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Overseas markets (Factors to consider when investing in EM (Higher…
Overseas markets
Factors to consider when investing in EM
Higher expected return due to higher risk
extra diversification (less correlation than larger developed markets)
possibility of high economic growth
the current market valuation of the asset
currency stability and strength
level of marketability
degree of political stability
market regulation
restrictions on foreign investments
range of companies available
communication problems
availability and quality of information
markets in small countries are highly influenced by swings in international investor sentiment and a sudden big flow of cash
Practical problems with overseas investment (CATERPILLAR)
Custodian needed
Additional admin required
time delays
expenses incurred/ expertise needed
regulation poor
political instability
information harder to obtain (and less of it)
language difficulties
liquidity problems
accounting differences
restrictions on foreign ownership/ repatriation problems
Indirect overseas investment methods
investment in multinational companies based in the home market
advantages
easier to deal in the familiar home market
multinational companies will have expertise and tend to conduct their business in the most profitable areas overseas
gives access to areas where direct investment may be difficult
disadvantages
overseas earnings diluted by domestic earnings
investor has no choice in where the company transacts its business
investment in companies with substantial export trade
Investment in collective investment schemes specialising in overseas investment
investment in derivatives based on overseas assets
Reasons for investing overseas
Matching foreign-denominated liabilties
Diversification by...
country
economy
stock market
currency
industry
company
Higher expected return
as fair compensation for higher risks involved
as a result of exploiting inefficiencies
e.g. undervalued stock, market or currency
Fundamental problems with overseas investments (MTV)
Mismatching domestic liabilties
Taxation
Volatility of currency