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SMK University of Social Applied Sciences

International Business 2012 specialization

Individual course work:

Investment decisions in the global market

Student:
Cerga Natalia
SMK Erasmus student
E-mail: ncerga@yahoo.com

Course tutor:
Muhammad Sohail

Data of submission

17 may 2014

Table of Contents
Summary........................................................................................................................................ 3
Objectives.................................................................................................................................... 3
Paper abstract:.................................................................................................................................. 3
Introduction..................................................................................................................................... 3
Results........................................................................................................................................... 4
Country risk for international investment................................................................................. 4
Investment decisions................................................................................................................ 5
Investment in 2014.................................................................................................................. 6
The emergency and frontier markets....................................................................................... 6
Calculations................................................................................................................................. 9
Recommendations and Conclusion............................................................................................... 11
Bibliography..................................................................................................................................... 11

Summary
When you have an amount of money that you dont need, you have to find a good way of using them.
One of them is investment, but here you have to be careful because of the risk that they involve. The problem is
usually: Where and why do you have to invest? And how much revenue will you get from it?
So, its a tough decision. Usually, you dont have to invest just in one country. In this project youll learn
how investors make decisions, what kind of risks exist and in plus youll see some examples of frontier and
emergency markets that have a good possibility to become an emergency or developed market in near future.
Mostly, investors do care about economy conditions and political situation inside a country. Here, youll find
some calculations of standard deviation that shows us economical risk present inside the country, according to
GDP data from 1999-2012.
Turkey is famous because of their turmoil and it was named China of Europe for the reason that labor is
cheap and it has all the benefits of being part of Europe. Nigeria has more than 170 million people and is rich in
resources, oil and timber being the main exports. Qatar is the richest nation in the world per head and it was
reclassified as emerging markets that cause hundreds of millions of dollars of foreign investment into the
region. Republic of Moldova has the cheapest labor in Europe and a geographical good position, being between
European Union and Eurasian Economic Union. The main natural resources that Moldova is famous are white
stones, sand and clay.
In conclusion, there are some countries with a good perspective in future that give you good investment
opportunities for a long-term, but at the same time it includes a high risk with a possible high profit!

Objectives

To see what is global market and investment


To find how to make investment decisions
To identify what kind of risks exist in global market
To study some frontier markets like Turkey, Nigeria, Qatar and Moldova that have a good position

to become an emergency market.


To calculate standard deviation for Turkey, Nigeria, Qatar, Moldova, India, China and USA.

Paper abstract:
The main purpose of this project is to understand how to make an investment decision and to explore
methods used to manage risk in the global markets. I studied web-documents or articles about this topic and I
used to give more attention for frontier and emergency markets. Also, I utilized one of the methods to calculate
risk, especially economic one: Standard deviation for which I worked with GDP data. I made all calculations
and graphs in Microsoft Excel, using data analysis tool for making descriptive statistics calculations.

Introduction
Global marketing include 3 main markets: developed, emergency and frontier. Investment is time,
energy, or matter spent in the hope of future benefits. According to the reports that I studied for 46 % of
investors pension and retirement saving is the key objective in 2014 and 5% of investors say they will invest
with a time horizon of ten years or more in mind. Direct investors care about the rules and regulations for
foreign investors, standards of treatment of foreign affiliates, the functioning and efficiency of local markets,
trade policy and privatization policy, business facilitation measures, restrictions and so on. Mostly, investors are
going in the verified markets where they are sure that will get an investment revenue, but also, there is another
category of risky investors who are going to invest money in frontier markets. This markets are mainly for
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those who have enough money to lose and are so much risky to invest the last money for the highest revenue or
the biggest waste.
Some examples of this countries are Turkey, Nigeria, and Qatar and also I consider my home country
Moldova. Moldova is a poor country with political instabilities, but because of its geographical position, the
cheapest labor in Europe and results of Standard deviation it is a good market to invest for a long-term period.

Results
Global marketing is a marketing on a worldwide scale reconciling or taking commercial advantage of
global operational differences, similarities and opportunities in order to meet global objectives.
Investment is time, energy, or matter spent in the hope of future benefits. Investment has different
meanings in economics and finance.
In economics, investment is the accumulation of newly produced physical entities, such as factories,
machinery, houses, and goods inventories.
In finance, investment is putting money into an asset with the expectation of capital appreciation,
dividends, and/or interest earnings. This may or may not be backed by research and analysis. Most or all forms
of investment involve some form of risk, such as investment in equities, property, and even fixed interest
securities which are subject, among other things, to inflation risk. It is indispensable for project investors to
identify and manage the risks related to the investment. (Global market and investment)
Country risk for international investment
The decision of investing in foreign securities involves an analysis of various mutual funds, exchange
traded funds, or stock and bond offerings.
Two main risk sources need be considered when investing in a foreign country:

Economic risk: This risk refers to a country's ability to pay back its debts. A country with stable finances
and a stronger economy should provide more reliable investments than a country with weaker finances
or an unsound economy.
Political risk: This risk refers to the political decisions made within a country that might result in an
unanticipated loss to investors. While economic risk is often referred to as a country's ability to pay back
its debts, political risk is sometimes referred to as the willingness of a country to pay debts or maintain a
hospitable climate for outside investment.

When considering international investments, there are three types of markets from which to choose:
Developed markets consist of the largest, most industrialized economies. Their economic systems are well
developed, they are politically stable and the rule of law is well entrenched. Examples of developed markets
include the U.S., Canada, France, Japan and Australia.
Emerging markets experience rapid industrialization and often demonstrate extremely high levels of economic
growth. This strong economic growth can sometimes translate into investment returns that are superior to those
available in developed markets. In addition to carefully evaluating an emerging market's economic and
financial fundamentals, investors should pay close attention to the country's political climate and the potential
for unexpected political developments. Examples include China, India and Brazil.
Frontier markets represent "the next wave" of investment destinations. These markets are generally either
smaller than traditional emerging markets, or are found in countries that place restrictions on the ability of
foreigners to invest. Although frontier markets can be exceptionally risky and often suffer from low liquidity,
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they also offer the potential for above-average returns over time. As with emerging markets, investors in
frontier markets must pay careful attention to the political environment, as well as to economic and financial
developments. Examples of frontier markets include Nigeria, Botswana and Kuwait. (Factors Influencing
Foreign Investment Decisions, 2014)
Notwithstanding the greater level of
optimism, members still see risks for the
global economy (Picture 1). For example,
members in China and India say that weak
economic conditions are the biggest risk
to performance of the global capital
markets (44% and 43%, respectively).
Members in Japan (43%), Canada (32%),
and Switzerland (30%) instead feel that
Picture 1: Biggest risk to global capital markets in 2014, Source:
http://www.cfainstitute.org/about/research/surveys/Documents/gmss global political instability is the biggest risk
_2014_whitepaper.pdf
facing the global economy in 2014. (GLOBAL MARKET SENTIMENT SURVEY, 2014)
Investment decisions
The first choice is to decide where to invest, by choosing among several possible investment
approaches. It is important to understand the factors that influence where and why companies decide to invest
overseas.
Direct investors tend to look at a number of factors relating to how they will be able to operate in a
foreign country:

the rules and regulations pertaining to the entry and operations of foreign investors
standards of treatment of foreign affiliates, compared to nationals of the host country
the functioning and efficiency of local markets
trade policy and privatization policy
business facilitation measures, such as investment promotion, incentives, improvements in amenities
and other measures to reduce the cost of doing business. For example, some countries set up special
export processing zones, which may be free of customs or duties, or offer special tax breaks for new
investors
restrictions, if any, on bringing home earnings or profits in the form of dividends, royalties, interest or
other payments

Because portfolio investment earnings are more likely to be tied to the broader macroeconomic indicators of
a country, such as overall market capitalization of an economy, they can be more sensitive to factors such as:

high national economic growth rates


exchange rate stability
general macroeconomic stability
levels of foreign exchange reserves held by the central bank
general health of the foreign banking system
liquidity of the stock and bond market
interest rates

In addition to these general economic indicators, portfolio investors also look at the economic policy
environment as well, and especially:

the ease of repatriating dividends and capital


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taxes on capital gains


regulation of the stock and bond markets
the quality of domestic accounting and disclosure systems
the speed and reliability of dispute settlement systems
the degree of protection of investors rights (Factors Influencing Foreign Investment Decisions, 2014)

Investment in 2014
Investors worldwide turn to equity markets for growth in 2014 with four-fifths planning to maintain or
increase the amount they invest and save this year according to Schroders Global Investment Trends Report.
The Eurozones economic situation is improving slowly, but growth is constrained. The report indicates that
despite the uncertainty investors are bullish, with more than half (56%) of those surveyed more confident about
investment opportunities in 2014 compared to last year (up nearly 10% from 2013), and just 11% saying they
are less confident than last year.
Overall, according to Picture 2, Asia Pacific remains the region that investors expect to deliver the strongest
growth, with 39% of investors identifying the region as the core growth driver in 2014. Unsurprisingly, given
the recent volatility in emerging markets, this is a marked decrease from last year, when 46% of investors saw
the region as the likely top investment hotspot. Investors are starting to look to place new money into mature
economies that are seen to offer more stable potential returns and currently stronger opportunities. This report
suggests that investors are seeking growth opportunities, looking both inside and outside of their national
boundaries. On average 70% of global investors believe equities will deliver the best returns over the next 12
months unsurprising perhaps given their strong performance towards the end of last year, but equally not
without challenges in a still transitioning global economy.

Picture 2: Investors expect of strongest growth in market, Schroders Global Investment Trends Report, 2014.

Indeed the Schroders Global Investment Trends Report shows that 82% of those polled will either increase
the amount they invest, or keep it the same as last year. (Schroders Global Investment Trends Report 2014,
26/02/2014)
The emergency and frontier markets
The stock markets of less developed or less stable parts of the world offer greater riches than developed
markets because of their greater potential to grow in near future. Gone are the days when the BRIC nations
Brazil, Russia, India and China were the go-to option for investing outside the developed world. Jim O'Neill,
the author for BRIC acronym, tipped the "N-11", a term for the next 11 economies that he believed would drive
global growth. The N-11 are Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines,
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South Korea, Turkey and Vietnam. Mark Mobius, a fund manager at Templeton and an emerging market
specialist, said: "Just a few decades ago, China and India were considered frontier markets, and
when I began my investment career Japan was considered an emerging market. So you can see
how economic progression and market development often go hand in hand. "

TURKEY
There is turmoil in Turkey
between
the
metropolitan
middle class and those who are
less affluent.
"Malaysia, Thailand and India
all faced issues with civil
unrest and all offered
fantastic
opportunities
to
investors,"
the
emerging
markets fund manager said:
"To portray Turkey as antibusiness
is
not
true.
Companies will continue to thrive
Picture 3: Investment in Turkey,
Source:http://www.telegraph.co.uk/finance/personalfinance/investing/10124566/ in Turkey."
Three-booming-stock-markets-from-the-investment-frontier.html, verified on
10/05/2014
Turkey has been named the
China of Europe thanks to it being a manufacturing powerhouse. Labor is cheap and it has all the benefits of
being part of Europe easy international trading without negatives such as the troubled single currency.
Turkey has the biggest population in Europe after Germany and more households are being created.
While a generation ago those in their twenties and thirties would continue to live with parents, now young
professionals are moving out. This means more fridges, washing machines, telephone lines, and more
construction.
Exchange-traded funds, which trade as shares but are more similar to funds, allow investors to buy in to spicier
markets. The Thread needle Emerging Global Emerging Markets Equity fund has a 4% in Turkey, an
overweight stance given the country only makes up 1% of the index.
NIGERIA
Nigeria has had one of the fastest growing
stock markets in the world over the past
two years. With more than 170 million
people, it has the largest population in
Africa and is rich in resources, oil and
timber being the main exports.
Mr. Mayo said: "If the price of oil is high it
simply makes the rich richer and there is

Picture 4: Investment in Nigeria,


Source:http://www.telegraph.co.uk/finance/personalfinance/in
vesting/10124566/Three-booming-stock-markets-from-the7
investment-frontier.html, verified on 10/05/2014

no incentive for them to help reform the nation. The oil price is currently falling, which brings momentum to
reform and wealth dispersion."
Mr. Mayo tipped Zenith Bank, which is paying a yield of 8%, and will benefit as more Nigerians are lifted out
of poverty and require bank cards and mortgages. Rami Sidani, head of Schroder's Middle East & North Africa
(MENA) desk, said: The Nigerian stock market was becoming more liquid as more global investors looked
outside emerging markets for profit opportunities.
QATAR
Qatar is the richest nation
in the world per head. Both the
United Arab Emirates and Qatar
were reclassified as emerging
markets up from their former
"frontier" status.
The promotion is likely to cause
hundreds of millions of dollars of
foreign investment into the region.
JP Morgan provisionally estimated
that the inflows arising from the
upgrade would be around $570m
for Qatar and $442m for the UAE.
Picture 5: Investment in Qatar,
Source:http://www.telegraph.co.uk/finance/personalfinance/investing/10124
Ghadir Abu Leil-Cooper, the Barings
566/Three-booming-stock-markets-from-the-investment-frontier.html,
verified on 10/05/2014
MENA fund manager, has bet 20% of
her fund on the region. She said: "The upgrade should lead to an increasing number of emerging market
investors focusing on the region and should be positive for other well-funded regional countries such as Saudi
Arabia. Resource-rich economies continue to benefit from an elevated oil price environment and this means
that countries such as Qatar and Saudi Arabia are able to invest heavily in infrastructure assets, which we
believe is a requisite to supporting economic and population growth."
In Qatar investment trust, has risen by 5% since the upgrade. Its value crashed in 2008 but over three
years the price is up by nearly 60%. (Wall, june 17, 2013)
MOLDOVA
Despite recent progress, Moldova
remains one of the poorest countries in
Europe. Moldova's economy relies heavily on
its agriculture sector, featuring fruits,
vegetables, wine, and tobacco. Moldova also
depends on annual remittances of about $1.6
billion from the roughly one million
Moldovans working in Europe, Russia, and
USA. With few natural energy resources,
Moldova imports almost all of its energy
supplies from Russia and Ukraine. Moldova's
dependence on Russian energy is underscored
by a growing $5 billion debt to Russian
natural gas supplier Gazprom, largely the
Moldova
Source: http://www.miepo.md/pageview.php?
l=ro&id=176&idc=72, Verified on 11.05.2014

result of unreimbursed natural gas consumption in the separatist Transnistria region. The government's goal of
EU integration has resulted in some market-oriented progress. Moldova experienced better than expected
economic growth in 2013 due to increased agriculture production, to economic policies adopted by the
Moldovan government since 2009, and to the receipt of EU trade preferences. Moldova is poised to sign an
Association Agreement and a Deep and Comprehensive Free Trade Agreement with the EU during fall 2014,
connecting Moldovan products to the worlds largest market. Still, growth has been hampered by high prices for
Russian natural gas, a Russian import ban on Moldovan wine, increased foreign scrutiny of Moldovan
agricultural products, and by Moldovas large external debt. Over the longer term, Moldova's economy remains
vulnerable to political uncertainty, weak administrative capacity, vested bureaucratic interests, corruption, high
fuel prices that are less than in Europe, Russian pressure, and the illegal separatist regime in Moldova's
Transnistria region. But, from April 28, 2014, Moldavian citizenships have a free visa from Lisbon to
Volgograd (Russia). Moldova have the cheapest labor in Europe and rate of education is 93%.
Stock of direct foreign investment - at home: $3.448 billion in 31 December 2012 est., and $3.262
billion in 31 December 2011 est.
Stock of direct foreign investment - abroad: $108.2 million in 31 December 2012 and $88.42 million in
31 December 2011. (The World Factbook: Moldova, 2014)

Calculations
The most common risk measure used in both hedge fund and mutual fund evaluations is standard
deviation. Standard deviation in this case is the level of volatility of returns measured in percentage terms, and
usually provided on an annual basis. Standard deviation gives a good indication of the variability of annual
returns and makes it easy to compare to other funds when combined with annual return data. For example, if
comparing two funds with identical annualized returns, the fund with a lower standard deviation would
normally be more attractive, if all else is equal. (Investopedia, 2014)
For making calculations of Standard deviation I used GDP data for every country in the period of 1999
since 2012. I made calculations using Microsoft Excel and Data Analysis tool. The steps for calculations of
Standard deviation was the next ones: Data> Data Analysis> Descriptive Statistics.
Year
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Standard
deviation
Mean

Nigeria
Qatar
Turkey
Moldova
India
China
USA
299
21660
4012
321
455
865
34639
378
29914
4220
354
457
949
36467
350
28667
3058
408
466
1042
37286
457
30749
3576
459
487
1135
38175
510
35644
4595
548
565
1274
39682
646
44052
5867
721
650
1490
41929
804
54229
7130
831
740
1731
44314
1015
62921
7736
951
830
2069
46444
1131
69167
9312
1231
1069
2651
48070
1376
84813
10379
1696
1042
3414
48407
1091
62528
8626
1526
1147
3749
46999
2294
72773
10135
1632
1417
4433
48358
2519
90805
10605
1971
1540
5447
49854
2722
93825
10666
2038
1503
6091
51749
828,9269
1113,714

24529,17
55839,07

2868,317
7136,929

622,3441
1049,071

402,3786
883,4286

1753,56
2595,714

5614,118
43740,93

Table 1: GDP per every country and calculations results of Standard deviation and Mean
Source for GDP data: http://data.worldbank.org, Source for Standard deviation and mean: Author work

We can notice according to Table 1, that risk of investment is the lowest one in India and the highest in Qatar.
Also, the highest GDP, which we can see in Graph 1, are in Qatar and USA, then Turkey.

Graph 1: GDP per country; Source: Author work

Also, there is the ascending economic risk for every country I made calculations, which we can notice in Graph
2: India < Moldova < Nigeria < China < Turkey < USA < Qatar. Unfortunately, Standard deviation cant show
us the real risk of investment that mostly depends on economy conditions and political situation inside the
country (Picture 1). India and Moldova present political instabilities that make investment more risky, but the
main opportunity of investment is a cheap, professional labor.

Graph 2: Standard deviation per country; Source: Author work

Moldova is a really good country to invest, but unfortunately because of our politics and government,
foreign investors meet a lot of problems, like controls and fees for different invented cases. Also, we can speak
about corruption that is the main topic of discussion this days in Moldova and it is mostly present in the
governmental institutions and on a government level. The position of my country is really good, being between
European Union and Eurasian Economic Union. Our industry rate is lower than agriculture and services rate
which means there is a chance for those who want to invest in industry field. A bad part is that we depend on
natural energy resources to Russia and Ukraine and this things create lots of troubles with Russia.
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Recommendations and Conclusion


Solutions to improve investors trust and market integrity:

To increase economy conditions and existing regulations


To make changes that will stop corruption at a governmental level
To upgrade transparency of financial reporting and other corporate disclosures
To make better enforcement of existing laws
To develop market trading rules
To improve auditing practices and standards

Investing involves a careful analysis of the economic, political and business risks that might result in
unexpected investment losses. The country risk analysis is a fundamental step in building and monitoring an
international portfolio. Investors that use the many excellent information sources available to evaluate country
risk will be better prepared than the ones who are going to invest without any analyses. The more risky is to
invest in frontier markets and these markets will be extremely volatile and should be considered only as a tiny
part of a diversified portfolio. These markets are for investors who can afford to lose. However, even Japan was
an emergency market one day, but now it is in the top of countries where you should invest without so much
doubts.
According to economic risk calculated using standard deviation the most convenient countries to invest
are India, Moldova, Nigeria, China and Turkey, but USA and Qatar present the highest economic risk because
of their high GDP that means that they have high prices and salaries and a big competition. By the other hand,
all of this countries present political instabilities that increase investment risk and trust.

Bibliography
Factors Influencing Foreign Investment Decisions. (2014). Retrieved from Globalization101,
2014 The Levin Institute - The State University of New York:
http://www.globalization101.org/factors-influencing-foreign-investment-decisions/
Global market and investment. (n.d.). Retrieved from Wikipedia - the free encyclopedia:
https://www.wikipedia.org/
GLOBAL MARKET SENTIMENT SURVEY. (2014). Retrieved from CFA Institute:
http://www.cfainstitute.org/about/research/surveys/Documents/gmss_2014_whitepaper.pdf
Investopedia. (2014). Retrieved from Hedge Funds - Standard Deviation & Value At Risk:
http://www.investopedia.com/walkthrough/fund-guide/uit-hedge-fund-reit/hf/standarddeviation-value-at-risk.aspx
(26/02/2014). Schroders Global Investment Trends Report 2014. London: Schroder Investment
Management Limited.
The World Factbook: Moldova. (2014, APRIL 14). Retrieved from Central Intelligence agency:
https://www.cia.gov/library/publications/the-world-factbook/geos/md.html
Wall, E. (june 17, 2013). Three booming stock markets from the investment frontier. London: The
telegraph.

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