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Invest Local – Stay Global!

by Jan-Philip Schade (02.06.2015)

No matter if you have ever only bought one stock or if you act as a large institutional investor, the
basic question everyone will ask himself is how to potentially maximize the return of his investment. But it is not only about returns, it is also about risk and the individual willingness to take more or less of it. Currently, the so called “Emerging Markets” are one of the most discussed topics when talking about sources of high income. Emerging Markets are countries such as Brazil, Russia, India and China (BRIC) where high GDP growth rates are fueling sales and consequently stock prices. But what about the mentioned risk of these markets? Is it safe to invest in an Emerging Market company? Am I able as an investor to understand the market characteristics, the company reports, the regulatory environment?

The presented research work has filled this gap and developed a methodology that enables investors
to solely invest in home-based stock companies while still being able to fully profit from the growth
opportunities of Emerging Markets.

The key for such an approach lies within globalization and the way companies are involved in today´s
international markets. This is most intuitively shown by the following example: let us consider a representative Bavarian car manufacturer and look at his sales distribution on a global basis. Quickly we will learn that this car manufacturer is selling his cars not only to German customers but also to Chinese and Russian clients (both being exemplary Emerging Markets). Staying with this example we can continue the causality easily by arguing that a growing demand of Chinese and Russian customers (triggered by a growth of their market) will lead to more sales of the Bavarian car manufacturer. All equal, higher sales lead to higher profits and finally to a higher stock price. Based on an unique sample of 20,635 international companies and their geographical sales distribution from 2003 to 2012 the presented work is able to show that investors which invest in domestic companies with a large Emerging Market sales exposure (e.g. the Bavarian car manufacturer) can achieve the same portfolio returns as if they had directly invested in Emerging Markets.

Fig. 1: The figure shows the results of an OLS regression of the novel methodology to gain Emerging Market exposure (“fundamental method”) and two comparable statistical-based methods (“correlation and beta method”) with an Emerging Market index...[Bildunterschrift / Subline]: Fig. 1: The figure shows the results of an OLS regression of the novel methodology to gain Emerging Market exposure (“fundamental method”) and two comparable statistical-based methods (“correlation and beta method”) with an Emerging Market index. The ex-post beta represents the regression coefficient indicating the co-movement of the regarded strategy´s returns and a representative Emerging Market index. “D1” stands for the decilebased portfolio with the highest sales (ex-ante beta or correlation) exposure, “D10” for the decile with the lowest exposure.

To prove the validity of the developed methodology it is compared to several commonly known
statistical models and evaluated based on different criteria. One of these criteria is based on a simple
ordinary-least-squares (OLS) regression which is able to capture the relation between the returns of
the investment strategy described above and the returns of the regarded Emerging Market (proxied by
the MSCI Emerging Market Index). In case the introduced strategy is able to result in returns which
are similar to the Emerging Market Index we should find a positive and significant regression coefficient.
Fig. 1. shows that portfolios which are based on high sales-exposures inherit positive coefficient
values (D1) whereas portfolios with a small exposure (D10) have negative coefficient values. Further it
can be seen that two pure statistical models perform similarly.3 Given that this result also holds for
further tests it can be concluded that the proposed investment strategy enables investors to invest in local companies while still participating from the development of Emerging Markets on a portfolio
level. Finally it should be noted that in contrast to the pure statistical methods investors are able to
understand the source of the strategy´s co-movement with the Emerging Market since it is driven by
fundamental sales. Statistical models do not offer this degree of transparency and therefore might be
more unattractive for investors wishing to participate from Emerging Market growth.

Scientific Career
  • since 2014
  • Ph.D. candidate, Universität St. Gallen (HSG)
  • 2011-2014
  • Elitenetzwerk-Studiengang „Finanz- und Informationsmanagement“ (M. Sc. Hons.), Universität Augsburg und Technische Universität München
  • 2008-2011
  • Bachelor of Science Technology- and management-orientated business administration (TUM-BWL), Major in Finance and Mechanical Engineering, Technische Universität München

Honors and Awards
  • * Allianz Global Investors scholarship (2012)
  • * Member of KPMG’s highQ-Program (2011)