Lecture 9 Flashcards
Please list and briefly describe market classifications
Market capitalisation: Developed markets tend to have higher market capitalizations.
Market liquidity:
Developed markets are characterised by greater market depth (measured by the ratio of market capitalisation to GDP), and better liquidity (measured by the bid-ask spread or turnover ratio).
Market concentration:
High proportion of market capitalization may be concentrated among smaller number of issuing companies.
Other factors:
In certain markets there may be restrictions on certain aspects of trading like short selling, price-movement restrictions etc.
Why would an investor choose to diversify into Emerging Markets?
Risk reduction - there is historically low correlation between developed and emerging markets
High economic growth usually results in high stock market returns
High FDI leads to currency appreciation
What may be some limiting factors when it comes to investing in emerging markets
-Restriction of asset ownership by foreign nationals
-Low free float due to state ownership
-Restricted repatriation of capital
-Discriminatory taxes
-Restricted currency convertability
-Only certain authorized investors
-Low liquidity
*The investability of emerging markets will increase as a result of financial market liberalisation
What are some arguments against international diversification?
Some of the benefits of international diversification may have been overstated due to:
Correlations between markets have increased over time due to:
-Increase in free trade between nations
-Capital markets deregulation and integrations
-Increase in MNCs
-Improvement of capital mobility
Contagion may also make diversification less effective
What are cases against diversifying into emerging markets
Return correlations between emerging markets can be extremely high - Tequila effect, Asian financial crisis
-EMs may take longer to recover from
-Overall, the higher returns come at much higher risk
