Transcript Fourth PPT File

GLOBAL INVESTING
AND THE
RISE OF CHINA,
INDIA, AND
GLOBAL INVESTING AND THE
RISE OF CHINA, INDIA, AND EMERGING
MARKETS
FINA 425
Prof. Dr. Korhan GOKMENOGLU
BY:
SIAMAND HESAMI
MARAL MEREDOVA
ELNUR SAMADLI
OVERVIEW:
 THE WORLD’S POPULATION, PRODUCTION, AND
EQUITY CAPITAL
 CYCLES IN FOREIGN MARKETS
 DIVERSIFICATION IN WORLD MARKETS
 THE WORLD IN 2050
Introduction:
 Until the late 1980s foreign markets were almost
exclusively the domains of native investors and were
considered too remote or risky to be entertained by outsiders.

At the end of World War II, U.S. stocks was almost 90
percent of the world’s equity capitalization;

But today, the U.S. market constitutes considerably less
than half of the world’s stock value, and that fraction is
shrinking.
Introduction:
 To invest only in the United States is to ignore the majority of
the world’s equity capital.
The 2005 World Population
The 2006 World GDP
The 2007 World Equity
The emerging nations’ share of output and equity
capital has been rising rapidly and will
continue to do so.
CYCLES IN FOREIGN MARKETS
• In the past, strong U.S. markets were often coupled
with weak foreign markets and vice versa. In the
1970s and 1980s, U.S. stock returns lagged behind
both Europe and Japan, then surged to the head of the
pack in the 1990s, only to lag behind again this
decade.
These differences in returns emphasize the importance of
maintaining a well-diversified world portfolio.
The Japanese Market Bubble
• In the 1970s and 1980s, Japanese stock returns averaged more than 10
percentage points per year above U.S. returns.
• In 1989, for the first time since the early 1900s, the market value of the
American stock market was no longer the world’s largest.
• The Nikkei Dow Jones, which had surpassed 39,000 in December 1989,
fell below 8,000 in 2002.
• The mystique of the Japanese market was broken.
The Emerging Market Bubble
• The collapse of the Japanese market shifted the emphasis of
global enthusiasts to emerging markets: India, Indonesia, and
even China, Latin America, Argentina, Brazil, and Mexico.
• The year 1997 marked the beginning of the collapse.
• In that two-year period, virtually no emerging market was safe.
• Most of the stock markets fell by at least 50% in dollar terms.
The New Millennium and the
Technology Bubble
• The last three years of the twentieth century, marked by the
emergence of a huge technology bubble.
• A few months into the new millennium, the technology bubble
burst and stocks fell into a severe bear market.
• All of the developed countries’ markets fell by at least 50
percent: from March 2000 through October 2002.
What have these market cycles taught us about international
stocks?
 No single market is always dominant,
 The globalization of the world markets affords investors more
opportunities for spreading their risk than are available in the
domestic markets.
DIVERSIFICATION IN WORLD
MARKETS
 The principal motivation for investing in foreign stocks is not
that foreign countries are growing faster and therefore will
provide investors with better returns.
• Foreign investing provides diversification.
• International diversification reduces risk.
• This asynchronous movement of returns dampens the volatility
of the portfolio.
• The correlation of returns between stocks or portfolios of
stocks is measured by the correlation coefficient.
• An asset with a low correlation with the rest of the market
provides better diversification than an asset with a high
correlation.
“Efficient” Portfolios: Formal Analysis
How do you determine how much should be invested at home
and abroad?
• by analyzing the historical return data
• by mathematical techniques of formal portfolio analysis
Risk-return trade-off ( Efficient Frontier)
Sector Diversification
• Returns between international industrial
sectors are not becoming more correlated
• One reason for the decreased correlation
between sectors is the moderation of the
business cycle, which means that shifts in
sector demands, rather than changes in the
overall economy, become the primary sources
of changes in firm profitability. (International
Incorporations)
Sector Allocation around the World
The financial sector is the largest sector in every region of the
world
• The largest share of the financial market value sector is found
in Europe, belonging to companies such as HSBC, UBS, and
the Royal Bank of Scotland.
•
The partial privatization of the Bank of China, the Industrial
and Commercial Bank, and the China Construction Bank
have also made this sector the largest in the emerging
markets.
•
In the United States, the largest financial firms are
Citigroup, Bank of America, and AIG.
Top 20 U.S. and Foreign Companies by Total Market Value in June 2007
Private and Public Capital
• Exxon Mobil may be the largest company by market value in the
world and it has the largest reserves of oil and gas (20 billion
barrels).
• Saudi Arabia’s Aramco and Iran’s NIOC have reserves of about
300 billion barrels!
• In many countries, gas, electric, and water facilities are still owned
and operated by government
• Growth of the world’s capital stock will come not only from private
entrepreneurs but from the privatization of many government-owned
assets.
The 2050 World Population
The 2050 World GDP
The 2050 World Equity
List of countries by future GDP estimate
Conclusion:
 Sticking only to U.S. equities is a risky strategy for investors.
 Sticking only to U.S. equities would be just such a bet since
U.S.-based equity will likely shrink to less than 18 percent of
the world market by midcentury.
 Equity in China and India will grow to more than one-third of
the world’s equity market and be twice the size of the United
States.
 Only those investors who have a fully diversified world
portfolio will be able to reap the best returns with the lowest
risk.
HAPPY INVESTING
THANK YOU
QUESTIONS?