 Emerging Markets

How to invest  ETFs  Mutual Funds  Index Funds

ETFs and Mutual Funds

Sector Breakdown

Index Funds  Similar to an ETF or mutual fund but tracks an entire index  Check leverage ratios  SQQQ

Emerging Market Indicators

GDP and Inflation  Connection critical in determining growth  When does inflation occur?  Inflation rate compared to GDP growth rate  Can find real and nominal rates online

GDP  GDP growth found to be uncorrelated to real returns

GDP Continued

Surprises in GDP

Trade Balance  Difference between a country’s imports and exports  Recessions trigger increase in export  Growth triggers increase in imports

Current Account  Exports less inputs  Net income from abroad  Net current transfers  Current account surplus increases net foreign assets by amount of surplus

Trailing P/E Ratio  Why is it important?  Based on actual earnings  Most accurate

Common Fallacy  Economic indicators do not tell the whole story  GDP growth does not equate to positive earnings growth

Debt to Export Ratio  Shows debt needed to fuel exports  High D/E ratio means more financing needed to fuel exports  Lower D/E is desired

Emerging Markets Risk  Foreign Exchange Rate  Non – Normal Distribution  Insider Trading Regulations  Liquidity  Capital Raising  Governance  Bankruptcy  Political Risk

Foreign Exchange Risk  Investments produce returns in origin country’s currency  Investors must convert to realize gains in USD  Currency fluctuations can impact total returns of security

Non – Normal Distribution  Returns of developed markets follow normal distribution  Emerging markets do not follow this distribution  Cannot use historical data

Insider Trading Regulations  Lax insider trading laws  Introduce market inefficiencies  Prices will deviate from intrinsic value  Highly Speculative

Corruption Index  Country’s with lower corruption figures likely have stricter regulations on insider trading  Lower rates of corruption mean lower risk for emerging market portfolio

Liquidity  Less liquid than developing markets  Higher broker fees  Slower transactions  Share Turnover = Total shares traded / Average # of Shares Outstanding

Raising Capital  Improper access to financing  Increased WACC  Lower WACC lower NPV  Less profit generating projects

Global IR 2012

Governance  Weak corporate governance  Government often involved  Restrictions on corporate takeovers

Bankruptcy  Increased chance of bankruptcy  Freedom to cook books  Higher interest rates on corp. debt  Heavier financial burden

Corporate Bankruptcy Filings

Political  Adverse political decisions  War  Tax Increase  Loss of subsidy  Change of market policy  Inability to control inflation  Laws regarding resource extraction

HDI  Difficult to quantify political risk but perhaps can use figures such as HDI

China Analysis  Shanghai Composite Index closes out Q1 as worst preforming global measure – down 15%  March rebound has helped

Leverage

Volatility and Price Swings

New Investors

P/E Ratios

Would you invest in China?