Prepared by:

Monisha

Sinha Roll

no. – 68

PGDM - II

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

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

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.

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.

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.

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

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.

Risks of Global Investing

Political Risk

Currency Risk

Custody Risk

Liquidity Risk

Market Volatility

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.

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

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.

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.

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.

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 ith foreign market is as

follows:

Ri INR = (1+Ri) (1+ei) – 1

= Ri + ei + Riei

where ,

Ri= foreign currency rate of return in the ith foreign market

ei= rate of change in the exchange rate between the foreign currency and the

INR.

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 (Ri= 0.14). During the same period the US

dollar depreciated 4% against the INR (ei = -0.04). The realized

rate of return in terms of INR from this investment is :

Ri 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 (Ri INR) = Var (Ri) + Var (ei) + 2 CoV (Ri, ei) + Var

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

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)

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)

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.

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

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