1. Investments: Analysis and Behavior
Chapter 17- Global Investing
©2008 McGraw-Hill/Irwin

2. Learning Objectives Know the benefits of international diversification
Understand the risks of international investing
Track developed and emerging markets
Recognize the home bias
Be able to utilize the different tools of international investing

3. Global investing benefits
Global stock market moves differently from domestic markets
Some international markets grow much faster than domestic markets
Global diversification: potential to cushion investor portfolios from downward fluctuations in domestic markets
Adding foreign stocks to portfolio may enhance total returns while reducing overall volatility.

4. Gross Domestic Product and GDP Growth in the Largest Economies Around the World
Annualized GDP % Growth
Country
$ billions
United States
10,949
3.5
3.3
Japan
4,301
4.1
1.2
Germany
2,403
2.3
1.5
United Kingdom
1,795
3.2
2.7
France
1,758
2.4
1.9
Italy
1,468
2.5
1.6
China
1,417
10.3
9.6
Canada
857
Spain
839
3.1
2.8
Mexico
626
1.1
3.0
South Korea
605
8.9
5.5
India
601
5.7
5.9
Australia
522
3.4
3.8
Netherlands
512
Brazil
492
2.6
Russia
433 .
-1.8
Switzerland
320
2.0
Belgium
302
2.1
Sweden
Austria
253
Average
1,538
3.6
2.9
Source: 2005 Word Development Indicators, World Bank

7. Tracking global markets
Global market indices available for investors
Problem: local indexes are computed in the local currency, using different computing methods
Morgan Stanley Capital International Inc provides consistent information for global market

8. Morgan Stanley Capital International
Apply the same company selection criteria and calculation methodology across all markets
Provide individual country coverage, regional and composite indexes for developed markets, emerging markets and all countries by region
Use full market capitalization weights
(Price x number of outstanding shares)

9. Table 17.3 MSCI Global Indices
Developed Markets - INTERNATIONAL INDICES
Emerging Markets - INTERNATIONAL INDICES
EAFE
EM (EMERGING MARKETS)
EMU
EM ASIA
EURO
EM EASTERN EUROPE
EUROPE
EM EMEA
FAR EAST
EM EUROPE
G7 INDEX
EM EUROPE & MIDDLE EAST
NORDIC COUNTRIES
EM ex ASIA
NORTH AMERICA
EM FAR EAST
PACIFIC
EM LATIN AMERICA
PAN-EURO
THE WORLD INDEX
Developed Markets - SPECIAL AREAS
EAFE + CANADA
EAFE ex UK
EASEA INDEX (EAFE ex JAPAN)
EUROPE ex EMU
EUROPE ex SWITZERLAND
EUROPE ex UK
KOKUSAI INDEX (WORLD ex JAPAN)
PACIFIC ex JAPAN
WORLD ex AUSTRALIA
WORLD ex EMU
WORLD ex EUROPE
WORLD ex UK
WORLD ex USA

10. Developed Markets Emerging Markets AUSTRALIA AUSTRIA BELGIUM CANADA
DENMARK
FINLAND
FRANCE
GERMANY
GREECE
HONG KONG
IRELAND
ITALY
JAPAN
NETHERLANDS
NEW ZEALAND
NORWAY
PORTUGAL
SINGAPORE
SINGAPORE FREE
SPAIN
SWEDEN
SWITZERLAND
UNITED KINGDOM
USA
Emerging Markets
ARGENTINA
BRAZIL
CHILE
CHINA
COLOMBIA
CZECH REPUBLIC
EGYPT
HUNGARY
INDIA
INDONESIA
ISRAEL
JORDAN
KOREA
MALAYSIA
MEXICO
MOROCCO
PAKISTAN
PERU
PHILIPPINES
POLAND
RUSSIA
SOUTH AFRICA
SRI LANKA
TAIWAN
THAILAND
TURKEY
VENEZUELA
Source:

12. Developed and Emerging markets
Developed markets: Securities markets in countries with advanced economics
Emerging markets: Securities markets in countries with rapidly evolving economics
Problems with investing in emerging markets: amount of investable assets available
much of the equity in emerging markets is not available to international investors
MSCI designates free index and non-free index.

13. Figure 17.5 The U.S., U.K., and Japan Are Dominate Developed Markets;
Korea, South Africa, and Taiwan are Major Emerging Markets

14. Countries vs. sectors
Diversifying globally is especially useful when countries have segmented markets
Alternative to country diversification: global sector diversification
MSCI developed the All Country Sector Indices using Global Industry Classification Standard (GICS) system
ETF iShares available in global sectors

15. Global Investing Risks
Market volatility
Investing in foreign market involves much higher market volatility
Above average gain, above average loss
On average, foreign markets have tended to under perform the U.S market while displaying a higher level of return

16. Table 17.4 Annual Returns in Foreign Markets Are More Volatile Than in the US
DJ Wilshire
MSCI
Year
5000
EAFE
Emerging Markets
1988
18.0%
28.6%
34.9%
1989
29.1%
10.8%
59.2%
1990
-6.2%
-23.3%
-13.8%
1991
34.3%
12.5%
56.0%
1992
9.0%
-11.8%
9.1%
1993
11.2%
32.9%
71.3%
1994
-0.1%
8.1%
-8.7%
1995
36.4%
11.6%
-6.9%
1996
21.3%
6.4%
3.9%
1997
31.3%
2.1%
-13.4%
1998
23.4%
20.3%
-27.5%
1999
23.6%
25.3%
63.7%
2000
-10.9%
-15.2%
-31.8%
2001
-11.0%
-22.6%
-4.9%
2002
-20.9%
-17.5%
-8.0%
2003
31.6%
35.3%
51.6%
2004
17.6%
22.5%
2005
10.9%
30.3%
Mean
11.9%
5.7%
10.5%
S.D.
17.4%
18.6%
33.4%
Data sources: and

17. Liquidity risk
Emerging markets often permit foreigners to buy only specific classes of shares for certain companies.
Scarcity of investment opportunity, thin volume, high premium
Higher market impact cost (costs tied to changing market bid and ask prices)
Especially high in emerging markets (brokerage commissions, exchange fees, currency translation costs, custodial fees higher in emerging markets)

18. Political risk Currency risk
Loss potential tied to government stemming from coups, assassinations, or civil unrest.
Government policy risk: lookout for policy changes
Expropriation risk: government confiscation of assets
Currency risk
Value of US dollar and all other currencies fluctuate
Strong dollar: increase in the amount of foreign currency per 1 US dollar
Weak dollar: decrease in the amount of foreign currency per 1 US dollar

20. Home bias
Despite the advantage of international investing, most investors commit very little of their investment portfolio to global equities
Home bias
Investors believe things they are familiar with are better than things they are not familiar with (familiarity bias)

22. Global investment opportunities
Buy multinational companies: exposure to international market, reduce the impact of home bias. (Ex. Coca-Cola, Wal-Mart, Toyota..)
Ways to gain global diversification
Buy stocks in companies with corporate headquarters in foreign countries
Buy stocks of multinational corporations that have globally diverse business operation

23. American Depository Receipts (ADRs)
Negotiable instruments that represent ownership in the equity securities of a non-US company
Issued by US commercial banks
Each ADR shares traded on US exchange is backed by specific number of foreign shares held by a custodian bank
ADR ratio: number of underlying shares represented by each ADR
Level I ADRs: issuers are not initially seeking to raise capital in US
Level II ADRs: no immediate financing needs, listed on US
Level III ADRs: issuer floats a public offering in US and obtain listing on major US exchange.

24. International Bonds
Domestic Bonds: Borrowers issuing bonds in their local market.
Foreign Bonds: Borrowers from another country issue bonds in your country, denominated in your currency
Yankee bonds
Samurai bonds
Bulldog bonds

25. Global mutual funds
International stock and bond mutual fund: cost efficient means of investing in global markets
Emerging market’s fund: invest in stocks of companies based in developing countries
Global equity fund (or world equity fund): a mutual fund that invests in US and foreign stocks
International equity fund (foreign fund): invest in the equity of the companies outside the US. Generally prohibited from investing in US equities
Foreign regional fund: an international fund investing in particular geographical region (Europe, Pacific Basin)
Single country fund: invest in a sole foreign country (Hong Kong, Mexico, Italy). Closed-end fund, extremely risky.

26. International iShares
Barclays Global Investors: leader in Index shares (iShares)
International iShares: track market movements around the world.
Most popular international iShares based on well-known MSCI indexes.
Good options for international exposure in an easy and cost effective way