Case Overview (Introduction summarizing the case):
Throughout this case study, which is one of the requirement of the principles of finace course, the concept of globalization of markets will be explained, and the factors that led to globalization of markets will be determined. Major global issues related to globalizations of financial markets will be also displayed and discussed. In addition, recommended actions and solutions will be suggested to investors in order to help them reduce the impact of the risk on investments. Last, I will put my self in the shoes of an individual investing in the Qatari stock market, and suggest risk minimization recommendations to investors. This analysis is an aplication of the knowledge I gained from the principles of finace course, and it is supported by valid references and sources of information.
The termonolgy of globalization was firstly introduced to the english language in Merriam webster’s dictionary in the year 1961 (popescu,2004) , but it gained popularity during the eighties. At that point of time, the term globalization reffered to technological improvements which aided international trade transactions. Finacial markets globalization mainly resulted from the process of innovation and technological developments (claudia,2012) , and it is associated with a set of advantages, including: the growth of global or multinational firms, economies of scale through specialization in certain goods, high quality products, and lower prices, on the contrary, the globalization of financial markets is associated with a series of problems espically from poor developing countries, as they struggle to compete with rich developed countries, as they are not prepared for such circumstances . The main factors contributed to the accelerated growth of the transactional financial markets since the late 1970’s iclude: Macroeconomic inestability among countries and natiobs, the movement of countries toward deregualtions and liberization of trade , and breakthroughs in technology, which led to a decline the unit transaction cost, and increased the capacity for holding large volume of transactions. As a result of globalization, global firms face different laws and restrictions, while they operate in different regions. Such as legal and economic difficulties and challenges are dramatically different from those a domestic company would face. Transactional firms, Unlike domestic companies, have financial obligations in other foreign nations, an example of their basic commitmenets is international taxation, which are complicated, as nations differ taxation policies.
Mainly, multinational companies must deal with risks arising from the fact that the firm does business across the nation, such risks include: ownership restrictions, exchange rate, intellectual property, and political instability. One of the main reasons why firms operate in foreign makets is the financial concept which states that putting all investmenets into the stock of an individual firm is not considered a wise decision. Similary, it is not favorable for a firm to invest in a single market.
In recent years, political and economic risks associated with international investments have jumped significantly this change is due to the effect of globalization. As an illustration, some MENA countries including Tunisia, Libia, Egypt, and Yemen governments have been overturned. Wheareas, counties such as Syria, and Iraq are still in turmoil. In addition, the confrontaion over Iran’s nuclear program, and the Arab-Israeli conflict. Such develpments have a great effect on investmenet activities in the region. There is no doubt that due to such issues, MENA countries are facing Macroeconomic issues like, increasing unemployement rates, inefficient public sector, and under-developed financial system. In addition, the dramatic decrease in the prices of oil since June 2014, as a result of the change in OPEC policy This drop in the prices of oil has a mixed effect on oil exporting and importing countries (Ahmed,2016). To begin with,oil improrting countries may attain an increase in their real income, While oil exporting countries may face financial problems accompained by economic shocks that spreads out to other regions. Besides, International investmenet involves currency conversion transactions at the beginning and ending of the investment period (Eun and Resnick, 1998). Global firms face exchange rate risks under both fixed (or semi-fixed) and floating conditions.
Recent global issues had increased the need of a financial manager who can alleviate the impact of the risk on portofolio investments. In order to minimize such risks, it is recommended to balance investments across various sectors. Typical fields include the telecommunications sector, engery, financials (banks), and others. Spliting the investment portofolio across different sectors, would help in balancing the normal ups and downs these different fileds may experience. In addition, successful portofolio managers diversify among different investment vehicles such as: stocks, real estate, mutual funds and bonds (Investopedia, 2018). Diversifying the portofolio across different asset instruments will reduce the sensitivity of the portofolio to swings in the market. It is important to note at this point, that bonds and stocks move in the opposite direction,
therfore if a portofolio is diversified across both, unfavorable movements in one will be stabilized by the positive results of the other. In addition, opting for an international diversified eportofolio is even more beneficial for investors than domestecally diversified portofolios, as they show lower volatility. According to the empircal findings of Eaker and Grant (1990), which compared between foreign mixed investment on one hand, and local investmenets in the USA on the other hand, showed that when a foreign portofolio increases gradually, returns from the investment increases. This process continues up to the point were the ratio of the foreign portofoilio reaches 60% of the total portofolio.
If I were in the shoes of an investor, investing in the Qatari stock market, I would design a well-diversified portofolio, which aims to provide me with the highest return possible for a given level of risk. This can be achieved by allocating investments among a variety of industries,and instruments. In other words, risk is minimized by investing in different fields that
would each react diffently to the same occurrence (Lioudis, 2018). To illustrate, let’s assume that an investor has a portofolio of only industrial stocks (QNCD, IQCD,GISS). If it is publicly announced that workers are going on strike, and all projects are cancelled, this will result in a decline in the share price. Therfore the portofolio will experince a severe decrease in it’s value. Moreover, as an investor I must use statical tools to quantify risk, and return and I must study the relationships between different stocks, and make decisions based on the fact that the more uncorrelated stocks are, the better.
All in all, globalization of financial markets is one of the most significant economic changes over the previous decades. Globalization had opened doors to many international investment opportunities. However, all investments involve certain amounts of risk. Some examples of international investment risks include: political risk, currency risk, and the risk of nationalization. Risk on investment cannot be compeletely eliminated, but diversication can difinitley lower the potential risk of loss. To illustrate, an investor’s local portflolio may have decreased by 15%, wheareas, his international portofolio may have improved by 20%, leaving him with a net investment return equal to 5%. Moreover, an international portofolio diversifies the exposure of investors to currency exposure. For instance, if an American investor buys a stock from Eurnext Paris Stock Exchange, he is also purchasing Euros. If the value of the U.S
Dollar declines, the international portofolio can help in neutralizing the fluctuations in currenices.
Case Overview (Introduction summarizing the case):