Fiance Project 15 pages

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all the detail instructions and examples are attached in the file below, please follow the instruction and develop a good 15 pages report. thank you!

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FIN 358 International Finance PROJECT Due Tuesday, December 12, 11:59pm. Please prepare a report for a country of your choice. Your report should be 15 pages long including detailed analysis of exchange rate, country stock index and macroeconomic data. There will be two parts in your report: country analysis and investment analysis. In addition you should submit a 1 page summary with your overall recommendation. The summary should state whether you recommend or not to invest in a country stock index for the next five years. It should summarize the main reasons for your recommendation based on macroeconomic risks, past performance (riskreturn tradeoff such as Sharpe ratio) and potential benefits for portfolio diversification. I. Country Analysis (a) Macroeconomic trends and risks Discuss Balance of Payments (Current Account surplus or deficit) , exchange rate, GDP growth, inflation, monetary policy, fiscal deficits/surpluses, yields on government bonds compared to the US T-bonds for the last 5-10 years. Macroeconomics data can be searched from the Central bank website of a country and from the IMF website among other sources. Exchange rate is available from the The Pacific Exchange Rate Service or from FRED database among other sources. (b) Is the country open to foreign investments? Discuss restrictions on foreign investments, capital controls, political environment and any other risks of investment in the country. II. Investment Analysis Find the monthly data on the country’s major stock index (see MSCI Barra or other source). Show the country stock index return in local (foreign) currency rfc and in USD r($). Note the conversion from the return in local currency into the USD using % change in exchange rate term e: 𝑒= (𝑆𝑡 − 𝑆𝑡−1 ) 𝑆𝑡−1 𝑟($) = 𝑟𝑓𝑐 + 𝑒 1 Look at the performance for the last 10-20 years of the country return in dollars r($) relative to the MSCI world index return (ACWI) and the USA index return. For the USA index use either MSCI index for USA or SP500 index. The data for the ACWI index and the USA index can be obtained from MSCI Barra website. The SP500 index data are available e.g. from Yahoo Finance. (a) Report the mean, standard deviation and the Sharpe ratio for the country return in dollars r($), USA index return and ACWI. Compare and discuss them. (Note: The T-bill (4 weeks or 3 months) can be used as a risk-free asset and data are available from the Fed website.) (b) Find the correlation between the country stock index return and the USA index return. Would it be beneficial from the point of view of international portfolio diversification to invest in this country for an investor holding only the USA index portfolio? 2 Peter Franch Wamberg 8/5/2015 Denmark Fin 358 International Finance Project The first part, I: Country Analysis, of the project will serve to provide the reader with a clear picture of how Denmark’s Macroeconomic qualities and data shape it as an economy and country. The goal of the presented data in I: Country Analysis section of this project is to provide sufficient information in order for the reader to proceed to the second part of the project: II: Investment Analysis. In this part of the paper I will discuss investment opportunities, as well as restrictions and risks for the international investor seeking capital gains in Denmark. I: Country Analysis Before getting into the different facts, analysis and eventually discussions, which will be derived from Denmark’s economic data; providing the uninformed reader with a few basic, informative characteristics of Denmark, will help the reader relate, as well as understand, the issues and possibilities the economy of Denmark possesses.             Denmark (dark-green marked country). Member of the Scandinavian region. Capital: Copenhagen (Approx. 1,900,000 inhabitants). Approximate population is 5,600,000 (600,000/5,600,000=10.7% not born in Denmark). Currency: Danish Krone (Exchange rate as of 8/5/2015 to the U.S. Dollar is DKK6.86/1USD). Memberships include but are not limited to: The UN, OECD, EU, NATO, Schengen, IMF and WTO. Monarchy. Government: The liberal party. 1st place in least corrupt countries in the world 2013. Corporate tax rate: 24.5%; Personal income 37.48-59%. Very open to foreign investments (foreign and domestic investors generally treated equally under law). Central Bank: Danmarks Nationalbank. I: Country Analysis (macroeconomic trends): This part of the project will be divided into 7 different sections: 1. 2. 3. 4. 5. 6. 7. Balance of Payments-Current Account Surplus or Deficit (All Values in US Millions) Exchange Rate (Fixed Rate with the Euro) GDP Growth Inflation Monetary Policy Fiscal Deficits/Surpluses Yields on Government Bonds Compared to the US T-Bonds for the last 5-10 Years 1: Balance of Payments-Current Account Surplus of Deficit (all values in US millions): Definition of Current Account: “The difference between a nation’s savings and its investments. The current account is an important indicator about an economy’s health. A positive current account balance indicates that the nation is a lender to the rest of the world.”-Investopedia According to the data gathered from the IMF’s database, the current account has enjoyed a trade surplus from 2009 through 2014; exports have exceeded imports. Exports ranged from 91,108.11 to 111,671.35 with an increasing trend from 2009-2011 at 91,108.11-111,245.26. In 2012 the exports dropped to 105,449.55 and climbed back to its peak at 111,671.35 in 2013, where it has kept a steady level. An important detail to remember is that the balance on goods and services also has remained postive throughout the same period; at an almost entirely increasing level, with merely minor drops. One reason for this minor drop in exports relative to imports in 2012 can be explained by the appreciation in the DKK relative to the Euro in late 2011-early 2012, causing the Danish exports to become more expensive to surrounding nations with the Euro; notable that it is a minor decrease in exports considering this movement in currency appreciation/depreciation. 2009 2010 2011 2012 2013 2014 Balance of Payments Current Account (Excludes Reserves and Related Items) 10,767.02 18,182.63 19,874.64 18,749.78 24,248.24 21,493.81 Goods, Credit (Exports) 91,108.11 95,029.88 111,245.26 105,449.55 111,671.35 111,449.17 Goods, Debit (Imports) 82,126.26 85,904.67 101,102.08 96,947.44 99,785.56 101,320.69 Balance on Goods 8,981.85 9,125.22 10,143.19 8,502.11 11,885.79 10,128.30 Services, Credit (Exports) 56,243.31 61,211.25 66,494.40 65,999.26 70,686.08 72,486.81 Services, Debit (Imports) 52,338.06 52,310.15 58,643.06 58,179.69 63,268.76 64,238.57 12,887.09 18,026.31 17,994.52 16,321.67 19,303.10 18,376.73 Balance on Goods and Services The quantitative data presented in the “Balance of Payments” above, can be further explained using the average and standard deviation. These low standard deviations calculated represent stable exports on both goods and services; as well as stable positive balances in these accounts; I would like to stress the fact that these numbers have a low volatility, despite the slight increase in the value of the Danish Krone in 2012 relative to the Euro; indeed is positive for Danish exports. Category Goods, Credit (Exports): Balance on Goods Average x 𝜇 = Σ n= 104,325.5533 𝜇=Σ x =9,794.407936 n Standard Deviation ∂= Σ ∂= Σ √(𝑥−𝜇)2 𝑛−1 √(𝑥−𝜇)2 𝑛−1 = 9,110.024182 =1,215.327826 Services, Credit (Exports): Balance on Goods and Services 𝜇=Σ 𝜇=Σ x = 65,520.18152 n x =17,151.57199 n ∂= Σ ∂= Σ √(𝑥−𝜇)2 𝑛−1 √(𝑥−𝜇)2 𝑛−1 =6,017.081574 =2,301.319483 This numeric data supports the stability and non-exisiting volatility of Denmark’s goods and services’ difference between exports and imports; the fact that Denmark is running a stable trade surplus. The financial account has a good, but different story; it’s increased dramatically from 2009-2014; from a -26,358.65 to +35,340.33 in 2014. This could be because Danes are purchasing less foreign assets (such as real estate), whereas foreigners have been acquiring more Danish assets. Financial Account (Excludes Reserves and Related Items) -26,358.65 -5,326.85 7,887.28 17,345.52 30,148.71 35,340.33 This positive change would indicate an increase in the ownership of Danish real assets (such as bank deposits, loans, corporate/governemt bonds, equity, factories, real estate etc.) These numbers could very well indicate an increase in foreign business interest in Denmark. The average for the financial account is 9,839.391115; and with a very high standard deviation of 23,079.13275. It should be noted that this high standard deviation is positive in this case; it represent a drastic increase in the acquisitions of Danish assets made by foreigners, and possibly a decrease in the purchases of foreign assets made by Danish citizens. However, the balance on the current, capital and financial account together has gone from a positive 33,670.67 to a negative 7,998.67 after net errors and omissions. 33,670.67 4,279.69 10,554.14 1,852.06 -647.33 -7,998.67 2: Exchange Rate: (Fixed Rate with the Euro): For the most relevant anlysis to be reached I’ll focus on the exchange rate between the Danish Krone (DKK) and the Euro; I’m doing this since the majority of Denmark’s trade is through the use of Euros, between other members of the EU (However, I’ll also include the exchange rates between the U.S. Dollar and Danish Krone, since this is a class at an American university). To reach a more in depth analysis/picture of the exchange rate of the Danish Krone; including a quick note about the relationships of the Norweigan and Swedish Krona compared to the Danish Krone is only unavoidable. This is because these 3 currencies are very closely related and compete on a big scale, on a daily basis. As shown in the graph below, the Danish Krone has had a fairly stable relationship with the Euro since January of 2000; it has stayed in between 7.425-7.468; no volatile/extreme changes in value. This is positive for the investor who (who owns the Euro as his/her domestic currency) might be interested in Denmark; this graph doesn’t only show the relationship between the Danish Krone and Euro for the past couple of years; this is almost 15 years worth of data (when going even further back in time, we still only see minor controlled changes in value). The trendline included in the graph shows this seemingly immovable relationship in value between the Danish Krone and Euro, and how it stays in the DKK7.44/1€ to DKK7.456/1€. DKK/EUR 7.47 7.46 7.45 7.44 7.43 7.42 7.41 Aug-15 Aug-15 Oct-13 Sep-14 Sep-14 Dec-11 No v - 1 2 Jan-11 Feb-10 Apr-08 Mar-09 Jun-06 May-07 Jul-05 Aug - 0 4 Oct-02 Sep - 0 3 Dec-00 No v - 0 1 7.4 Jan-00 As mentioned above I would not deem it anything else than appropriate to also compare the performance of the Danish Krone to the Swedish and Norweigan Krona. These currencies have many similarities and are fairly close in terms of their value. The Danish Krone has been stronger than the Swedish Krona since November 1992; and stronger than the Norweigan Krone since January 1991 (according to the Pacific Exchange Rate Service). The reason why this is worth mentioning is because these currencies are very tighly related and intervene in each others’ economies constantly. It is possible to pay with Danish Kroner in Sweden and Norway, and vice versa. Based on the historical performance of the Danish Krone, it has presents itself as a very stable currency with little or no drastic change in value, when comparing it to its closest competitors; the Euro, Swedish and Norweigan Krona. It has stayed in the same close range with the Euro, and been stronger than those of Sweden and Norway for decades. DKK/USD Oct-13 No v - 1 2 Dec-11 Jan-11 Feb-10 Mar-09 Apr-08 May-07 Jun-06 J ul - 0 5 Aug-04 Sep-03 Oct-02 No v - 0 1 Dec-00 10 9 8 7 6 5 4 3 2 1 0 Jan-00 Interestingly enough; the U.S. Dollar actually dropped in value compared to the Danish Krone during the financial crisis (the drop in value started in August 2006 and went to 4.73DKK/1$ in July 2008); after that its trend stayed in the 4.5DKK-5.9DKK/1$ until December 2014, where it went to 6.0356DKK/1$. The latest rate between the Danish Krone and U.S. Dollar was 6.8386DKK/1$ in August 2015 according to the Pacific Exchange Rate Service. Worth to note that the Danish Krone stayed strong against the U.S. Dollar during the financial crisis of 2008. 3: GDP Growth: The definition of “Real Gross Domestic Product” (GDP) is an inflation-adjusted measure that reflects the value of all goods and services produced in a given year, expressed in base year prices. Often referred to as “Constant Price”, “Inflation-corrected GDP” or “Constant Dollar GDP”. The “GDP constant Prices (Percent Change)” graph shows the percentage change in GDP constant prices from 2013 to 2015; the continuing numbers are the predictions made by specialists. The predictions show a positive increase in the GDP from 2014 through 2020. Based on the definition above we see that the value of goods and services are increasing. In 2013 the value had decreased by -0.4870%; moving along in time it had increased to almost positive 1% in 2014 where it has been projected to increase at a decreasing rate until 2020. The “Gross Domestic Product, Current Prices (National Currency Billions)” graph, shows us the decrease from year 2014-2015 from about 340-297 Billion DKK, since 2015 however, it has been increasing at a steady rate to about 378B (projected in 2020). These graphs show a healthy increase in the Gross Domestic Product of Denmark. 400 Billions DKK One important graph and “aspect” of the GDP that should not be left out; it the GDP Per Capita and its change within the same time period. One could argue that it “obviously” follows the exact same trend as the “Gross Domestic Product, Current Prices (National Currency Billions)”; since it is the same number divided by the Danish population. This measure is however helpful, because it tells us that the performance of the Danish workforce, and therefore growth in the economy and an increase in productivity. GROSS DOMESTIC PRODUCT, CURRENT PRICES (NATIONAL CURRENCY BILLIONS) 350 300 250 200 150 100 50 0 2013 2014 2015 2016 2017 2018 2019 2020 To sum up, the gross domestic product is one of the primary indicators of a country’s economic performance. Per Capita Gross Domestic Product is used as an indicator of standard of living as well, with higher GDP per capita meaning a higher standard of living (one fun fact that may be interpreted as a supporting argument of the information given above; Denmark has been ranked #1,2 and 3 as the happiest nation worldwide several years in a row, ranked first in entrepreneurship and equality). GROSS DOMESTIC PRODUCT PER CAPITA, CURRENT PRICES 70,000.00 60,000.00 50,000.00 40,000.00 30,000.00 20,000.00 10,000.00 0.00 2013 2014 2015 2016 2017 2018 2019 2020 4: Inflation: INFLATION RATE (%) 4 3.5 3 2.5 Percent As the central bank of Denmark, Danmarks Nationalbank is in charge of monetary policies in Denmark. One of the main objectives of Danmarks Nationalbank is to ensure stable prices, meaning, keeping the inflation as low as possible. It has been the objective of the monetary policy, for decades now, to keep the exchange rate of the Danish Krone stable. First this was done to keep it stable against the Deutsche Mark, now the Euro. One of the reasons for this is that the cost of living in Denmark, generally is fairly high. The main goal is to keep the inflation close to, but below 2%. 2 1.5 1 0.5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 0 Also, as shown in the graph there has been some cases of higher versus lower inflation rates since 2000; considering that the Central Bank of Denmark wants to keep these rates low, they’ve done a stable job keeping them low. The highest was in 2008 (financial crisis) and the lowest was in 2014, lower than 1%. x n 𝜇 = Σ =1.93019 ∂= Σ √(𝑥−𝜇)2 𝑛−1 =0.733569% These statistical measures show us that the average inflation rate during the time period of 2000-2021 will be (if these inflation rate estimates are correct) lower than 2%; which is the goal of the Danske Nationalbank. Furthermore, the standard deviation in these numbers is also considerably low; 0.733569%. What this number tells us is little deviation from the mean (average) of 1.93019%. This is also good news, considering that these estimates turn out to be true or at least, within a close range. 5: Monetary Policy: The fixed exchange rate policy means that Denmark’s policy is aimed at keeping the Krone strong/stable against the Euro; the Central Bank of Denmark conducts monetary policy by setting the monetary-policy interest rates; furthermore, these interest rates are linked to the lending as well as the deposit facilities made available by the Central Bank of Denmark to the banks and mortgage banks. When Denmark changes its interest rates relative to those of the ECB, this normally has an effect on the exchange rate of the Danish Krone against the Euro; through the money market, the monetary policy interest rates also affect the lending and deposit rates offered to firms and consumers. 6: Fiscal Deficits/Surplus: This significant drop in debt, as shown in the graph to the right, marks a significantly positive change in the performance regarding government spending. CENTRAL GOVERNMENT DEBT 490 Amount in Bilion DKK The Danish Government debt has received the highest ranking, AAA/Aaa, from the largest international credit rating agencies. This is partially because of the low level of debt and the composition of long term-liabilities. There has been a decline in central government debt as a percentage of the GDP over the past 2 years, which should be noted since it has not been that long since the financial crisis, it represents a turning point after the debt accumulation that happened during the crisis. 487 487 485 480 475 470 465 458 460 455 2011 2012 2013 2014 2015 Year 7: Yields on Government Bonds Compared to the U.S. T-Bonds for the Past 5-10 Years: The yields on Danish Government bonds have actually stayed close to the U.S. T-bonds for many years; the rates on the Danish bonds have been a little higher than the U.S. rates with the greatest difference (favorable to the Danish bonds) in 2008, almost 300 basis points difference. At its highest the Danish was almost 6%, whereas the U.S. T-note was only 3%. The Danish rates, however, have been lower than the U.S. rates, which was in 2014. Excluding the financial crisis in 2008, the rates on these two have been relatively close, with a similar pattern in movements, and a stable +0-1% for the Danish rate. Generally speaking, Denmark is open to foreign investments. It is a small country with an open economy; because of its high dependence of foreign trade (exports is the largest component of the Danish GDP) Denmark trade and investment policies are liberal and truly do, encourage foreign investment. The Danish business environment has been characterized as one of the most attractive in the world, reflecting a great macroeconomic environment, excellent infrastructure and a well-educated and flexible labor force. Restrictions include the purchase of real estate in Denmark by foreigners; EU citizens and companies may purchase any type of real estate except for vacation properties without authorization from the government. Non EU citizens need to have been present in Denmark for at least 5 years in a row, before being allowed to purchase real estate; again, vacation homes require authorization from the government. This obviously puts a restriction on real estate investment, as a foreign investor. Denmark has been considering imposing capital controls, but with hardship from banks; reasoning that the country must allow the free flow of capital, one reason for this being that Denmark is a member of the European Union. The Spokeswoman for Economy Minister and Deputy Prime Minister Morten Östergaard, Sigga Nolsoee, said that the government has no plan on imposing restrictions on capital movements. The political environment in Denmark is very stable, (it has been ranked the least corrupted country in the world) it is a democratic system, citizens exert their influence indirectly through voting, and generally a very safe place to be. Part II: Investment Analysis: In this part of the paper, there will be paid close attention to the investment opportunities through analysis. The actual calculations can be viewed in the Excel file submitted. The major stock index in Denmark is called OMX Copenhagen (^OMXC20), or commonly referred to as C20. It has the 20 “biggest players” of the publicly traded Danish companies, these include A.P. Møller Mærsk, Pandora, Vestas, Novo Nordisk with many more. The index’s data as well as various other, very thorough calculations are all included in the excel file submitted. This file includes returns, variances, standard deviations, correlations between Denmark, the U.S. and the World standard, as well as the Sharpe ratio. The Danish stock index is (in my opinion) a stable index, just to give a quick idea of its performance for the past 2 months, it has had a return of 0.54% and 0.69%; this positive gain seems to be the general trend. All this can be seen in the Excel file. Recommendation based on analysis: Before I get into my actual recommendations about actions I deem appropriate to take, regarding the investment opportunities Denmark offers, I would like to address Real Estate Investing, which was briefly discussed in restrictions in part one of the paper; as an international investor. Considering the harsh restrictions the Danish government has chosen to put on international real estate investors (mentioned in the first part of paper) and the tax on capital gains (can be up to 50%) earned from real estate investing; one could argue, taking your money in other investment directions, would be the better alternative. Of course there are two sides to this; the negative aspect of successfully investing in real estate in Denmark is obviously the hefty tax-rate; however, I would still deem it an extremely safe and stable environment to pursue this kind of capital gain. As mentioned earlier, Denmark has been ranked the least corrupted country in the world, it provides one of the most effective work-forces worldwide, and it should also be mentioned that “Danish design” is famous globally (there is a reason for this). Because of these positive aspects (including many more), real estate investments can be preferable as well as profitable, if the taxrate does not cause too much pain. Based on the information provided throughout this entire paper, it is my recommendation to invest in the very stable and secure market Denmark offers. The overall reason for this (referring to the qualitative aspects in part one) is that Denmark presents a very advanced, internationally focused, safe and advanced economy. Advanced and internationally focused includes that Danes have been ranked as the number one non-native English speakers in the world, internationally focused because Denmark is a part of the EU and Schengen; with little natural resources Denmark needs to use its advantages to stay competitive. It is also worth mentioning that the state of Denmark’s economy is on the right track, and the Danish Krone is a stable currency. Referring to the quantitative data presented in this paper (as well as in the Excel spreadsheet) it is, again, recommended to invest in Denmark. Even though Denmark has a very, very little economy compared to many other countries, it still has many opportunities for the international investor. When comparing the largest index, the C20, in Denmark to the S&P500 in the United States (this is not an entirely fair/realistic comparison, considering the difference in sizes) we see an enormous difference in risks: US: ∂ = Σ DK: ∂ = Σ √(𝑥−𝜇)2 𝑛−1 √(𝑥−𝜇)2 𝑛−1 World: ∂ = Σ = 311.9 =25.4 √(𝑥−𝜇)2 𝑛−1 =67.3 These numbers represent the standard deviation in monthly index prices for the last 15 years; one thing to keep in mind is that the S&P500 includes 500 companies, the C20 only has 20 companies. When analyzing the Excel file attached, it is also interesting to see how much higher the average annual returns the C20 index offers, compared to that of the S&P500. C20 has an average annual return of 11% while the S&P500 has a 4% average annual return. These higher returns obviously come with a higher annualized standard deviation; the C20 has a standard deviation of 19%, whereas the S&P had an annualized standard deviation of 15%. It is worth noticing how much higher the annualized return in Denmark is though: C20: Average annual return: 11%; Standard Deviation: 19% S&P500: Average annual return: 4%; Standard Deviation: 15% That is a difference of 7% in average annual return and only 4% in standard deviation; this increase in return came at a “lower than expected” risk. Regarding the correlations between Denmark and the U.S.; it is definitely a noteworthy correlation of about 0.67. Modern Portfolio Theory states that adding assets to a diversified portfolio that have correlations of less than 1, with each other, can decrease risk without sacrificing return. Such diversification will serve to increase the Sharpe ratio of the portfolio. When analyzing the data we do see that the general tendency of the returns is a mirror-effect (increase in the C20 is generally associated with an increase in the S&P500). When comparing the Sharpe ratios of these indexes; the C20 in Denmark has the highest: C20: 0.468 S&P500: 0.119 World: 0.049 What the Sharpe ratio tells us is the average return in excess of the risk free rate per unit of volatility or total risk; generally, the higher the Sharpe ratio, the more attractive the risk adjusted return is. When considering the Sharpe ratio it is very clear that the C20 offers the investor a bigger average return in excess of the risk free rate per unit of volatility; which again, represents a reason as to why international investors should strongly consider Denmark. Based on the info included in this project it is my advice to invest in Denmark. The numbers included speak for themselves, it is far from a bad place to put ones money; Denmark has a stable economy, is open to foreign investment, it is a very advanced nation, the economy and people have proved themselves to do very well while relying mostly on the exports of services (almost no natural resources), the currency has also proved to stay fairly stable during long periods of time, etc. Overall, a very stable economy with great potential for capital gains. Project based on Germany I. Country Analysis The following paper presents a country analysis and an investment analysis. I did not only chose Germany, because it is my home country, but moreover I was curious to know which effects being part of the EU has on the German economy. First of all, I will start with the macroeconomic trends and risks. a) The Balance of Payments shows the record of a country’s international transactions over a certain period of time. It is presented in the form of a double-entry bookkeeping. Transactions are either recorded as credit or as debit. The major three accounts of the Balance of Payment is the current account, the financial account and the official settlements account. The current account is the balance of international trade, net unilateral transfers and net income receipts from abroad. If the imports exceed the exports, then a country is running a trade deficit, vice versa a trade surplus. As it can be seen in the graph1, Germany only had current account surpluses for the past years. The current account surplus declined during the crisis of 2009 as Germany was exporting less to other countries due to recession. As Germany exports a lot, others demand euro at the FOREX market and this demand for the euro creates a pressure for the euro to appreciate. The current account surplus seems to be a problem for various reasons. Peter Navarro, the economic advisor of Donald Trump accused Germany of currency manipulation, as they reported their largest current account surplus on February 9th with 270 bn euros.2 He says that Germany makes their exports more competitive by having a weak euro, compared to the old Deutsche Mark. However, Germany says that even though the European central bank is based in Frankfurt it makes no sense that Germany deliberately tries to weaken the euro, as Mario Draghi is keeping the interest rates near zero and buying bonds in order to stimulate economies outside of Germany. According to the economist, the real problem Germany has started a decade ago when employers and unions agreed to restrain wage growth, which resulted in a devaluation of Germany within the euro zone. The best way out of the imbalance would be to not to keep cutting wages in down-and-out countries like Greece, but to let them increase in Germany. The financial account determines the difference between the capital inflow and capital outflow. 1 http://www.tradingeconomics.com/germany/current-account http://www.economist.com/news/europe/21716641-not-reasons-donald-trump-thinks-it-germanys-currentaccount-surplus-problem 2 Germany had a capital and financial account surplus of 9718.91 million euro in February 2017.3 In this year Germany exported more than it imported, thus running a current account surplus. As the European central bank sells domestic currency and buys foreign currency from the market the domestic currency weakens. This will be further explained in the next point. The Exchange rate is the price of one currency in terms of another. The foreign exchange market is where buying and selling of different currencies takes place. The German economy seems set for a solid first quarter in 2017, as the data suggests that Q4’s momentum extended into the new year.4 In December Germany was experiencing some contractions due to seasonal factors, however industrial production swung back to expansion in January. Business sentiment indicators are still showing signs of strength, implying industrial production growth and a recovery in business investment. In March households experienced 3 4 http://www.tradingeconomics.com/germany/capital-flows https://www.focus-economics.com/country-indicator/germany/exchange-rate some higher inflation, however generally German households are in a sound financial position, benefitting from low indebtedness and a healthy labor market. In regards to the Euro there should be a distinction between short term and long term investments. Currently with the new presidential elections in France, where LePen would be against the EU, and also the Brexit last year, the euro was, or still is, in great risk. However, in the short term the euro might actually get stronger again. This is due to the EZB, which wants to end its QE-program (buying government bonds) by the end of this year.5 Last time in 22.01.15 when they introduced the QE-program the euro dropped from 1.40 to 1.05, so it might actually rise again now. However, in the longer term there are still great risks, because there is uncertainty if France will also leave the euro and the whole impact Brexit has is still not clear. 5 http://www.onvista.de/news/trotz-vieler-euro-risiken-der-euro-wird-ueberraschend-staerke-zeigen!60244295 As an investor there would be more advantages to buy bonds in the US rather than in the EU, as in the US they have higher interest rates and also the permanent rise in the USD.6 However, for export firms in Germany it is a huge advantage to have a weak euro, as this increases the demand for products in the US, especially in the automobile industry. Furthermore, the euro gained 1.4% to $1.0861 on Monday following Emmanuel Macron’s victory in the first round of the French presidential election.7 The next thing I would like to consider is the GDP growth.8 Germany is the fifth largest economy in the world and largest within the euro zone.9 Also it is the second largest exporter and its exports account for more than one-third of national output. Therefore, the export of high added value products has been the main driver of growth in recent years. On the expenditure side: household consumption (55%), gross capital 6 http://www.faz.net/aktuell/wirtschaft/waehrung-euro-verliert-an-wert-chance-oder-risiko-13369251.html http://www.tradingeconomics.com/germany/currency 8 https://www.theguardian.com/world/blog/2017/feb/23/germanys-gdp-shows-19-rise-over-last-year 9 http://www.tradingeconomics.com/germany/gdp-growth 7 formation (20%) and government expenditure (19%). Exports account for 46% of the GDP, while imports account for 39%, adding 7% to total GDP. Increase in home real income (real GDP) growth leads to higher return on home assets and results in appreciation of home currency. Germany overtook the UK by showing growth of 1.9% last year, which was mainly due to consumer spending. Economists say that government and state spending will be the main drivers of growth in the upcoming quarters. However, external factors such as Brexit, US trade policy and upcoming elections increase uncertainty and could harm investment, which would have an effect on the GDP growth. The following diagram shows the Inflation rate of Germany.10 In February Germany experienced one of the highest inflation rates since August 2012. The reason for this is an increase in oil and energy prices. Another reason was an increase in food prices, which rose by 4.4%.11 This created pressure on the European Central Bank as the 10 11 http://www.tradingeconomics.com/germany/inflation-cpi/forecast https://www.tagesschau.de/wirtschaft/inflation-deutschland-105.html increase in inflation was close to ECB’s definition of price stability of just under 2%, providing ammunition for some officials pushing for a gradual exit from unconventional stimulus. An increase in home inflation leads to depreciation of home currency using relative PPP. As goods in the home country become more expensive, country import more and this creates a downward pressure on the home currency. However, many say that oil and energy prices will not increase any further, so that inflation will drop again and stay between 1% and 1.5% in the long term. The objective of the Monetary policy of the ECB is to ensure price stability.12 Commenting on consistent criticisms from Germany about the bank's persistently low interest rates, Draghi was resolute, saying: "Low rates are necessary now to get higher rates in the future... The recovery of all of the Eurozone is the interests of everyone, including Germany."13 Since the ECB announced that all of its key interest rates, as well as the scale of its quantitative easing program remain unchanged, just with a bit of a decreased rate (from 80 billion euro/month to 60 billion euro/month), this is not in the interest of Germany. Foreign investors will not invest in a European country as this policy makes it more favorable to invest in countries like the USA, as Germany has low interest rates and investors make more revenues in the US. Furthermore, the monetary policy changes affect the exchange rates the following way. Monetary expansions lead to lower interest rates and exchange rate depreciation. And vice versa, monetary tightening leads to higher interest rates and strengthening of the currency. In the case of Germany, they experience a depreciation in the euro, as they don’t 12 https://www.bundesbank.de/Navigation/EN/Tasks/Monetary_policy/Monetary_policy_decisions/monetary_ policy_decisions.html 13 http://www.businessinsider.com/european-central-bank-monetary-policy-decisions-january-2017-1 have their own central bank, which could raise interest rates again. The next point I would like to discuss is the Fiscal surplus, which Germany is currently experiencing.14 For the last three years, Germany only had a budget surplus. This means that Germany took more money in (taxes and other fees) than it spent (purchases and transfer payments). The German government recorded a net lending of 23.7 billion euros at the end of 2016, which was the biggest surplus recorded since German reunification, as revenues grew to 1,411.4 billion euros, due to a large increase in income tax and property tax payments and in social contributions. Because of the economic boom and high exports, the wages rose which lead to higher tax revenues. Many politicians demand a decrease in the tax rate and Germany should start investing the money and not just use it to pay of old debts.15 Germany should spent more 14 http://www.tradingeconomics.com/germany/government-budget http://www.manager-magazin.de/politik/deutschland/deutschland-haushaltsueberschuss-des-bundes-a1129671.html 15 to boost domestic demand, so that Germans buy more goods from abroad and help to reduce its criticized trade gap with the rest of the world.16 The last macroeconomic risk concerns the Yields on government bonds compared to the US Treasury bonds for the last 5-10 years. Germany’s 10Y increased 0.08% to 0.33 on April 24, 2017. The US reached 2.27.17 The Germany Government Bond 10Y reached an all-time high of 10.80 in September of 1981 and a record low of -0.19 in July 2016. 16 17 https://www.ft.com/content/7a06d15e-f9db-11e6-9516-2d969e0d3b65 http://www.tradingeconomics.com/germany/government-bond-yield US 5Y was lately 1.802, which was much higher compared to Germany which has -0.352. However, it is very difficult to compare the US bonds, which are priced in dollars with the German bonds, which are priced in euros. Both have different expectations of inflation and a relative value of each currency. However, generally the main factors which are responsible for this big difference in yield are the expectation for inflation and currency changes. People would demand a higher yield in a country which has more expected deflation and currency depreciation. There are arbitrage opportunities which make sure of this, called interest rate parity. However, as long as the European Central bank is still using its bond-purchase stimulus program and creating low interest rates, the yield on government bonds from Germany will stay low, compared to the USA. Therefore, it makes no sense for investors currently to buy bonds. b) First of all, I would like to consider some general restrictions and openness information upon foreign investment in Germany. Germany is very open to foreign investment and supports foreigners. Foreign investment has been a considerable contributor to Germany’s economic growth and prosperity. For example, the 1956 U.S.-FRG Treaty of Friendship, Commerce and Navigation, affords U.S. investors national treatment and provides for the free movement of capital between the US and Germany.18 The investment problems foreign companies might face are usually the same domestic firms have to deal with, for example high marginal income tax rates and labor laws which impede hiring and dismissals. One huge advantage is the reliable legal system. The legal framework is solid and the judiciary is independent. Before starting a business, companies have to register themselves in the commercial register and the trade office register. “While Germany's Foreign Economic Law contains a provision permitting restrictions on private direct investment flows in either direction for reasons of foreign policy, foreign exchange, or national security, in practice, restrictions have only been imposed in the sectors of air transport, maritime transport, inland waterways, and rail transport. Additionally Germany limits the foreign provision of employee placement services, such as providing temporary office support, domestic help, or executive search services.”19 In general under German law a foreign owned company which is registered as a GmbH or AG is treated the same way as a German-owned company. However, Germany also has a strict competition law, which fights against cartels, merger control and monitoring abuse. Other benefits would be that Germany has a huge resource of developed infrastructure, a great transportation system, one of the most technologically advanced countries, a highly educated labor force and a very low level of corruption.20 However, there are also some current risks to consider. The member ship in the European Union brought Germany many advantage over the last years, but it also causes some recent problems in the 18 https://www.export.gov/article?id=Germany-Openness-to-and-Restrictions-upon-Foreign-Investment https://www.export.gov/article?id=Germany-Openness-to-and-Restrictions-upon-Foreign-Investment 20 http://www.investineu.com/content/germany-–-major-destination-foreign-investment 19 wake of the European sovereign debt crisis. European Union bailouts have high costs (for example Greece) and if more countries face this issue then this will have a negative effect on Germany’s economy and balance sheet. Brexit last year should also be considered. Many industries, especially the automobile industry, will have some serious struggles with new trade restrictions and customs duties. For 28% of the companies the profit margins already declined, because imports were more expensive due to the low pound.21 Furthermore, France has some new elections now and if LePen would win and France would also leave the EU then this will also have a huge impact on the German economy. Right now it would probably be better to invest in the US, as investors make more profit there with higher interest rates, as I already stated when talking about the low exchange rate. II. Investment Analysis After discussing all of the macroeconomic trends and risks it is now important to analyze Germany’s stock index in comparison to the US and the world. The following graph shows the performance for the last 20 years of Germany in dollars, relative to the USA index return and the MSCI world index return.22 21 http://www.manager-magazin.de/finanzen/artikel/brexit-treibt-auslaendische-investoren-verstaerkt-nachdeutschland-a-1132449.html 22 https://www.msci.com/end-of-day-data-country The following screenshots show the monthly data on Germany’s major stock index return in local (euro) currency r(€)and in USD r($). a) The following table demonstrates the mean, standard deviation and the Sharp ratio for Germany, the USA index return and ACWI. The 3-month T-bill were used as a risk-free asset. For the last 20 years German stock market offered the same average annualized USD return of 6.59% as the USA, which was slightly more than the 5.17% of the World. At the same time the volatility risk (standard deviation) for Germany was higher than the one from the USA and the World. Germany has a standard deviation of 23,83%, whereas the USA has 15,27%, similar to the World with 15,50%. In this sense it would be better to invest in the US than in Germany, as there is less risk. The Sharp ratio of return to risk is less for Germany with 0,19, than the Sharp ratio for the USA or the World with 0,29 and 0,20. This would also mean the USA is more favorable with a higher Sharp ratio. However, the Sharp ratio of Germany is close or nearly similar to the World sharp ratio. Germany has been going through two main crises during the last 20 years. In 2008 was the big financial crisis, which sent exports into a tailspin and 2011 the euro crisis. The average loss in the euro exchange rate was 8.92% per year. b) In order to answer the question whether it is beneficial from an international diversification point of view, to invest into Germany for an investor holding only the USA index portfolio, it is important to look at the correlation between Germany and the USA. The following table shows the correlation between Germany’s stock index return and the USA index return. Usually it is always good for an investor to have diversification, as this increases the sharp ratio and reduces the nonsystematic variance. However, it is important to have a low correlation in order to benefit from the diversification. As the correlation between Germany and the USA is 0.82, it would not be beneficial for an investor to invest into Germany. Countries like Japan would be better for the portfolio, as they give more diversification. Summary It is very difficult to say, whether it would be good to invest in Germany’s stock index for the next five years. Even though Germany has a lower sharp ratio, this does not mean that you shouldn’t invest in it. In order to achieve portfolio diversification and increase sharp ratio it is good to invest into various markets. However, an important component of diversification is international return correlations. The higher the correlation the higher the volatility of the portfolio. Germany and USA have a very high correlation, which means less benefit to diversification. Furthermore, the bond buying program of the European Central Bank will further create a downward pressure on the euro. As an export-led economy Germany may be well-positioned to benefit from both the ECB’s actions and the continued depreciation of the euro. U.S. dollar based investors could seek to mitigate the risk of a depreciating euro through either a single-country play on Germany(currency-hedged) or broad regional exposure to Europe (currency-hedged).23 However, hedging can also reduce or eliminate gains. With the QE program, bond purchases have driven sovereign yields to zero or even negative numbers. This means it would be better to turn to stocks, but as an investor a country like the USA with high interest rates and a developing currency is much safer and more profitable. Even though Germany has a current account surplus and one of the highest GDP growth I think the key factor to consider is currently the political situation. England will leave the EU at the earliest in two years, so the whole impact this has is not clear yet and France election are also not finished. Being part of the EU means for Germany that it is very dependent on the other country’s situation and the decisions of the ECB. All in all, with the unstable situation in the EU I would not recommend to invest in the stock index for the next five years. 23 https://blackboard.pace.edu/bbcswebdav/pid-3154077-dt-content-rid-8258913_1/courses/FIN-35820099.201720/Investment%20in%20Germany%20%26%20Eurozone_%20Blackrock%284%29.pdf
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Australia
The report is segmented into two parts. The first section presents country analysis of Australia
which offers the reader a clear picture of the country’s Macro-economic qualities and various
data that shape the economy and the country. Through the country analysis, sufficient
information is provided to help the reader carry on with the second section of the project. The
second section covers investment analysis. In this section, the various investment opportunities
and the restrictions as well as risks for any international investor seeking capital gains in
Australia.
Country Analysis
Balance of Payments-Current Account Surplus of Deficit (all values in US millions):
Through balance of payments, one gets an overview of record of international transactions that a
country has had within a defined time period. In most cases, the balance of payments is presented
in form of double-entry bookkeeping (Figure 1). In this case, transactions are recorded as credits
or debits. The primary three accounts of Balance of Payment is current account, financial
account and settlement account. In the current account, some of the items contained include
international trade, net unilateral transfers, and the net income receipts from abroad. In case the
imports are so much that they outweigh the exports, the country will be operating in a deficit. In
the instance that exports outweigh imports then the country will be known to have trade surplus.

Figure 1: Key Figure for September 2017

Source: http://www.abs.gov.au/ausstats/abs@.nsf/mf/5302.0

Figure 2: Current Account Balance
Retrieved from http://www.abs.gov.au/ausstats/abs@.nsf/mf/5302.0
As at the quarter of September 2017, the current account deficit that is seasonally adjusted fell to
$9,125 m by a margin of $539m.
Also, there was a fall of $376 m on the balance on goods and services hence leading to a surplus
of $3,056 m in the September quarter 2017. Additionally, the main income deficit reduced to
$11,968 million by a margin of $1,044 million.

In regards to the seasonally adjusted chain volume terms, the deficit level on goods and services
increased within the three months, from $9,592 million to $9,737 million from June to
September 2017. Even though this difference was noticed, no so much contribution is expected
in terms of growth to the GDP.
In March 2017 quarter, the deficit of Australia’s current account shrank to A $3.1 billion,
representing 0.7 per cent of the GDP. This is notably, the smallest since the float of the
Australian dollar as shown in Figure 3.

Even though Australia is known to have high savings rates as defined by the developed country
parameters, the investment rates normally remain higher hence the country only runs a sizable
current account deficits (Figure 4). The last time Australia had a quarterly surplus was in June
1975. From that time, Australia has had a “structural” current account deficit economy that
mainly relies so much on foreign capital.

Retrieved from https://www.austrade.gov.au/news/economic-analysis/australias-shrinkingcurrent-account-deficit
GDP Growth
Figure 5: GDP Per Capita
The Australian economy remains one of the most resilient and sustainable by the different
macroeconomic policies in place. For a record 26 years, Australia has progressively grown more
than three per cent each year. The growth is also attributed to strong institutions and solid trade
ties between the country and the Asia-Pacific region. Australia boasts of being the major
developed economy that never recorded any annual recession since 1992 to 2016 (Figure 6).
Even though the world as has witnessed end of global commodity super-cycle, the Australian
community continue to do well.
In this economy, the rebalancing of economic activity from commodity investments to other
activities remains high and is made possible through the different monetary and fiscal policies,
currency. Nonetheless, Australia’s economy also faces the issue of global risk due to the known
issue of a “low-growth trap”.
Just like the other OECD countries, the level of productivity in Australia has declined from its
highest point in the 1990s, even though this remains within the mean performance in the long
term as shown in Figure 2. Even though there has be...


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