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 ContentsSummary..........................................................................................................................................................................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

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SummaryWhen you have an amount of money that you don’t 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, it’s a tough decision. Usually, you don’t have to invest just in one country. In this project you’ll learn how investors make decisions, what kind of risks exist and in plus you’ll 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, you’ll 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.

IntroductionGlobal 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.

ResultsGlobal 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 investmentThe 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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Picture 1: Biggest risk to global capital markets in 2014, Source: http://www.cfainstitute.org/about/research/surveys/Documents/gmss_2014_whitepaper.pdf

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

global political instability is the biggest risk facing the global economy in 2014. (GLOBAL MARKET SENTIMENT SURVEY, 2014)

Investment decisionsThe 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 investor’s rights (Factors Influencing Foreign Investment Decisions, 2014)

Investment in 2014Investors 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 Eurozone’s 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 marketsThe 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 anti-

business is not true. Companies

will continue to thrive in Turkey."

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

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Picture 3: Investment in Turkey, Source:http://www.telegraph.co.uk/finance/personalfinance/investing/10124566/Three-booming-stock-markets-from-the-investment-frontier.html, verified on 10/05/2014

Picture 4: Investment in Nigeria, Source:http://www.telegraph.co.uk/finance/personalfinance/investing/10124566/Three-booming-stock-markets-from-the-investment-frontier.html, verified on 10/05/2014

Picture 6: Foreign direct investment in Republic of MoldovaSource: http://www.miepo.md/pageview.php?l=ro&id=176&idc=72, Verified on 11.05.2014

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.

Ghadir Abu Leil-Cooper, the Barings

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)

MOLDOVADespite 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

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Picture 5: Investment in Qatar, Source:http://www.telegraph.co.uk/finance/personalfinance/investing/10124566/Three-booming-stock-markets-from-the-investment-frontier.html, verified on 10/05/2014

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 world’s 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 Moldova’s 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 Nigeria Qatar Turkey Moldova India China USA1999 299 21660 4012 321 455 865 346392000 378 29914 4220 354 457 949 364672001 350 28667 3058 408 466 1042 372862002 457 30749 3576 459 487 1135 381752003 510 35644 4595 548 565 1274 396822004 646 44052 5867 721 650 1490 419292005 804 54229 7130 831 740 1731 443142006 1015 62921 7736 951 830 2069 464442007 1131 69167 9312 1231 1069 2651 480702008 1376 84813 10379 1696 1042 3414 484072009 1091 62528 8626 1526 1147 3749 469992010 2294 72773 10135 1632 1417 4433 483582011 2519 90805 10605 1971 1540 5447 498542012 2722 93825 10666 2038 1503 6091 51749

Standard deviation 828,9269 24529,17 2868,317 622,3441 402,3786 1753,56 5614,118

Mean 1113,714 55839,07 7136,929 1049,071 883,4286 2595,714 43740,93Table 1: GDP per every country and calculations results of Standard deviation and MeanSource for GDP data: http://data.worldbank.org, Source for Standard deviation and mean: Author work

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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 can’t 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 ConclusionSolutions to improve investor’s 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.

BibliographyFactors 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/standard-deviation-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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