Question

• Reasons for Global Investments – During the past 20 years investments in global (non-U.S. companies has grown dramatically. Please write a reflection paper about the changes that caused the increase in foreign investments—investments in non-U.S. companies. There are three interrelated reasons that U.S. investors should consider when constructing global investment portfolios.
• Requirements: 500

Answer 1

During the late 80s and early 90s, a series of democratic revolutions seen across the communist countries. Due to this reason, many of the countries through eastern Europe and finally in the soviet union itself, face the collapse of the communist governments. The soviet union was divided into 15 independent countries while many of the eastern European countries adopted a democratic politics and free-market economics. By this time also, emerging countries like China and India become taking part in world development. India liberalized its economy and opened it for foreign direct investment after a long time of gaining independence. Thus this presented a host of export and investment opportunities for developed market investors who were looking for new investment avenues since the growth in the developed market was becoming stagnant. Same is the case for Latin America also, it has seen the horrific rules of dictators and finally then being disposed of their rule. Thus there was a democracy and free-market reform there too.

Even though the opportunity for returns are good in emerging market (non-US) companies, it is important to take care of risk involved in such transactions as:

1. Exchange rate risk - This is the risk of getting less value for your money invested after a certain time due to the depreciation of the value of your country's currency.

2. Country Risk - This is the risk of investing in unstable and war-torn countries like Syria, Afganistan, Pakistan, etc. where there are chances of more default because of seizing of the market due to national issues.

3. Diversification - The investor should make its portfolio in such a way so that there is a negative correlation between the returns in countries where he is investing so that not all investments bust simultaneously.