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Emerging Financial Markets 7. Diversification Can Help Reduce Risk

Emerging Financial Markets 7. Diversification Can Help Reduce Risk. Prof. J.P. Mei. Will Rogers once said: "Take all your savings and buy some good stocks and hold it 'til it goes up, then sell it. If it don't go up, don't buy it". Note:

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Emerging Financial Markets 7. Diversification Can Help Reduce Risk

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  1. Emerging Financial Markets 7. Diversification Can Help Reduce Risk Prof. J.P. Mei

  2. Will Rogers once said: "Take all your savings and buy some good stocks and hold it 'til it goes up, then sell it. If it don't go up, don't buy it". Note: People only complain about diversification when their main bet is winning.

  3. International Allocations 2

  4. International Performace 2

  5. International Diversification • Benefits of International Investment • High return potential (market segmentation) • Lower risk through Diversification • Short- vs. Long-term Correlation among emerging markets • Short-term correlation tend to increase during market crisis. • Long-term Correlation between emerging and developed markets tend to be much less volatile. 2

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  10. The home country bias • The sorry state of Japanese retirees • Chile’s AFPS, Mexico, and Bolivia Pension Scheme • The "self-interest" of Financial Institutions limits diversification • Why not just invest in multi-nationals? -They move like pure domestic stocks 6

  11. The Japanese know how to save, but they have a lot to learn about putting their money to workJapanese personal financial assets, $9.6 trillion

  12. US Investors have a more diversified portfolioU.S. personal financial assets*, $21 trillion

  13. The Ten largest US MultinationalsSource: Forbes 8

  14. Obstacles to International Diversification • Lack of Information • Difficult to trade (high cost) • FX risk & political risk • Benefits are not certain • What is best way of doing it? • You may not need to go overseas. Use ADRs could capture most benefits. 9

  15. Direct Investment • Buying Emerging Market Stocks Directly • (1999 new issue $22B, up 44%) • How do ADRs trade? Just like IBM. • Pay dividends in $ • Greater Disclosure & GAAP accounting • Lower custody cost (save 20-110 bp) • Downside: • Limited menu which may track local market poorly • Not appropriate for outperforming the local index 2

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