international securities markets diversification and

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  • 1. International Securities Markets Diversification and Globalization
  • 2. The World Equity Market
    • World equity markets grew rapidly from 1992 to 2006
    • Market capitalization (value) of developed countries stock markets was $33 trillion at year end 1999. By year end 2002 it was $20.9 trillion
    • By 2005 the developed markets had recovered and their market capitalization reached $36.5 trillion
  • 3. The World Equity Market
    • Markets fluctuate with economic activity
    • Over time markets recover with the economy
    • World markets had a strong recovery in 2003 and continued into 2007.
    • Developed world securities markets continue to expand
    • Major growth also in the emerging markets
      • Argentina - Brazil - China Taiwan -- Mexico
  • 4. Emerging Markets Share 2002 and 2005
    • 2002 2005
    • Mideast and Africa 18% > 31%
    • South Asia 12% > 14%
    • East Asia 48% < 29%
    • Eastern/Central Europe 7% > 11%
    • Latin America 15% = 15%
  • 5. Diversification Benefits
    • Invest in foreign markets for diversification
    • Foreign markets do NOT move in harmony with each other
    • Diversified portfolio from many countries is less volatile than domestic portfolio - could even have a higher rate of return
    • As the world markets become more global , returns between countries may become more harmonized.
  • 6. Diversification Benefits cont.
    • Correlation between the historical returns of different countries is less than 1.0
    • Richard Roll: Most significant factor relating to the size of the market decline in each country was the beta, , of that market to the world market index
    • No country continually outperforms the others on an annual basis
  • 7. Risk Reduction with International Securities
  • 8. Degree of Diversification
    • Measure correlation of stock movements
    Correlation Coefficient: Measures movement of one series of data over time to another series of data - in this case stock market returns
  • 9. Assets with correlation coefficient of less than 1 reduce amount of risk No relationship 0 Two variables move opposite of each other Perfect negative -1 Two variables move together up and down Perfect positive 1 Implication Relationship Coefficient
  • 10. Correlation Coefficients Between Foreign Markets and U.S. Markets in $ rates of Return 0.78 0.55 Average 0.82 0.64 United Kingdom 0.72 0.53 Switzerland 0.82 0.55 Spain 0.86 0.66 Netherlands 0.36 0.31 Japan 0.77 0.37 Italy 0.89 0.54 Germany 0.87 0.58 France 0.80 0.77 Canada 0.72 0.48 Australia Correlation Correlation Country 2000-2005 1985-2003
  • 11. Correlations of Total Return between U.S. Markets and Emerging Markets in U.S. Dollars 2000-2005 0.39 South Africa 0.45 Russia 0.44 Taiwan 0.49 India 0.40 China 0.73 Mexico 0.72 Brazil 0.34 Argentina Correlation Coefficients
  • 12. Return Potential in International Markets International diversification Less risk exposure Possible higher returns
    • Several countries had long-term growth
    • rates superior to U.S. in terms of real GDP:
    • Singapore
    • China
      • Norway
    +
  • 13. Returns in Developed Markets In U.S. $ 4.1 32.2 41.3 -6.3 Italy 17.0 15.9 36.3 -10.9 Switzerland 6.7 30.1 59.9 -11.8 Spain 11.6 23.2 45.3 -16.3 Hong Kong 11.4 16.9 65.2 -29.9 Germany 28.6 24.7 56.7 -10.8 Canada 11.9 20.8 42.8 -18.6 France 9.1 21.3 34.2 -14.2 United Kingdom 28.0 16.9 38.6 -8.7 Japan 6.6% 12.5% 31.9% -21.4% United States 2005 2004 2003 2002
  • 14. 5 Yr. Returns in Emerging Markets in U.S. $ 2000-2005 7.68% Italy 6.00% Switzerland 13.20% Spain 8.40% Hong Kong 6.60% Germany 14.60% Canada 6.00% France 6.36% United Kingdom 7.68% Japan 3.12% United States
  • 15. Return Potential in International Markets
    • Many countries are highly competitive in
    • automobiles, steel, & consumer electronics
    Capital formation and potential investment opportunity
      • Germany
      • Japan
      • France
      • Canada
    3. Enjoy higher individual savings rates than U.S.
  • 16. Annualized rates of return of world indexes over 32-yr. period 1969-2001
  • 17. Current Quotations on Foreign Market Performance
    • Track performance of selected world markets
    • 1st index EAFE =Europe, Australia, FarEast
    • Quotes are in local currencies & in U.S. $
    • U.S. investors compare returns in U.S. against an investment in U.S. stock market
    Instructions to navigate msci website: on Power Point tool bar click View , choose Notes Page www.msci.com
  • 18. Other Market Differences
    • Culture
    • Willingness to take risk
    • Desire for dividend income versus growth in share value
    • Number & type of companies available to stockholders
    • Bureaucratic differences
  • 19. Other Market Differences cont.
    • Accounting conventions
    • Government regulation of markets
    • Problem with comparing P/E ratios:
    • Earnings calculated differently according to local or regional accounting
  • 20. Currency Fluctuations and Rates of Return
    • Tracking foreign markets requires adjustments
    • Reported returns adjusted for
    • foreign currency effects
    • How important is the foreign currency effect in relation to overall return performance in foreign currency?
    • Do foreign exchanges overpower actual return on investments in foreign countries?
  • 21. Currency Fluctuations and Rates of Return
    • Foreign currency effect is about 10 to 20% as significant as the actual return performance in the foreign currency
    • If dollar is rising/falling rapidly over a short period the impact can be much greater
  • 22. Currency Fluctuations and Rates of Return
    • Investment in Switzerland: 10% return
    • CHF declines by 5% against U.S. $
    • CHF profits are worth less in $
    • Gain on investment:
    • 110% (Investment with 10% profit)
    • Adjusted value of CHF relative to U.S. $
    • = 0.95 =1.00 - 0.05 decline in currency
    • 104.5% (= 110 x 0.95) of original investment
    • Actual return in U.S. $ 4.5% instead of 10%
    Swiss franc = CHF
  • 23.