Chapter 19: Overseas Markets

Question 1

Why invest overseas?

Answer 1

• To match liabilities in a foreign currency
• To increase expected return
• To increase diversification and hence reduce the overall portfolio risk

Question 2

How may overseas investments increase expected return?

Answer 2

Expected returns may be higher on overseas investments as fair compensation for the higher level of market risk in different countries, or if there are inefficiencies in the global market which means that certain assets seem undervalued.

Equally you may expect a higher return if you expect there to be favourable currency movements.

Question 3

How may overseas investments increase diversification?

Answer 3

Investment markets in different countries are not perfectly correlated.

By investing overseas, the portfolio is exposed to different:

• economies,
• stock markets,
• currencies,
• industries,
• companies
• and opportunities not available domestically.

Question 4

What are the problems of overseas investment?

Answer 4

• adverse CURRENCY MOVEMENTS
• higher TAXATION
• higher EXPENSES
• and greater EXPERTISE required.

Practical issues:

• CUSTODIANSHIP of overseas assets.
• additional ADMINISTRATION required
• TIME delays
• EXPENSES
• REGULATION is poor
• POLITICAL problems
• INFORMATION is harder to obtain.
• LANGUAGE difficulties
• LIQUIDITY problems
• ACCOUNTING differences
• RESTRICTIONS on ownership of assets and on repatriating funds

Question 5

What are the different ways of getting overseas exposure?

Answer 5

DIRECTLY
by investing in bonds, shares, etc.

INDIRECTLY, by investing in

• multinational companies,
• exporting companies,
• collective investment vehicles,
• derivative instruments based on overseas investments.

Question 6

Discuss investment in emerging markets

Answer 6

Investments in emerging markets such as China or Mexico can offer higher expected return due to rapid industrialisation, but with high risk.

Question 7

Factors to be considered when investing in an emerging market

Answer 7

• current market valuation
• possibility of high economic growth rate
• currency stability and strength
• level of marketability
• degree of political stability
• market regulation
• restrictions on foreign investment
• range of companies available
• communication problems
• availability and quality of information