Module 9 International

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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:

◦ 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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4

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 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

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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%

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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%

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In emerging market winners one year---

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were losers the last year.

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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

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Changes in International Investments Risk Returns 1980s and 1990s

-10%

-5%

0%

5%

10%

15%

20%

25%

0% 5% 10% 15% 20% 25% 30%


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


Country Region Developed

or Emerging markets

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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.

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Malaysia Portugal TurkeyMexico Japan Hong KongUnited Kingdom Israel ChinaChile Hungary

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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


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)

-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%


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

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Buying investments in foreign countries is not easy

Many options exist here in the U.S.

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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.

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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.

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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.

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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)

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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

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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.

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Italy

Germany

South Korea

Mexico

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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Fluctuation in currency rates is a source of risk.

Economic factors of country relative to others.

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Monthly Change in Value Relative to U.S. Dollar

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

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91

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91

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91

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91

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92

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92

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92

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92

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93

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93

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93

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93

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94

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94

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95

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95

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95

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95

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96

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96

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96

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96

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97

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97

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97

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97

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98

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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

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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 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.

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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.

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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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40

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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

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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.

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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.


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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


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?

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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?

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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

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Documents

Module 9 International