Using Financial Analysis to Select the Best Place to Invest from Hong Kong, Japan - Case Study Example

CRITICAL EVALUATION USING FINANCIAL ANALYSIS TO SELECT THE BEST PLACE TO INVEST FROM HONG KONG, JAPAN AND UK STOCK MARKETS by Student’s Name Course Code+Name Professor Date Critical Evaluation using Financial Analysis to select the best place to Invest from Hong Kong, Japan and UK Stock Markets Recently, there have been varied opinions in the investment circles in America about investing in the international stock markets. It turns out that investors in the international stock markets have been enjoying the benefits of international trade and diversification by getting higher returns and less overall risk exposure compared to the local investors. On the other hand, some investors have wrongly dismissed international stock trading citing that it is complicated and risky (Gibley 2012). Even though indeed there are benefits to take advantage of, the investor needs to learn and know the variables affecting this endeavor before taking the next step (U. S. Securities and Exchange Commision 2012). This paper presents a critical analysis of Hong Kong, Japan and United Kingdom stock markets with regard to their performance to select the best place to invest in. The benefits of international stock diversification cannot be underestimated. One of the key benefits is spreading of risks due to diversification. Diversification draws its importance from the fact that stocks are highly responsive to economic environment. Of course some stocks are more volatile than others, but the bottom-line is that the economic scenario in a given country will affect the stock market performance both directly and indirectly (Thompson South-Western 2007). Stocks in the same country generally behave in a similar way since they are affected by similar conditions. That only means that if the stock movement in unfavorable, the investor is to experience generally total loss. This is putting all eggs in one basket. Internationally diversified portfolios will spread the risks since all it sometimes stocks move differently with stocks in the American market. Taking advantage of potential for growth is also an opportunity presented by international stock diversification. Due to difference in the variables affecting the economies, investors may position themselves strategically to reap from the growth in other economies. Some of these variations are brought about by the natural resources availability, the population structure, economic policies and export magnitude. Taking advantage of emerging markets could also increase returns to investors. Emerging markets grow faster because their debt level is lower and their household income is low (Gible 2012). The International Monetary Fund estimates that emerging markets will grow up to three times that the developed economies (Gibley 2012). The Japanese Stock Market Stocks in the Japanese stock market are currently very promising, a breath of success after a period of poor performance. A come back is finally being realized. In this market, the high performing blue chip companies are grouped in the Nikkei 225 index. In 2012, the Nikkei 225 has risen by an impressive 69% (Thomason, Nohara, & Wang 2012). Japanese firms are sharply skyrocketing in earnings levels. This could be attributed to the stimulus program by the government to enable Japan to pick up from the low performance. (Downloaded from Bloomberg) The above graphical diagram shows how the Nikkei 225 has fared since March 2009. At the end of the curve it shows the recent improvement of the stock’s performance shown by the Nikkei index. Statistic Japan US Mean 0.0007 0.0085 Median 0.0026 0.0024 Maximum 0.1010 0.0822 Minimum -0.0955 -0.1737 Std. Dev. 0.02140 0.0189 Skewness -0.4227 -1.3756 Kurtosis 6.40004 12.9794 Jarque-Bera 466.293 4397.464 Correlation Coefficients Japan 0.9999 US 0.7695 1.0000 The statistical table below shows that the standard deviation of the earnings in the Japanese stock market in the last 5 years have been rather volatile. It is the most volatile of the three stock markets. From the 20th century, the investors in Japan had a different economic environment because the Japanese government then took a different path. Generally, the investors in the Japanese stock markets experienced extremes of huge returns or huge losses in the 20th century. Taking the different path was attributed to variables like culture and the size their economy. These cause considerable difficulties for the foreign investors. Even in the period after the 2nd world war, the Japanese stocks did not show any improvement, a time when most of the other countries showed tremendous growth. In fact, the equities experienced a loss of 95%. The bills suffered a loss of 99%. The Japanese Yen also considerably lost value. After over 60 years since the reopening of the Tokyo Stock Exchange, the Japanese stock exchange has grown dramatically and Japan becoming an economic powerhouse. For example, an investor in 1949 would have earned over 200 times returns by 2000 (Francis & Adams 2007). Stock hit the all time low during the year 2011 after the earthquake menace. The Nikkei 225 plummeted by a huge 10.6% to closing at 8605.5. This was a drop of over 1000 Nikkei 225 points after touching an 8227.65 low marking 14% fall (CBC News 2011). The earthquake, which destroyed several businesses and claimed the lives of over 10000 people, had a huge impact in the economy. Toyota for example temporarily halted their production of cars. The later experienced a loss of over 20 vehicles. This auto-manufacturing giant lost by 7.4%. The Japanese Yen dropped to 81.79 against the dollar. The Dividend yield in the Japanese market is at 2.3%, which is an impressive rate. The inflation level is generally low. The Nikkei index is only at 10times the focused revenue. The economy of these countries forms part of the analysis of the stock market performance. Some analysts have taken issue with the current indebtedness of the Japanese government. The Japanese human resource is composed of mainly old people. The March 2011 earthquake on the flipside proved to the world that the Japanese economy is a resilient one owing to the speed with which the economy has picked. The 2011 gross domestic product was an impressive 4.1%. Such a rate is faster than big economies like Australia, United States etc (Hutchinson 2012). The Japanese Yen is currently doing well at 79 US Dollars up from 120. Products by the Japanese companies have had very good reception in the world and reputed to be good products. They have explored various products even more than the United States, and sustained competitive advantage. The United States can rival Japan in only a few products and lines of production. Even though the stock market is lower trading below its best in 1990, the Standard and Poor’s rating of 500 is equally below the best of 2000. The high growth rate and reconstruction in Japan will soon see it recoup all the debt. The Hong Kong Stock Market The Hong Kong stock market posted the best results in 2011 with many analysts and investors expressing optimism that this associated period is an attractive period for investor to take advantage of. This market had a fair share of uncertainty at the beginning of 2011 caused by a multiplicity of market variables. The trading instruments currently in the Hong Kong stock exchange are warranties and equities (Ng 2012). Statistic Hong Kong US Mean 0.0066 0.0085 Median 0.0017 0.0024 Maximum 0.07990 0.0822 Minimum -0.0555 -0.1737 Std. Dev. 0.0205 0.0189 Skewness -0.4333 -1.3756 Kurtosis 6.2754 12.9794 Jarque-Bera 472.291 4378.464 Correlation Coefficients Japan 0.1000 US 0.7695 1.0000 From the statistical table above, the standard deviation of the earnings from the Hong Kong stock exchange shows that the market is moderately volatile in the period between 2007 – 2012. The Chinese stock market has been experiencing market anomalies within the structure of returns, which is serial dependent. Te china stock market got affected greatly in the Asian financial crisis of 1997. Their exports dropped by a from a growth rate of 20% in the previous year to 0.5% in 1998. Inflow of foreign investment also followed that year adding insult to the already hurt economy. The anomalies and volatility experienced in the Hong Kong stock exchange are still worth enough for the current investor and potential investor of Hong Kong stock market. Such information in important to enable them understand the market situation there. Downloaded from Trading Economics “http://www.tradingeconomics.com/hong-kong/stock-market” The graph above adapted shows the current good performance of the Hong Kong stock market. The Hong Kong stock index (HSI) is seen to be improving considerably over last few months (Trading Economics 2012). The HSI is trading at 636 points, equivalent to 2.89%. The average from year 1964 is 6739 points. The highest points the Hong Kong Stock Index ever hit was 31638, which was reached in the year 2007. The highest performing blue chip companies are grouped into the Hang Seng index. It looks out for the performance of 50 blue chips and it is weighted on capitalization basis, with a base value of 100. As at today December 29th 2012, the Hong Kong stock exchange has in the last 1.5 years. This came with revamped hope and a signal for potential investors to take advantage of the strengthening economy. The closing of the Hang Seng index was 22656.9 points. The Hong Kong stock market ranks number 10 in the world. In Asia it is the second largest after the Tokyo stock market. Especially after 2009, Hong Kong Stock market has grown considerably after the launching of the Growth Enterprise Market. Afterwards there was a proliferation of small and medium enterprises, which saw the economy, take a good shape (Walter Cluwer Ltd 2012). The year 2010 was a prolific trading year for this market. There was a growth in listing by 55% compared to the previous year. 35 trillion shares were traded during that year. The listed companies rose to 1244. The market capitalization was almost HKD 30 trillion that year. By 2011, total number of listed companies stood at 1258 and 8200 stocks listed on the main board. Turnover in value was HKD 22 Billion with the market capitalization standing at HKD 137.8 Billion (Walter Cluwer Ltd 2012). The Hong Kong Exchange launched the strategic plan 2010-2012. It was aimed improving the infrastructure, reiterating its position as a global venue for listing and development of the renbinbi capability. There are major changes being anticipated which the investors should take note of. The plan to extend the working hours will certainly increase the quality and magnitude of the service delivered and gives it a competitive advantage over the other global players. Efficiency is also expected to be increased by the plan to trade options and futures in the afterhours. The stock markets risk management is critical to clear improve the clearing of the capital adequacy. The over-the-counter market will not be left out in the reforms. A clearinghouse will be established before the lapse of 2012. Communications will be improved with the advent of a Data Centre. The UK Stock Market The UK stock market can be compared to the general performance in the euro word recently. Europe has experienced a rather sluggish growth recently causing complains and dissatisfaction from various factions. The political will and reforms enjoyed have not brought a direct benefit in the economy yet but they have set an important foundation. Long term benefits are therefore anticipated (Cook 2012). The UK has a long record of stock market date due to long time it has engaged in stock trading. The history dates back to the time before World War 2. In the 1950s after the World War 2, fixed income securities experienced losses after the British console suffered inflation and plummeted by 80%, where the other equity instrument enjoyed one of the highest returns in the UK stock market history. In comparison to the US stocks, the British stocks performed poorer than the US stocks in the 20th century. Thereafter the UK stock market has generally been over performing the US stock market. The London stock exchange remains a key venue in the entire Europe and it still is the largest stock market in that continent (Eckett 2012). The table below relays descriptive statistics for evaluating performance of the UK stock market in comparison to the United States for the period between 1992 and 2010. The means are positive for the two markets are less than 0.001, the US posting a larger mean of 0.0009. From the standard deviations it can be concluded that the UK stock has been more volatile compared to the US counterpart with SD 0.0192 although they are roughly similar. Below the table are plots showing the volatility further. The table also presents the correlation between the markets showing that the two markets indeed influence each other in operation. Statistic UK US Mean 0.0006 0.0009 Median 0.0022 0.0025 Maximum 0.1005 0.0818 Minimum -0.0973 -0.1747 Std. Dev. 0.0192 0.0191 Skewness -0.4275 -1.3650 Kurtosis 6.3993 13.4794 Jarque-Bera 465.853 4446.525 Correlation Coefficients UK 1.0000 US 0.7695 1.0000 The UK The US .20 .20 .10 .10 .00 .00 -.10 -.10 -.20 -.20 92 94 96 98 00 02 04 06 08 92 94 96 98 00 02 04 06 08 (Downloaded from “www.finance.yahoo.com”) Benefits of Investing in the Japanese Stock Market Despite the fact that the bear market has lasted for a long time and the 2011 earthquake even further damaged the market, the investors stand to benefit a great deal from the rapid rise of the economy and market (Jubak 2012). The recent developments, which hit Japan, send to a low base, meaning that the performance will most likely rise. The second reason is that the projected economic growth rate of 2% is impressive. The government has appropriated a substantial piece of budget for the rebuilding of the infrastructure. The household spending is also imminent due so consumption in home finishing, housing, etc. Another reason for expected growth of the Japanese stock is the projected inflation of 1%. This inflation rate will stimulate the economy and it will certainly grow. Finally, the plan by the government to cut government deficit spending is also a reason for investors to smile. The government will thus rely on the fund from earning from sale of new bonds. Benefits of investing in the Hong Kong Stock Market The Hong Kong Stock market is picking up from the adverse effects of the Asian crisis at a fast rate. Hong is at rapid growth. In 2006, the GDP grew by 6.8%. In the year 2011, IPOs hit $43 billion. It is currently the second most popular stock for companies, which want to list. The tourism sector is booming with hotel booking rising steadily at 90%. Currently, the stock in the Hong Kong Stock Exchange based in China mainland has risen to 50% from 13% in 1997. In the last decade, the stock market value has shot up by 300%. This stock market is therefore very promising with many benefits for the international investors to take not of. Benefits of investing in the UK Stock Market For the European economies, fiscal policies are expected to be the tools to help stabilize the economies. Proponent analysts argue that the emerging economies are not expected to do much next year. The stock to look out for is the one from the advanced economies (Cook 2012). The UK market is an advanced economy and the government has outlined many policies aimed at streamlining the economy. Yields are expected to be high. Financial Strategies on the Tree Stock Markets In international stock market investment, diversification is important to spread the risks. In the Japanese stock market, the best investment strategy would be to target small companies. This is motivated by the fact that the one of the biggest economic variables challenges is the high rate of exchange. Small companies are the biggest beneficiaries of domestic growth and development and they supply to the export giants. An American investor may invest in the financial sector, which has remained resilient even after the adverse effects of the Asian crisis of 2008 Conclusion From the analysis of the performance of the stock market in the three countries, it comes out clearly that it is of advantage to the investor invest in international stock markets. The strategies reveal that an assortment of portfolios which and investor can choose to invest in. In conclusion, the Japanese stock market stands out from the rest as the stock to be out looked in 2013. It is in fact the best choice for a risk adverse individual owing to the fact that it has very low chances of going down. The Japanese economy has the highest growth rate among the three peers. In addition, 2013 has no elections in Japan ruling out the risk, which could results from politics. Politics are crucial because one cannot separate politics from economic development. It is worth noting that diversification is important. Reference List CBC News 2011, Japan stock market falls more than 10%, Available at: http://www.cbc.ca/news/world/story/2011/03/15/japan-stock-market-down.html [viewed December 31 2012] Cook, H 2012, 2013 Lookout: European equities one to watch. Available at: http://www.morningstar.co.uk/uk/news/97817/2013-Outlook-European-Equities-the-Ones-to-Watch.aspx [viewed December 31, 2012] Eckett, S 2012, UK Stock Market Almanac, London, Harriman House Publishing. Francis, T & Adams, M 2007, Japanese Securities Market: A historical survey, Seihei Okuyama. Gibley, M 2012, Why Invest Internationally? Available at: http://www.schwab.com/public/schwab/resource_center/expert_insight/investing_strategies/international/why_invest_internationally.html [viewed December 31, 2012] Hutchinson, M 2012, Investing in Japan: is there light at the end of the tanel? 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