CH 10 - 5 Overseas markets

Question 1

5 Overseas markets

1. Introduction

Answer 1

Objective of investment strategy: Balance risk and reward.
Role of overseas investment: Diversify risk, match liabilities, and/or increase expected returns.
Challenges: Additional investment and management problems.

Question 2

5 Overseas markets

2. Reasons for Overseas Investment

Answer 2

Matching liabilities in foreign currency:
Protect against adverse currency movements.
Invest in overseas assets matching foreign currency liabilities.
Example: A European pension fund with USD liabilities investing in US bonds.
Increasing expected returns:
Higher returns may be due to higher risk or market inefficiencies.
Example: Emerging markets can offer higher potential returns but with higher risk.
Reducing risk via diversification:
Diversify by investing in less correlated economies and industries.
Examples:
Investment in a different currency or stock market.
Access to industries unavailable domestically.
Constructing a portfolio with a larger pool of companies.

Question 3

5 Overseas markets

3. Problems of Overseas Investment

Answer 3

Market performance differences:
Mismatching risk if overseas markets behave differently than domestic ones.
Currency fluctuation risk:
Potential for quick losses due to volatile currency values.
Example: Yen’s 8.6% rise after Japan’s 2011 tsunami.
Increased expertise required:
Extra variables like analyzing foreign economies, currencies, and overcoming poor information.
Administrative challenges:
Need for overseas custodians for asset safekeeping, dividend handling, etc.
Different tax treatments:
Withholding tax, possible double taxation, mitigated by agreements between countries.
Accounting practices:
Issues with less information, language barriers, and time delays (though improving).
Political and market risks:
Risks from political instability, poor market regulation, or liquidity issues.
Example: Restrictions on foreign ownership of shares.

Question 4

5 Overseas markets

4. Key Features of Freehold Property Investment in Outer Mongolia

Answer 4

Characteristics:
Long-term investment providing real returns (inflation-adjusted).
Likely to be unmarketable with challenges in repatriating funds.
Issues for European investors:
1. Political risks and legal protections for ownership and rental agreements.
2. Language, cultural barriers, and difficulty maintaining distant properties.
3. Exchange rate dependence for returns in domestic currency.
4. Check for double taxation agreements to reduce tax impact.