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Emerging Markets S How to invest S ETFs S Mutual Funds S Index Funds ETFs and Mutual Funds Sector Breakdown Index Funds S Similar to an ETF or mutual fund but tracks an entire index S Check leverage ratios S SQQQ Emerging Market Indicators GDP and Inflation S Connection critical in determining growth S When does inflation occur? S Inflation rate compared to GDP growth rate S Can find real and nominal rates online GDP S GDP growth found to be uncorrelated to real returns GDP Continued Surprises in GDP Trade Balance S Difference between a country’s imports and exports S Recessions trigger increase in export S Growth triggers increase in imports Current Account S Exports less inputs S Net income from abroad S Net current transfers S Current account surplus increases net foreign assets by amount of surplus Trailing P/E Ratio S Why is it important? S Based on actual earnings S Most accurate Common Fallacy S Economic indicators do not tell the whole story S GDP growth does not equate to positive earnings growth Debt to Export Ratio S Shows debt needed to fuel exports S High D/E ratio means more financing needed to fuel exports S Lower D/E is desired Emerging Markets Risk S Foreign Exchange Rate S Non – Normal Distribution S Insider Trading Regulations S Liquidity S Capital Raising S Governance S Bankruptcy S Political Risk Foreign Exchange Risk S Investments produce returns in origin country’s currency S Investors must convert to realize gains in USD S Currency fluctuations can impact total returns of security Non – Normal Distribution S Returns of developed markets follow normal distribution S Emerging markets do not follow this distribution S Cannot use historical data Insider Trading Regulations S Lax insider trading laws S Introduce market inefficiencies S Prices will deviate from intrinsic value S Highly Speculative Corruption Index S Country’s with lower corruption figures likely have stricter regulations on insider trading S Lower rates of corruption mean lower risk for emerging market portfolio Liquidity S Less liquid than developing markets S Higher broker fees S Slower transactions S Share Turnover = Total shares traded / Average # of Shares Outstanding Raising Capital S Improper access to financing S Increased WACC S Lower WACC lower NPV S Less profit generating projects Global IR 2012 Governance S Weak corporate governance S Government often involved S Restrictions on corporate takeovers Bankruptcy S Increased chance of bankruptcy S Freedom to cook books S Higher interest rates on corp. debt S Heavier financial burden Corporate Bankruptcy Filings Political S Adverse political decisions S War S Tax Increase S Loss of subsidy S Change of market policy S Inability to control inflation S Laws regarding resource extraction HDI S Difficult to quantify political risk but perhaps can use figures such as HDI China Analysis S Shanghai Composite Index closes out Q1 as worst preforming global measure – down 15% S March rebound has helped Leverage Volatility and Price Swings New Investors P/E Ratios Would you invest in China?