Has Capital Raising Become Hair-raising - Book Report/Review Example

The researcher states that the countries which are experiencing liquidity problems are known as the PIIGS which are Portugal, Ireland, Italy, Greece, and Spain which earlier sought bailouts from the European Central Bank (ECB) and the International Monetary Fund (IMF). It is ironic indeed that a country like Italy (as cited in the article as an example) has seen its stock market gain by an astounding 16.3% versus that of the S & P 500 which has only 7.2% so far. Italy is having problems with its budget deficits and is in danger of defaulting on its many sovereign debts yet its stock market performed quite well.

However, this good performance can be seen only when measured in dollar terms but this is a result of the euro's depreciation. Many international investors go to great lengths to try ensuring a well-diversified portfolio. They invest in mutual funds and hedge funds in trying to minimize their risks but sometimes unforeseen events can unravel their best plans. International finance is indeed a very risky undertaking and one must be prepared to cover all the bases, so to speak. In this article, the author showed how conventional wisdom went down the drain as the recommended usual strategy of investment by diversified funds did not perform very well.

Most international funds managed by expert managers thought they would do well by investing largely in emerging markets but this turned out to be a dud or a disappointment for them. The fund managers made a big mistake in their general mistrust of European markets and getting enamored with emerging markets such as India (down 9.8% to date) and China (up by a minuscule 2.8% only so far). These “savvy” international large-cap core funds are weighted less in Europe than they should have been (only 59% on the average) and favor the emerging markets when they should have raised their Europe weightings much higher.

The net result is these funds missed out on the extraordinary gains in European stocks due to the favorable exchange situation as the euro depreciated against the US dollar. Many fund managers tried to shock-proof their international funds by employing a quite sophisticated system of currency hedging to nullify the possible effects of a devalued US dollar. This had been the case in the past twelve months when the funds had a great tailwind as the US dollar had tumbled on international markets but it has since recovered most of that lost value.

In retrospect, the two main reasons why international funds did poorly is an overwhelming love of emerging markets and a failure to capitalize on favorable exchange rate movements in Europe. The three most important elements of any investor are safety, profitability, and liquidity. Depending on an investor's objectives and his risk profile (whether risk-tolerant or risk-averse), the three elements can change in the order of priority.