Prices of the largest and most diversified U.S. equity index known as the S&P500 continue to increase faster relative to company earnings, leading to an overvalued U.S. market. The problem is what to do next.
Graph 1
If the trend in graph 1 continues, the chances of a market correction will continue to increase, and if a correction occurs, investors will lose value on their investments. The biggest problem with corrections is that investors holding the most stable companies with the best fundamentals tend to be driven down along with the market. This type of risk is known as systemic risk. Although this presents a buying opportunity, it could also mean taking considerable losses for other investors.
Graph 2
Figure 1
Running for Cover
To avoid this problem, many money managers have already started to shift their investments to European markets. However, this will not necessarily lead to investment outperformance due to the positive correlation of U.S. and European markets in the past year as shown in graph 2. Even more worrisome is the fact that the chance of another European crisis is very high[i], which could eat away at investment returns. More importantly, volatility lowers the risk-to-reward ratios, such as the Historical Sharpe ratio, as shown in Figure 1.
Emerging Markets
One asset class that has the potential to outperform the S&P500 over the next few years is known as the emerging market economy (EME). Regrettably, there are a limited number of emerging economies that can be accessed by the average investor. The best way to invest in these markets recently has been through equity traded funds (ETFs). These ETFs provide opportunities to investors that would like to invest in a single asset group. In the case of emerging markets, ETFs can offer low-expense ratios that are relative to actively-managed mutual funds. ETFs allow the investor to buy a single financial product that reflects the economic growth of a single country and that is composed of different industries (utilities, financials, industrials, etc.).
Graph 3
Unfortunately, many emerging market ETFs have been underperforming over the past few years due to the low commodity prices. Even worse, many emerging market economies suffer from being overdependent on one or more commodities. For example, Nigeria is highly dependent on the price of oil for its economic growth. This over-dependence has made ETFs specializing in single commodities popular with investors, but if this is the case, investing in a single commodity may be the smarter move. Graph 3 shows that the Brent Crude Oil Spot Price correlates strongly with the Global X MSCI Nigeria ETF price. As a result, if the goal is to outperform the market on a risk-to-reward basis, single commodity country dependent ETFs may not be the best choice if the ETF fails to offer diversification among various industries.
The right emerging market ETF would need to have a significant chance at being positively impacted by near future events. It would also have to be diversified enough to have a significant chance of outperforming the S&P500 on a risk-to-reward basis. More importantly, the ETF would need to serve as a hedge against S&P500 systemic risk.
Graph 4
China
Since the end of 2015, Graph 4 shows that industrial metals such as zinc and copper have signs of recovery[ii]. As the biggest consumer of industrial metals, this recovery has been driven by Chinese investment in their infrastructure. This spur in demand should continue to increase this year as the Chinese party will inaugurate its 19th National Congress party in October[iii]. Historically, change in leadership can create political upheaval within the Chinese party, which is why investors expect the Chinese government to continue to increase infrastructure spending in the hopes of maintaining political stability. Additionally, China’s infrastructure initiative, “One Belt, One Road” (OBOR), should keep driving up the price of industrial metals such as zinc and copper[iv][v]. The problem with zinc, however, is that China is the largest producer and consumer of zinc in the world. This makes it much harder to profit from this metal without a significant amount of systemic risk. The bottom line is that investing in zinc exposes individuals to China’s production and consumption whims. The result is that investing in zinc would overexpose the investor to China; then, we must look at the biggest producer of copper, Chile.
Chile
Although 60% of Chile’s export is copper, it only drives 20% of its GDP, leaving room for industry diversification[vi]. 63.4% of Chile’s economy is moved by the service sector and 32.4% by industry but only 4% by agriculture[vii]. This is an important fact because economies that are driven by services tend to have a greater elastic labor force. Additionally, Chile’s human capital is much higher than other emerging market countries[ix]. Although the country is politically stable, high tax policies and regulations have started to have an impact on the Chilean economy. Fortunately, this can be reversed given a change in leadership[x].
Sebastian Piñera
In November of this year, Chile will be having elections, and leading the polls is Former President (2010-2014), Sebastian Piñera[xi]. This self-made billionaire and Ph.D. Harvard-trained economist is promising pro-business policies and double digit growth if he wins the presidency[xii]. He argues that the Chilean economy is in trouble, not because of fundamentals, but because of over-taxation and over-regulatory policies originated by the current president, Michelle Bachelet[xiii].
Donald Trump
A tax plan, that would include infrastructure spending in the U.S. could also drive up the price of copper, which should positively influence the Chilean economy[xiv]. Although a bill has not been presented to the Senate yet, House Representative Paul Ryan assured that a bill would be introduced before August of this year[xv]. In another interview, Treasury Secretary, Steven Mnuchin stated that an infrastructure bill should be signed by the end of this year[xvi]. During the presidential election, Donald Trump promised that one of his biggest priorities would be a one-trillion-dollar infrastructure bill[xvii]. If this bill is passed, it could spur a copper rally as investors speculate on the future price of copper.
Graph 5
Copper and the USD
Graph 5 shows that copper tends to have an inverse relationship with the USD, which serves as a hedge against inflation for U.S. investors[xviii]. Although many metals, including gold, generally hold this inverse relationship, few commodities will be influenced in the next couple of years by many political and economic variables such as copper. If this inverse relationship stays constant, a decline in the USD could be good news for copper.
International Capital Asset Pricing Model
The most popular ETF with exposure to the Chilean economy is called I-shares MSCI Chile Capped[xix] (ticker symbol: ECH). Before analyzing ECH, we can use a version of an old finance model to figure out whether we should look into this ETF further. The international CAPM model can serve as a quick benchmark before spending too much time looking into the potential foreign investment.
Figure 2
Figure 3
Figure 4
Using Ishares Core S&P500 (ticker symbol: IVV) as the benchmark:
Using 10-year bonds for the U.S. and Chile:
We get the following:
5.97% represents the minimum yield that we need to consider this investment.
Graph 6
Assuming a best case scenario of $79 per share for ECH, from Graph 6, we can calculate the holding period yield (HPY):
Figure 5
Because 79.54% is greater than 5.97%, and given the economic and political events taking place in the near future affecting copper and Chile, we can consider taking a closer look at ECH.
Treynor Measure
Looking at the three-month Treynor measure, we can see that ECH is becoming a good hedge against IVV.
Figure 6
Using ten-year bonds as our risk-free rate, we can calculate the three-month Treynor measure for ECH:
Now we can compare this Treynor measure to IVV:
Since the goal is to hedge against systemic risk from the S&P500, a negative Treynor measure due to a negative beta means that ECH has outperformed IVV on a risk-to-reward basis for the past three months[xx]. Although this is only one measure of risk-to-reward performance, ECH currently seems to be performing as a hedge against IVV.
Price Multiples
Looking into ECHs’ biggest sectors, utilities represent 26.6% of this ETF while financials represent 19.95%. Recently, a bill was introduced to the Chilean Congress proposing the adoption of Basel III[xxi] Rules, which should give the Chilean financial sector access to more capital by reducing sector risk if the bill is passed into law. One of the biggest financial holdings of ECH is Banco Santander Chile (ticker symbol: BASC), which accounts for 6.54% of this ETF. Using price multiples, we can find if this bank is correctly valued.
Using the 10-year average PE Method:
Figure 7
Using the current PS Method:
Figure 8
We can find our Historical Multiple Valuation Method using the PE and PS Method:
Figure 9
Because the current price of BASC is currently $25.53[xxii], we can see, using the PE and PS method, that historical-multiple valuations indicate that Banco Santander Chile is approximately 12.8% undervalued.
Graph 6
Given the market and economic conditions in the U.S., and the market correlation with European markets, ECH proposes a diversified alternative, given the global events taking place in the near future, to outperform the S&P500 on a risk-to-reward basis. The biggest drivers of this ETF currently seem to be dependent on future Chinese infrastructure investment, the upcoming Chilean elections, Donald Trump’s infrastructure plan, and the ability of Chilean banks to attract more capital, assuming they adopt new banking regulatory standards. This does not mean that you should invest in ECH but that some risk-to-reward measures indicate that investors looking to outperform the S&P500 on a risk-to-reward basis should consider looking further into ECH.
[i] https://www.ft.com/content/8fe6f7b6-5687-11e7-80b6-9bfa4c1f83d2
[ii] http://www.mining.com/copper-lead-zinc-prices-stay-boil/
[iii] https://www.ft.com/content/cca9dd28-20de-11e7-a454-ab04428977f9
[iv] http://www.mining.com/copper-best-performing-commodity-2017-analysts/
[v] http://www.cnbc.com/2017/05/22/one-belt-one-road-why-the-real-value-of-chinas-project-could-like-in-soft-power.html
[vi] http://www.economist.com/news/business/21576714-mining-industry-has-enriched-chile-its-future-precarious-copper-solution
[vii] https://www.cia.gov/library/publications/the-world-factbook/geos/ci.html
[viii] http://reports.weforum.org/human-capital-report-2015/report-highlights/
[ix] http://reports.weforum.org/human-capital-report-2015/report-highlights/
[x] https://www.ft.com/content/6e681350-2378-11e7-a34a-538b4cb30025
[xi] http://www.reuters.com/article/us-chile-politics-left-idUSKBN16T27J
[xii] https://www.forbes.com/profile/sebastian-pinera/
[xiii] http://www.emol.com/noticias/Economia/2017/05/03/856663/Sebastian-Pinera-propone-bajar-el-impuesto-a-las-empresas-y-crear-cuerpo-colegiado-en-el-SII.html
[xiv] http://thehill.com/policy/finance/330430-trump-tax-plan-likely-to-include-infrastructure-spending-report
[xv] http://www.newsmax.com/Newsfront/paul-ryan-tax-reform-long/2017/04/19/id/785320/
[xvi] http://money.cnn.com/2017/04/20/news/economy/mnuchin-tax-reform/index.html?category=economy
[xvii] http://fortune.com/2017/02/28/trump-congress-address-infrastructure-investment/
[xviii] https://www.thebalance.com/how-the-dollar-impacts-commodity-prices-809294
[xix] https://www.ishares.com/us/products/239618/
[xx] http://investexcel.net/treynor-ratio-excel/
[xxi] http://www.reuters.com/article/us-chile-banks-idUSKBN1932BC
After reading through all this article I came to find out about the expanding portfolios which are emerging onto the markets. Now this being said this is a very good thing for us as an investor or even a consumer. But not the big dogs on wall street don’t like seeing low volume caps or penny stocks which companies are mostly just getting started and that no one knows of them just yet. So, the market for these types of companies are merged into one giant stock or what know as a ETF or EME. These are a larger stock of many different companies together. Even though buying up some ETF or EME seems like a great way to make a lot of money, just like everything else in the stock market it could still be dangerous to invest into since you don’t know if they category of stock is doing good or not. Now to become successful in this market you must learn your trade and just because you have one red day “bad day” doesn’t mean you can’t make up for it later down the road.
Great articles, it shows the importance of international trade. And the needs for a viable relationship among the developed nations and the nations of fast potential economic growth. The self-interest of the key players in the economy usually investors, determine the future of the economy. As long there is still a prospect in S$P500 it will continue to attract more investment until the marginal investment will decrease and lead to a market crash. The positive relationship between the US and Britain will not make Britain a right bail-out option. It is now necessary for the developed nations to strengthen and support the emerging market economy of the third world countries for them to evade the potential crash in the most significant world stocks and also help the emerging nations to stabilize their economy. Over-dependence on a single exportation product is not right for economic progress due to unforeseen in the world market price as it is illustrated in the case of Nigeria. In conclusion, for a nation to grow and develop, human capitalization can’t be an overemphasis. Chile has a promising future because her development is not only a function of a product or security stocks but human skills with the limitless potentials.
This article is great, it gives me a better understanding in the stock market. It gives you an insight on what the stock market is really like and how it fluctuates regularly. I used to do a lot of research into stocks whenever i was younger because my parents said it is important. knowledge is power. It is a good idea to invest in stocks whenever the market is down because the more you can profit. My investment was not very big so I tend not to worry about it too much. The company is doing well and continuing to grow nation wide so for now I choose not to worry about it too much. Of course having a savings account that you regularly contribute to is probably the safer thing to do. It doesn’t hurt to have some small investments here and there. Stocks are a good investment regardless of age. the older the better though.
I found this article particularly interesting due to my most recent interest in investing in the stock market. I wish I had read the article sooner. Unfortunately, just a few months ago, the stock market experienced a drop and so did I. I ended up losing thousands of dollars because I was too heavily invested in one particular stock. I have not studied ETFs much but it seems like something that is definitely worth putting more time and effort into. The idea of being able to invest in one single asset group which is comprised of multiple industries is revolutionary to me. It definitely seems that there would be lower risk involved due to the diversity of the asset. Had I diversified my investment in the market, I could have potentially suffered less of a loss than having all of my funds in one stock. Life lesson learned. Don’t put all your eggs in one basket. I definitely have a lot to learn about watching the market as a whole, not just the US market but international markets as well.
The main theme of this article is to promote the growing between nations that support each other or ally to grow in areas such as innovation, technology, etc. It explains well the international trade and how the diversification of bonds can make a difference for investors. Someone who is trying to start investing should not put their money into one single stock, it is like saving all your money in the bank before the great depression.. you don’t know but it can just crumble and be gone forever. There is a lot of potential in some nations that have a strong market and some are doing more innovations and advances than others but all of them have a goal in common, become a stable economy or a major piece in the world economy. Marianny Mata
I found this article interesting and informative, very well explained about the international trade and the best options on how to invest. This made me think and reevaluate how I have my 401K money invested and consider the different stocks and not to have it in just one.
As the article explains, the different type of risks and of them being the systemic risk, which gives a good investment opportunity but also a high risk in losing at the same time.
The charts are great to understand and give me a visual understanding of the different risks.
This article was very interesting. I was particularly interested by the analyzation of the Chinese economy and the Nigerian primary ETF that they have so closely held onto for so long. Timana mentions that in the case with Nigeria, their economic strength comes from the focus on their single commodity (crude oil), I am interested to see how long that clutch onto that ETF will last. It reminds me of the phrase “Don’t put all of your eggs in one basket.” In Nigeria’s case they have, but it has been a stable and steady basket for a long time which is why investors have had so much interest in this one dimensional economic growth. On the other hand, China’s economic growth is quite interesting as they are the leading producer of zinc in the world as well as the leading consumer of zinc in the world. It leaves investors at the mercy of the fluctuation of the production. To me, that seems like a poor investment as I would think the production and consumption is all by the same country. The best analogy would ‘digging a hold and using that dirt to fill another hole.’
Interesting read, I am curious tho at the moment a large number of investors have invested over sea’s. wouldn’t you say that could also affect Americas investment gains. Since the money is leaving the country and going towards over sea’s business. Could a person say we are not gaining as much as we could be?
No. This is a common misconception.
Prior to being enrolled in an economics class, I knew little to nothing about our nation’s economy. Not long ago if I had been presented with this article I would have gaped at the intricate economic related vocabulary and moved on confessing that I just did not understand what information the article was trying to share. Now, after reading my economics textbook and other supporting documents I was able to process the information provided in this article after multiple readings. I have recently been interested in the stock market and the process of investment and never would have imagined that there were so many factors involved in an investment. Unfortunately, along with investment comes risks and many things to consider. The investor must decide whether or not they want to invest in the economy of their home country or the economy of another nearby country. It seems that research would become a necessity when trying to make an educated investment.
One of the biggest problems in the market is that the prices in the equity max are increasing rapidly, leaving the economy at risk for collapse. One solution was to move to European markets, but due to the drop in S & P, they are also likely to collapse. The other solution was to invest in emerging market economies, but those are small and few. The best way to invest in these would be through equity traded funds, which allow the investor to buy a single financial product that reflects the economic growth of all the industries in a single country. ETF’s, however, are less diverse, so they could not have as much benefits to investors, but they do have the potential to outperform the S&P500 index. One country that is doing surprisingly well as an emerging market is Chile. They diversified and did not depend on one commodity like copper, instead opting to go into agriculture and other services. I believe that EME’s like Chile have the potential to help globalization grow by giving investors the ability to invest at a risk-to-reward basis.
An emerging market economy (EME) is defined as an economy with low to middle per capita income. Such countries constitute approximately 80% of the global population, and represent about 20% of the world’s economies.
Although the term “emerging market” is loosely defined, countries that fall into this category, varying from very big to very small, are usually considered emerging because of their developments and reforms. Hence, even though China is deemed one of the world’s economic powerhouses, it is lumped into the category alongside much smaller economies with a great deal less resources, like Chile. Both China and Chile belong to this category because both have embarked on economic development and reform programs, and have begun to open up their markets and “emerge” onto the global scene.
There is the great opportunity for those invest in ETF of emerging market of the single asset group (buying single financial product) because its offer low expense ratio. The problem of the emerging country is that they are over-dependent on single product as such oil, zinc, coper…this will target the investor.
After reading this article, I’ve learned many things that I did not know before. As one of the interesting things that I learned that Timana mentions is how important international trade and the importance it has on all countries across the world. As something that I did not realize before was the driving force of that economic resources can effect the market. Through the examples stated of economic growth I found China’s case to be the most interesting. As metals have shown signs of recovery due to China’s production and consumption of zinc due to investment in infrastructure. But even with that said, there is too much systematic risk as it can overexpose the investors in China. On the other hand I found the country of Chile interesting in its own way as well, as even though 60% of Chiles exports is copper, it was only 20% of its GDP leaving market diversification. Throughout reading this information I think that every country has its upside and downsides in there economies, as some can lead to good and poor investments
I think this article is very informative for me as a student. By reading this article, I know the concept of emerging market economy and equity traded funds. Also, I understand the importance of international trade. How these different country like China. Chili. and U/S are influence each other is really impressive to me. I also learn that government policy and reform play important role in economy. They may spur investment a lot.
Merging markets is ecess so we will have more gain in the future when it comes to resources
Given that the US Congress sees a reduction in spending as only a reduction in the amount of spending increase as a percentage year over year, the value of the US Dollar will inevitably continue to decrease comparable to the relative values of commodities. Copper is a raw material that is used in thousands of products from electronics to art and as long as the world economy continues moving upward, it will be a necessary material for all countries. While we most likely can count on the value of the dollar to continue its decline and the value of copper to steadily increase as it has been, it is vital that all investors diversify their portfolios. Emerging Market ETF’s have shown to be good investments and savvy investors should dedicate a portion of their portfolio to them. However, if the correction that many market analysts predict is indeed on the horizon, we ought to be cautious and also invest in traditionally save options.
i found this article interesting in the fact that as the US equity goes up investors risk losing out so they are starting to invest in Europeans markets to help balances it out. having a balanced and diverse portfolio is very important because you would like to be able to have the ability to balance one market going down with a market going up. i recently reinvested my 401k where we are doing this and im in the process of learning the benefits behind it. it helps lower risk when US or European markets are low.
Reading this article a second time helped me understand the concepts a little bit more than it did before, it became much clearer. This article is very interesting and informative because it helps readers recognize the importance of emerging markets in the economy. It helps the reader understand the different risks the emerging market has compared to a developed market. I understood by the article that investing in an emerging market has a higher risk than investing in a developed one due to the fact that an emerging market is more likely to bring a higher compensation, so this is the reason that emerging markets outweigh developed markets. It is important for investors to understand how the emerging market can impact the economy, this article makes you think about all the varied determinants there are when it comes to investing. Here we can see that China and Chile seem to have great success in the emerging markets due to its high demand in metals, such as zinc and copper, according to the article, these would be a good investment to look towards. This article explained some of the global consequences that can affect your transaction so when investing in the emerging markets, it is important to analyze all the potential outcomes which can occur.
Investments to me, have always been a complicated and risky topic. The company I work for, I believe, provides our 401K through investments using company and employee shares. I think that is how were are receiving our 401k benefits because I recall choosing the firms to invest when registering for the benefits. However, I assume that investing in stable firms, the risk will most likely be lower but it is a still a gamble because even big and presumed stable enterprise have experience losses. By reading the article, it seems to me that before one decides to invest here in the country or abroad, one would need to take a course on investments and do plenty research to learn to read the graph and know how to do work the formulas to know if it good idea to invest in particular firms. The article also mentions that an investor must also take in consideration the economy of the country and the policies or changes the administration of that particular country is contemplating on implementing or modifying
Emerging markets are a very interesting investing concept. When considering where to put your money for the optimal profit yield on investment, one must consult their risk tolerance and personal goals for their specific investments. Emerging markets for example, would be an excellent opportunity for someone looking for a high-risk: high-profit type of investment. I would suspect most younger investors who aren’t depending on their investments in order to retire on any time soon would be much more likely to invest in an emerging market’s ETF, especially considering the immense potential some emerging markets have for growth. However, older investors who are approaching their retirement age and are more so looking for a stable growth investment or even an investment that would yield relatively low-returns but also feature lower-risk would much rather prefer an already established market’s ETF as they are getting ready to “cash out” their invested assets very soon.
Currently I use a financial advisor, and have my investments diversified at 18 years old (baseball money). The ETF’s were never brought up to me at this age, and did the typical low risk investments. 60-70% mutual funds, Roth IRA, and a 30-40% in stocks into 12,000 different investments. Recently I have been hearing more about the corrections the stock market is wanting to make, and I get to have a Vegas account. I day trade to my general knowledge, and the long term investments are key to knowing especially if there is change in leadership. For instance I knew president Trump wasn’t appeased on trade deals with big business countries. I liquidated everything, and kicked my feet up this December. I avoided 6% in losses, and threw it right back in after January 7th. This is just how the market protects its self, and these new emerging markets could boost, or crumble the stock market. So just due to being chicken when the stock market is getting more rumors of emerging markets.
Kathy Allen
MacroEconomics
April 4, 2019
Although this article was written in 2017, it was still interesting and educational because it taught me that investing in a diversified portfolio can increase earnings or lose earnings if an individual does not understand the risks to reward ratio system and the fundamentals.
As a novice investor, my husband and I invested with Capital One’s investment program in 2007 with the understanding the portfolio was mostly investments of mutual funds and a few foreign investments. When the crash of 2008 came along, we lost over more than half of our investments and barely regained a decent rate of return over the years.
Through the years, I have learned to take advice from financial advisors who have rebuilt my investment portfolios by various mutual funds, bonds, a few oversee markets and European markets. American companies take up 47% of my investments with energy, technology, and oil. None of my investments deal with precious metals or gold. Every year, my advisor will go over the portfolio to update and adjust the investments to reduce any loss of gain. I defiantly, lose money when the stock market falls, but I gained it back.
Prior to this economics class, this would have all appeared to be very confusing and hard to understand. However, being more than halfway done with the semester I find it very interesting and knowledgable to read. I found it interesting that you don’t have to invest only in US companies but can invest in things out of our country.
Although, investing in something you believe will succeed comes with a big risk. Higher the risk usually higher the reward. This is where a lot of research comes into play. In the article, it suggests investing in ETF of emerging markets of the single asset group because it offers a low expense ratio.
I found this article to be very informative and if I was investing my money in different markets, this would be very helpful. The article talks about how people in America are starting to invest in other markets than those just in the United States. People are doing this because they are risking on losing out on other opportunities. The article also gives a brief idea of countries such as China and Chile, and how their markets are affecting the economy. Timana’s article makes one realize that when investing, it is probably best not to throw all of your money in one specific area. By this, he is saying to invest money wisely because the market has many ups and downs. If one is new to a concept of the stock market and what to do in situations, this would definitely be the article to read because of the graphs and the detail behind each reasoning.
Professor Timana you’ve come up with an amazing article. Overall the article was interesting and informative. With the knowledge I’ve acquired from your course in the past 4 months the graphs and vocabulary make sense to me. From graph 1 and its information if a market correction were to occur that would negatively impact investments as will the market. A systematic risk means danger to the market and a risk to individuals investments. Nowadays, United States investors are looking towards the European market. Unfortunately, Europe might fall in crisis and therefore affect the return on investments. The world economy of today is risky and positive numbers on investments are not fully secured. The smartest decision to make would base ones investments on ETF. Equity trade funds only focus on one particular asset. Investor’s purchasing financial products that countries specialize on sounds like the best alternative. The downfall is that prices are not high and those EFT markets have been under-performing in the recent years. Lets take for instance Nigeria and crude oil. Graph 3 shows how for 5 years how Nigeria has maintained a stable economic development. Investing in one product appears to be the best option in today’s economy. One must see the factors that surround the investment one is attempting to pursue. Investments will never be secure but with the correct decisions your investment will have a higher possibility to provide the wanted returns you seek.
After reading this article and understanding what an emerging market is, helped me to understand a bit more about investments. Anytime one makes an investment, there will be risk. Depending on the investment sometimes the risk can be higher, but the investors could also gain a greater return. Emerging market economies are smaller countries that are progressively developing and growing, marking its place in the global economy. Its potential entice investors that have greater appetities for high risk investments. Investing in EFT’s is a lower risk investment, allowing the investor to take a chance on a single commodity. With all new investmesnts, in the growing process the return can fluctuate which is why one must keep a diversified investment portfolio.
The concept of investing and being an investor it can be fun if you’re winning the game. However, if you’re playing then there is also a chance of losing. Essentially you invest in a company and the goal is to make more money then you put in. However it won’t always be like that, sometimes you lose it all. Personally, I don’t think I would invest because its too much of a gamble. People argue that its more than a gamble because they have actual data that can predict what will happen next. If that actually were the case I feel everyone who can analyze this data would be filthy rich already. However that’s not that case because we can try to analyze as much data as we want or can but at the end of the day, it will all depend on the chance if we are getting paid or not.
Noah Abercrombie
Emerging markets continue to be touted as a way to diversify risk, while I agree with portfolio diversity in general, I would be reluctant to use this as a strategy. To me the risks are too great for me to have comfort in going that route. The political risk in emerging markets is a significant factor that can be nearly impossible to manage. History has shown there are real risks with political regime changes or changes in national laws that impact valuations. Examples that come to mind was Argentina and Venezuela nationalizing foreign ownership of assets, which created massive losses for multiple corporations. Some of the more unstable countries and governments can potentially provide investment opportunities. But I am not interested in the risk that is not easily identified. So for these reasons I would prefer to focus on companies with solid track record or results and with great management teams in the more developed countries.
This article clearly and concisely plays a academically and fiscally relevant devils advocate while illustrating each of the varying trends in not only the United States but on an international level. While I have not had much exposure to investments prior to this course, outside of retirement recommendations to diversify your investment portfolio, this article allowed a greater insight to the aspects of the market in relation to the fluctuations on National and World Market levels. As the S&P 500 companies have continued to be the most well known group of companies as they continue to foster their growth within the economy I was surprised to see the direct causational relationship leading to the overvalued US market. While many may think the greater something is valued “the better”, with this increase in the overvalue is an increase in the change of a market correction and thus an increased risk that investors would then lose money on their investments as a result. While American Investors begin to “abandon ship” and look to international/global investment opportunities they are greeted with different risk profiles to evaluate. The European market may seem appealing until the investor reviews the increased risk of another European crisis which would be economically devastating. Furthermore while Emerging Markets may appear to be a great alternative, these markets are difficult for the average investor to access- leading to the explanation of the ETF’s or Equity Traded funds. This was completely new aspect of investment for me to learn that the ETF’s allow for singly financial products that reflect the economic growth of a single country but remain diversified in their composition of different industries. However, even as this option begins to sound more viable the risk is actually more difficult to ascertain. For ETF’s each risk is fluctuating based on the reliance on commodities of the emerging market and the strength of the commodity itself on the market. Having read this article answered many questions and gave me many more, I have always listened to the President’s speak of the tax reforms and the implications on our economy, now feel as if I need to go back and re-watch with the knowledge of what these reforms implications mean. The inverse relationship between the USD and copper prices being only one factor previously foreign to me. Ironically at the end of reading this…I am more convinced that “diversification of my portfolio” is the precise right route, now it is time I can review the portfolio and perhaps have a more educated opinion on the investments within.
I really wish I would’ve seen these earlier, maybe years ago. I got my first taste of investing and it was through my job. I have been working here for 9 years but it took me 5 years to finally grow up and enroll into the 401k plan. When I finally signed up for the 401k they gave me options to choose my investments. I wish I would have had charts like the “Timanomics” because it really breaks it down. The Historical Sharpe Ratio gives an accurate answer if the expected return is close. Another good thing the graphs and article show is the work the different countries do together. It is important the different countries work together because this helps prevent war and countries hiding goods from others. In example The United States has had issues with the Middle East in the past because of the oil. But once Texas became a large oil state the U.S. did not have to depend on import of oil as much.
I find this article to be very interesting eventhough it was written back in 2017. Part of economics is trying to predict how certain stocks and industries will do. I like how this article not only focuses on the United States, but on other places like China,Nigeria, Europe, and Chile as well. When we look into the US economy, we can’t just focus on it by itself without looking into how other countries are doing. Anytime we make any investment in the stock market, we are taking a risk on losing that money but its good to know what markets are doing well and to not put all of our investments in just one place. Before taking this course, I was very confused about it and did not understand how the stocks worked and had never heard of EMTs nor what the emerging markets where. The article gives you a better understanding and has very useful information.
This article is very informative, it gave me a better understanding of the stock market. This article also shows the importance of international trade. The article talks about what S&P500 is the way they could handle this situation in the future. If this continues it can lead to individuals losing their money due to the company’s stock. This is also known as the systemic risk or collapse of an economic industry. I also found this article interesting because it really shows not only how our economy is affected by the economies of other countries, but also how important international commerce is to develop and maintaining countries. Since many other countries look at the US as a role model in providing a foundation. This article is full of visuals which help better understand the concept. It can be used to help predict, teach and analyze. This is a very useful article for not only students to understand the concept but to investors.
Reading this article helped me realized that the S&P 500 is a good way to analyze how markets are doing. In the article it shows correlation between a specific company and a main focus of a country’s commodities. Companies can operate all around the world and their profits also depend on the national GDP of the specified country. While American Investors begin to “abandon ship” and look to international/global investment opportunities they are greeted with different risk profiles to evaluate.
An interesting read definitely broadened my view on how global changes affect the stock markets. The point about Nigeria being dependant on oil prices is interesting; especially with the no exceptions Donald Trump has put on Iran. The price of oil has begun to rise, so I assume people invested in the ETF are thriving. What is more interesting in my opinion is the fundamental reliance of Chile’s ETF on China’s infrastructure. This article, especially the calculations helped me understand that the S&P 500 is a good measure for how a company and a country’s main commodity is doing. With the US serving as a leader in the financial industry, I would imagine the number of countries reliant on our growth and policies is impacted every time a president introduces new economic plans, in this case, Donald Trump’s new trillion dollar infrastructure spending plan and the countries affected would be numerous because of copper being an indicator for world growth. If his plan hikes the price of copper, the global economy could see a small increase due to the price of copper.
My favorite thing about this article is that it focused on other countries instead of just the U.S. I would not have understood any of this unless I took Macro-economics as well. Overall, from this article I learned about international trade. I also learned about the S&P 500 and why investing is important and when to invest and when to not. Overall, Great Article!
This is a great article it helped open my eyes to the importance that international trade has in not only our economy but also in all other economies across the globe. The most interesting part of this article to me was the section about Donald Trump and his bill he is planning on introducing, which was one of his biggest promises during his election, the Trillion Dollar Deal. That would drive copper stocks up which could potentially be good for lots of people. This article helped me realize that that would not just affect the United States but it could have residual lasting effects across the globally economy as well and the United States Economy. I also found Chinas “One Belt, One Road” infrastructure initiative interesting because that too can have an affect on industrial metals prices thus effecting the global economy.
This is actually an interesting article due to the fact that it goes in depth about the stock market (and the certain factors that drive it). This article talks about the massive potential on foreign markets (in particular China and Chile) and how American investors are going overseas to invest in said markets as a result. This is because of the ever increasing likelihood of market corrections going down in the US, which in turn would cause losses to investors. The foreign markets mentioned both have a common theme to them that have gotten them to where they are in the first place: government interventions to stimulate their respective economies. As a result, there are plans domestically to do just the same thing that China and Chile did. In a way, investing in markets is a smart idea: if one market starts bottoming out, at least you have another market that can reduce the blows from said market. In all, this was a great read, lots of good information in it.
The extent of my knowledge of the stock market stems from playing the stock market game in fourth grade. After this endeavor, and ultimately my team’s win, I thought I had learned everything there was to know about the stock market. However, upon reading this article, I realized this was a rather large misconception and my win was pure luck (who knew Disney would jump so much so fast!) This article has thoroughly broadened my knowledge of the stock market and the many risks that accompany it. Though, it is discouraging to see the amount of systematic risk involved and the immense losses that go along with it. Even more interesting is the effects of investing in your own country’s assets, such as the Chinese being the “largest producer and consumer of zinc,” versus investing in other countries assets, as the United States purchasing Chile’s copper. Both positively influence the zinc and copper industries, however, the former creates a larger amount of systematic risk, which is concerning for the Chinese government. It truly is informative and astonishing that investing in your own country so heavily can backfire so extensively.
This article really puts into perspective the risk and reward value of ETF’s (equity traded funds) within an emerging market. To my knowledge I feel like mutual funds would have the greatest competition compared with ETF’s due to their similarities but also great differences. I feel as if ETF’s are a tricky yet a possibly positive investment within an emerging market, because from my perspective you should look at a countries major contributors to their economy before considering an investment due to a ultra dependence within a specific sector of their economy. As a young adult interested in making future investments that are stable with growth, with an honest return this really opens my eyes to what alternate markets/investments I could make centered around my future investment goals. What concerns me about emerging markets is like I said earlier on how certain countries rely on specific sectors of a market that their economy is reliant on such as for example Venezuela had an oil boom in the late 1970’s causing the countries market to grow and expand their economy. Yet to this day Venezuela is vulnerable to foreign policy regulations that would ultimately effect trade with other countries. Another consideration I feel needs to be made is a countries leadership and political rule can effect a countries economy for the worse, especially when regarding the president of Venezuela Nicolas Maduro for example. With any investment one must carry the risk when doing so ever with and numerous positives presented with it. Mutual funds could be another alternative to investing in something such as an ETF yet have multiple major difference such as the money that you have invested being allocated in multiple different assets, rather an ETF is treated as if were a stock investing in one share within an economic sector and has live pricing with the movement of the economy.
I found this article very interesting and helpful when thinking about investing in the stock market. The stock market has always been something I am interested in, but have never fully understood and have always been somewhat confused about. One of the things that stood out to me about this article is that it takes into consideration the importance of foreign markets and how they can affect the US stock market. I have such a hard time being comfortable with stock market predictions, because you can never be totally sure your predictions are correct, even though the predictions are based on the facts and probability of what will happen. I agree that emerging markets are a great place to invest and I can clearly see why they are so enticing to investors; it presents itself as a fresh start and a place of many opportunities. I do think, however, that foreign investment needs to be carefully considered and thought out. Changes in government leaders in other countries can usually be predicted, but can also be unexpected. What if a new leader emerges in one of these new market countries, and everything takes a totally different turn from what was expected? I think I would need to see a country that has showed a strong, steady growth over a certain period of time in order to invest, as opposed to taking the risks of investing in young or brand new emerging markets. The risk is high and not always easy to identify. I do acknowledge that foreign investment is very important ans can benefit the US greatly, is done properly. Investing in foreign economies, like Chile, can help to build up those countries markets, which will make them stronger trading partners for the US in the future. More stabilized markets will make global trade much stronger.
With the S&P500 (the top 500 new companies in America) skyrocketing in price, it is difficult to justify the constantly rising prices which leads to the U.S. market being overvalued. Interestingly, the higher S&P 500 values are not supported by equally higher company earnings. This increase in market values exceeding company earnings leads to a market correction. As a future investor, I think market correction is very concerning. I would expect an investment in the S&P 500 to be stable and more predictable. I wouldn’t be happy as an investor and it’s a scary thought that my investments could lose significant value. Moving investments to a Chilean ETF such as ECH could be a good hedge against a fall in the S&P 500. But there could be a risk that the price of copper does not increase as hoped because of reduced infrastructure spending in the U.S. and China. Clearly, there is a complex risk vs. reward decision for investors to make when investing in any markets.
Interesting read! Prior to reading this article, I wondered the methods that were used to evaluate the risks of investing in economies overseas. Now that I know these methods, I understand why economists are so cautious about investing their money, as there is not simply one factor that can be considered to determine where to invest money. The author discusses the reasons why investors, economists, and government leaders each need to evaluate the health of an economy’s stocks. I wonder if there are others who would need to determine this information. Possibly individuals of society could use this information if they were moving to a new country. Most people do not want to move to countries with bad economies, so this method is a way to determine a portion of the economic health of a country. Once again, this article is very thought-provoking, one that all members of society, no matter what their profession, should consider.
Hopefully others with more experience will chime in but here is what I have found.
Think of the entire market. Sometimes everything looks like it is on sale, especially if the country is going through political or economic trouble. Some investors use a “basket” approach in such situations where you buy a basket of stocks in that country to gain exposure to the country rather than any specific company.
Fees, taxes and reporting can be incredibly complex. So you’ve done your research and found a company that offers a great value proposition, now what? Often times purchasing the security directly through your broker is difficult or impossible and you have to look around for a broker that has access to that security. Annual reports can also be difficult to obtain and fully understand, especially if they are written in a language you aren’t proficient in.
I find this article very informative especially as it relates to investing in emerging markets. Investing in emerging markets can offer US investors rewarding returns. However, like every other market, investing in emerging markets also comes with some risks. One particular risk that is peculiar to emerging markets is the risk related to political instability in some of the emerging markets. Stable political system is needed for any business to function properly. Other risks of investing in emerging markets include low commodity prices, unregulated markets, poor monetary policies, inflation, and unstable currency value. Despite the risks involved, they are many benefits that investors can gain from investing in emerging markets. One of such benefits is the opportunity for huge growth. Businesses in emerging markets have the potential for huge growth because of the availability of local raw resources. Also, some emerging markets have a large number of consumers and labor supply. Brazil, Russia, India, and China are some of the examples of developing economies with huge growth in the past decade. These countries are collectively referred to as the BRIC countries. Investing in emerging markets also offer US investors the opportunity to diversify their investments. When investments in the US market is not doing well, the investments in emerging markets may help to offset the loss. In conclusion, I think that the benefits of investing in emerging markets outweigh the risks involved in investing in them.
After reading this, I feel more informed as to the checks and balances we can input to stabilize our economy. That being said, I do not see Trump’s infrastructure plan helping to stabilize the economy. There is too much going on politically right now to predict Trump’s future and how it all will affect the economy. Having somewhat of an understanding how copper, other countries, and other goods affect the US economy has me worried for our future. Thankfully, our current economy is strong and thriving, although it has slowed. Thanks to possible trade deals with China, I believe our economy will continue to prosper in the next couple year; but where there is inflation, there has to be a market burst. As I am new to economics, I cannot foresee how or when the market burst will take place. All I know is that like all things, it is inevitable.
This article was very informing of the equity traded funds (ETFs) which provides low-expense ratio and exposes the investor to different markets. Additionally, the writer did a phenomenal job of informing the reader of ETFs’ benefits and problems. Moreover, the writer’s interesting take on this article was the unique connection of the underperformance of the ETFs with international economies. Rather than seeing the market of the United States as separate from the world, the writer knew of the connectivity of the individual countries’ economies. The writer’s analysis of Chile intrigued me the most for I was able to identify the strong correlation that exists between business/economics and the political world. Before reading this article, I was aware of the correlation, but I did not know the extent to which a country’s economy could change as the presidents change seats. Overall, I was surprised at the extent of research this paper went, and I realized that stock investment is not just the money it takes to buy the stock. Stock investment is also the time and analysis it takes for an individual to research and calculate the risk factors as well as growth potential.
Aside from the interesting content presented, this article definitely makes you really think about the way you invest in economies and the risk vs. reward situation. As I will have to eventually invest in the economy, reading the article has made me more aware of how other countries’ economies around the world have an impact on the United States economy. I will admit that it took me a few readings to truly understand the message the article was tying to convey but emerging economies are an essential component to the world economy. Since emerging markets tend to grow faster than developed, it would make sense for one to invest in an emerging market than the market of a developed country. The example with Chile helped me understand why investing in a market outside of the U.S. could have benefits. Going back to the idea of risk and reward, by investing in developing markets, there is a huge risk that could possibly turn into a huge reward. I am glad I read this article as I realized the benefits of taking risks in investing in global economies. Overall, this article was very informative on the topic of emerging markets and their importance to future investors, such as myself.
This article was informative and detailed all around. The stock market is in constant change, but many do not realize how much international trade means to each country. Equality traded funds have become the new way of investing in markets which I had not even truly realized or even been informed about until I read this. As many advantages as this bring with reflecting the growth of one single country. It brings up that the stock market cannot really grow without the trade that would be involving other countries which is a point that many fail to realize and disagree with because they do not inform themselves on how much of an impact it may cause whether it is negative or positive. This article not only highlights that point but also bring into light the other key components of how a change in leadership can affect a countries economy like it has in Chile.
Common old-school knowledge for investing in the stock market has been to purchase blue chip stocks and hold them as long as possible. These stocks typically grow in value and provide steady dividends. Blue chip stocks while tried and true can appear dull. Many investors seek to obtain higher returns on investment and want it quickly. They want to find more exciting ways, even if it includes higher risk, to increase their portfolios rapidly. As the global community has gotten smaller, the opportunity to invest internationally has blossomed. Investments in emerging markets seem to fall into this category. Professor Timana gives a thoughtful review and analysis, including using several economic model indicators, to evaluate a popular equity traded fund (ETF) from Chile. The future of the ETF is based on several future trends. With any stock purchase, the investor takes a risk by betting on how market factors will affect the value of the fund. One factor affecting this ETF is President Trump’s campaign trail infrastructure plan promise. President Trump has a good track record for keeping campaign promises and getting things done, so if I had to bet on him and I had the money I would invest.
Having read the article about “Finding Value in Emerging Markets” and knowing a little bit about risk in the market one must always do the work about the market. The market is always going to have its ups and downs but one must be able to do the work to foresee what is going to happen at different times of the trend of any emerging market. This is not just about metales but other goods also that can be impacted by political or social or environmental happenings there can always be a problem or a situation that can make something more or less powerful and change the course of the market. I believe that if we make both markets strong we will have to worry less about what is happening and more on how we can make the market better by improving the overall of the markets. It is always better to improve so we can all make money.
I thought it was insightful that Mr. Timana insisted that the Emerging Market Economy (EME) is predicted to generate more return on investment than the S&P500 through Equity Traded Funds (ETF). It’s interesting because these portfolios are diverse in the type of industries that are invested in and are essential for single commodity countries to grow in success. For example, he used the economy of Chile to advocate the use of ETF’s due to the room for diversification in their economy. With 32% of the labor force working in the service industry, which is an elastic labor force, the room to invest in a diverse market is high. The economy of Chile has a human capital that is higher than any other emerging market country and will reach a higher potential for growth with political stability. This investment strategy is in response to systematic risk the S&P500 is vulnerable to and allows investor to avoid losing returns in an over-valued market. It seems like this type of investment will be a step ahead of typical investments that stay within the S&P500.
I thought it was insightful that Mr. Timana insisted that the Emerging Market Economy (EME) is predicted to generate more return on investment than the S&P500 through Equity Traded Funds (ETF). It’s interesting because these portfolios are diverse in the type of industries that are invested in and are essential for single commodity countries to grow in success. I never considered the importance of investing in multiple markets at once rather than a single market, because I thought your return wouldn’t be as high. The analogy could be to not put all of your eggs in one basket. For example, he used the economy of Chile to advocate the use of ETF’s due to the room for diversification in their economy. With 32% of the labor force working in the service industry, which is an elastic labor force, the room to invest in a diverse market is high. I also found it was interesting to consider the political ramifications that change in leadership can have on the economy. The economy of Chile has a human capital that is higher than any other emerging market country and will reach a higher potential for growth with political stability. I always thought that success in economics and investing was solely based on your knowledge in the stock market alone, but now I realize insight on global politics is important for the decision making process of potential investments in unstable and emerging economies. This investment strategy is in response to systematic risk the S&P500 is vulnerable to, and allows investor to avoid losing returns in an over-valued market. It seems like this type of investment will be a step ahead of typical investments that stay within the S&P500 that could easily loose value with reevaluations, and would allow the investor to have a higher return in foreign economies with less risk.