Overseas Markets

Question 1

Objective of overseas markets

Answer 1

• Overall objective of investor : strike the correct balance between risk and reward
• Main asset classes may be offered in overseas investment markets in addition to the
  domestic market

Question 2

Reasons for overseas investment

Answer 2

• To match the liabilities in foreign currency
  o Investor with liabilities expressed in overseas currency is exposed to risk of adverse
  currency movements
  o Unless those liabilities are matched with investments in the appropriate currency
• To increase the expected returns
  o Returns on overseas investments can be higher than domestic returns
  o May be due to
  ▪ high risk leading to high expected returns or
  ▪ the existence of inefficiencies in the global market
• Applies more in the case of emerging markets
• To increase diversification and reduce risk
  o Investing in different countries or different economies with low degree of
  correlation helps to diversify risk
  o Also achieved by investing in industries not available for investment in the home
  market
  o How it achieves diversification :
  ▪ different economies,
  ▪ different currencies
  ▪ different stock markets
  ▪ a large number of companies from which to construct a diversified portfolio
  ▪ investment opportunities not available domestically

Question 3

Problems associated with overseas investment:

Answer 3

• Currency fluctuation risk
• Mismatching risk
• Different market performance to the home market
• Increased expertise needed to assess the markets
  o Extra variables to analyse- currency
  o More work required to deal with the problems of poor information
• Additional administration functions
  o Need to find -safeguard the assets, dividend tracking and handling rights issue
• Different tax treatments
  o High overall tax charges
  o Tax in country of investment and own country
• Different accounting practices
• Less information may be available compared to local home market
• Language problems
  o language for publishing accounts
• cultural differences
• Time delays due to time differences between countries
• Poorer market regulation in some countries
• Political risks
• Liquidity issues – many less developed markets are not liquid
• Marketability issues
• Basis of repatriation of funds , legal protection and risk
• Restrictions on ownership of certain assets

Question 4

Indirect overseas investment (incl advantages and disadvantages)

Answer 4

• Avoids some of the practical problems associated with direct investments
• Ways of achieving indirect overseas exposure
  o Investment in multinational companies based in home markets
  ▪ Advantages
• Easy to deal in the familiar home market
• Companies will have expertise and conduct businesses in profitable
  areas overseas – including areas where direct investment may be
  difficult
  ▪ Disadvantages
• Company’s earnings are diluted by domestic earnings
• Loss of control
  o domestic companies with overseas exposure ( imports, exports, company investing
  overseas
  o Investment in collective investments specialising in overseas markets
  o Investment in derivatives based on overseas assets