Module 9 International

1. Module 9International

2. Module 9 Learning Objectives • Evaluate international economies and growth rates. • Differentiate between developed and emerging markets. • List the pros and cons of investing in foreign companies listed on U.S. exchanges and ADRs. • List the benefits of investing in international funds. • List the pros and cons of international bonds as compared to domestic bonds. • Evaluate international investments using: • Economic growth rates • Political risk • Currency risk • Index performance • Industry analysis • Correlation with U.S. investments • Locate and download information to evaluate international investments from internet sources.

3. Test your knowledge • How many countries are there in the world? • 250 according to the CIA • How many have stock markets? • 52 large ones counted in the World Stock Exchange Federation • What is the value of the stock exchanges? • $50 trillion in 2006 – US is less than $20 T

4. What Is International Investing?

5. Why Invest Internationally? • Lots of economic activity and growth outside of the U.S.

6. Go to www.cia.gov and click on the The World Factbook. Go to the country listing and find the GDP growth rates for each of the following countries: • Canada • Spain • South Korea • Russia • Indonesia

7. Source: World Federation of Exchanges http://www.world-exchanges.org/WFE/home.Asp

10. In emerging market winners one year---

11. were losers the last year.

14. Choices - International Investments • Country • Region • Developed or Emerging markets

15. Developed Markets Large economies. High GDP per capita. Sophisticated markets. Categorized as U.S., Japan, and Europe.

16. Which of the following are developed markets?

17. Emerging Markets Rest of Asia, Latin America, Middle East, South Africa,Central and Eastern Europe. High risk - Spectacular gains and losses. Emerging markets become developed markets.

18. Choices - Regions and Countries

19. More recent risk return

20. Buying International Investments • Buying investments in foreign countries is not easy • Many options exist here in the U.S.

21. Buying - Foreign Companies Listed on U.S. Exchanges • Over 800 foreign stocks listed on U.S. exchanges. • Must meet U.S. requirements.

22. American Depository Receipts (ADRs) • Foreign shares are put in deposit with a bank the the U.S. The bank issues ADRs. • ADRs are listed on U.S. exchanges. • Close to $900 B in ADRs are traded.

23. Find the country these companies are based in and their industry. Go to www.nyse.com – Check out foreign listings. • Vodafone Airtouch • Royal Dutch Petroleum • Nokia • Unilever • Sony • Novartis

24. Buying - International Funds • 10% of all mutual fund assets. • Fund takes care of buying, selling, and foreign requirements. • Higher fees than other funds.

25. Buying - Foreign Bonds • About $15 T in foreign bonds is outstanding. • Half issued by governments and half are private.

26. Check out www.bloomberg.com for the latest rates on Canadian, UK, French and Japanese bonds. Assessing both currency and interest rates, are there any good investments?

27. Evaluate - Growth • Growth in economy is important • Look at growth in GDP and GDP per capita • Inflation needs to be under control • Industries • One or two industries may dominate the country’s market

28. Here are some GDP per capita figures for various countries. Discuss the possibility of a strong consumer market in each country. • Czech Republic $12,289 • Kazakhstan $4,480 • Russia $6,339 • Indonesia $2,639 • Nigeria $749 • Kenya $975

29. For the following countries, compile information on GDP, GDP growth rate, GDP per capita, inflation rate, and government debt. Which one looks like the best investment prospect? Check out the www.cia.gov World Factbook, a great source of country information. Italy Germany South Korea Mexico

30. Evaluate - Government • Stability • Corruption • Economic policies • Debt level

31. How corrupt is the government?www.transparency.org

32. Evaluate - Currency Risk • Countries have different currency that are exchanged at market rates. • Major currencies are U.S. dollar, euro, and Japanese yen.

33. Evaluate - Currency Risk • Fluctuation in currency rates is a source of risk. • Economic factors of country relative to others.

34. Have Asian currencies strengthened or weakened about the U.S. dollar in the past year? • Check out http://pacific.commerce.ubc.ca/xr/ and use the service to plot the following currencies against the U.S. dollar. (Hint: You can add additional currencies on the same chart by holding down Ctrl when selecting a currency.) • Hong Kong dollar • Thai baht • Indonesian rupiah • Japanese yen • South Korean won

35. Evaluate - Calculating a Foreign Return • Need to factor in the effect of currency fluctuations to your return on an international investment

36. Let’s look at a Japanese investment

37. Let’s look at a German stock

38. Calculate these • You invest in Canada in 1981 at an exchange rate of $1.20 Canadian dollars to $1 U.S. dollar and cashed out in mid-2000 at an exchange rate of $1.492 Canadian dollars to $1 U.S. dollar. Your Canadian investment returned nothing over the years. • You invested in a European stock in 1993 with an exchange rate of 0.82 euro to $1 U.S. dollar and cashed out in mid-2000 at an exchange rate of 1.11 euro to $1 U.S. dollar. Your investment returns 15% over the years. • You invested in the U.K. in 1985 with an exchange rate of 0.915 pound to $1 U.S. dollar and cashed out in mid-2000 at an exchange rate of 0.657 pound to $1 U.S. dollar. Your U.K. investment returns 25% over the years. • You invest in Switzerland in 1984 with an exchange rate of 2.52 Swiss francs to $1 U.S. dollar and cash out in mid-2000 at an exchange rate of 1.72 Swiss francs to $1 U.S. dollar. Your Swiss investment returns -10% over the years.

39. What will happen to the currency? • Economists try to predict where currencies will go by looking at what it costs for buy the same thing in many countries. • Which currencies are over-valued? • Which currencies are under-valued? • The Big Mac index • http://www.economist.com/markets/bigmac/

40. Evaluate - Correlation

41. A tale of two correlations

45. Correlation • The following shows how foreign stock markets have correlated with the U.S. market. (60 monthly returns were used.) Based on correlation alone, if your goal is to diversify, which country would you choose to invest in?

46. Correlation • Look at the following data on correlation, return, and standard deviation for countries in the Americas. The Standard and Poor’s 500 had an average monthly return of 1.2% and standard deviation of 4.8% in the same period. Based on this information, which market presents the best investment opportunity?

47. Monitor • International investments need to be monitored very closely. • Country factors can change very quickly and very drastically. • Monitor credit ratings for international bonds. • Use the appropriate indexes: • Morgan Stanley World - Developed markets including U.S. • EAFE - World developed markets excluding U.S. • Europe - European developed markets • Emerging Markets