2. Prepared by: Monisha Sinha Roll no. – 68 PGDM - II

3. 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

4. 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

5. 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.

6. 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.

7. 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.

8. 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

9. 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.

10. Risks of Global Investing Political Risk Currency Risk Custody Risk Liquidity Risk Market Volatility

11. 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.

12. 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

13. 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.

14. 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.

15. 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.

16. 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 i th foreign market is as follows: R i INR = (1+R i ) (1+e i ) – 1 = R i + e i + R i e i where, R i = foreign currency rate of return in the i th foreign market e i = rate of change in the exchange rate between the foreign currency and the INR.

17. 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 (R i = 0.14). During the same period the US dollar depreciated 4% against the INR (e i = -0.04). The realized rate of return in terms of INR from this investment is : R i 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 (R i INR) = Var (R i ) + Var (e i ) + 2 CoV (R i, e i ) +  Var

18. 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

19. 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)

20. 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)

21. 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.

22. 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

23. 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