all mutual
fund assets.
Fund takes care of
buying, selling,
and foreign
requirements.
Higher fees than
other funds.
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About $15 T in foreign bonds is outstanding.
Half issued by governments and half are
private.
Investing in Foreign Bonds - Top Countries
120
($ B)
100
80
60
40
20
0
Canada
UK
Germany
Mexico
Argentina
Japan
Brazil
Australia
Italy
Source: U.S. Treasury
25
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Growth in economy is important
◦ Look at growth in GDP and GDP per capita
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Inflation needs to be under control
Industries
◦ One or two industries may dominate the country’s
market
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Czech Republic $12,289
Kazakhstan $4,480
Russia $6,339
Indonesia $2,639
Nigeria $749
Kenya $975
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For the following countries, compile
information on GDP, GDP growth rate, GDP
per capita, inflation rate, and government
debt. Which one looks like the best
investment prospect? Check out the
www.cia.gov World Factbook, a great source
of country information.
Italy
Germany
South Korea
Mexico
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Stability
Corruption
Economic policies
Debt level
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Countries have different currency that are
exchanged at market rates.
Major currencies are U.S. dollar, euro, and
Japanese yen.
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10.0%
5.0%
1998
1998
1997
1997
1997
1997
1996
1996
1996
1996
1995
1995
1995
1995
1994
1994
1994
1994
1993
1993
1993
1993
1992
1992
1992
1992
1991
1991
0.0%
1991
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Fluctuation in currency rates is a source of
risk.
Economic factors of country relative to
Monthly Change in Value Relative to U.S. Dollar
others.
1991
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-5.0%
-10.0%
Euro
Japanese Yen
-15.0%
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Check out
http://pacific.commerce.ubc.ca/xr/ and use
the service to plot the following currencies
against the U.S. dollar. (Hint: You can add
additional currencies on the same chart by
holding down Ctrl when selecting a currency.)
Hong Kong dollar
Thai baht
Indonesian rupiah
Japanese yen
South Korean won
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Need to factor in the effect of currency
fluctuations to your return on an international
investment
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The Effect on Currency Risk
Japan
Yen/$U.S.
300
250
250 yen/$1
200
Bought stock
for 2500 yen or
150
100 yen/$1
$10 per share
100
Sold stock
for 2500 yen or
50
$25 per share
00
99
20
98
19
98
19
97
19
96
19
95
19
95
19
94
19
93
19
92
19
92
19
91
19
90
19
89
19
89
19
88
19
87
19
86
19
86
19
85
19
84
19
83
19
83
19
82
19
81
19
80
19
19
19
80
0
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The Effect of Currency Risk
Euro
1.3
1.2
1.1 euro per $1
Bought German
stock at 80 euros
or $100 per share.
1
0.9
Sold German stock
at 80 euros or
$72.72 per share.
0.80 euro per $1
0.8
0.7
Jul 2001
Jan 2001
Jul 2000
Jan 2000
Jul 1999
Jan 1999
Jul 1998
Jan 1998
Jul 1997
Jan 1997
Jul 1996
Jan 1996
Jul 1995
0.6
Jan 1995
Euro per U.S. $1
1.1
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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.
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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/
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Correlation Between U.K. and U.S. Stocks
Correlation Between Japanese and U.S. Stocks
(FT 100 and the S&P 500 - 5 years ending 2/2001)
(Nikkei 225 and S&P 500 - 5 years ending 2/2001
10%
15%
Correlation = .52
10%
Correlation = .73
5%
0%
-20%
-15%
-10%
-5%
0%
-5%
5%
10%
15%
FT 100 Monthly Return
Nikkei 225 Monthly Return
5%
0%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
-5%
-10%
-10%
-15%
-20%
S&P 500 MonthlyReturn
-15%
S&P 500 Monthly Return
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The Americas
Correlation With Standard and Poor's 500 (Five Years Ending 2/2001)
Venezula
Peru
Mexico
Chile
Canada
Brazil
Argentina
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Note: Some indexes had less than five years of data.
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European Indexes
Correlation with Standard and Poor's 500 (Five years ending 2/2001)
U.K.
Turkey
Switzerland
Sweden
Spain
Slovakia
Russia
Portugal
Norway
Netherlands
Greece
Germany
France
Finland
Denmark
Czechoslovakia
Belgium
Austria
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Note: Some indexes had less than five years of data.
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Asia and Australia
Correlation with the Standard and Poor's 500 (Five Years ending 2/2001)
Taiwan
Thailand
Sri Lanka
S. Korea
Singapore
Philippines
Pakistan
Malaysia
Japan
Indonesia
India
Hong Kong
Shanghai
New Zealand
Australia
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Note: Some indexes had less than five years of data.
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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?
Country
Sweden
Spain
Finland
Germany
Correlation with U.S.
Market
.54
.47
.62
.65
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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?
Average
Monthly
Return
Standard
Deviation
Correlation
With U.S.
Argentin Brazil Canada Chile Mexico
a
0.2% 2.9%
1.0% -0.5%
1.7%
11.6% 11.7%
48%
61%
Peru
Venezuela
-0.7%
1.9%
5.6%
8.5%
9.3%
9.0%
15.4%
78%
62%
67%
32%
29%
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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
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