International Investing Strategies Based on Earnings-to-Price Ratios and GDP Growth with Consideration for Risk and Corporate Governance
Date Issued
2005
Date
2005
Author(s)
Dunn, Roger
DOI
en-US
Abstract
Reference Information
Dunn, Roger Y.
“International Investing Strategies Based on Earnings-to-Price Ratios and GDP Growth with Considerations for Risk and Corporate Governance”
National Taiwan University, International Business MBA Graduate School
Advisor: Professor Lin Xiu-Wei
January 31, 2005
Abstract
This thesis attempts to equip the American investor with an international investing strategy that outperforms the US financial markets (Dow Jones and Nasdaq) and the average return across nine Asia-region financial markets (Hong Kong, Singapore, China, Taiwan, Korea, Japan, Malaysia, India, Thailand).
This field of study did not seem important or financially worthwhile until recent years because although the US stock market has realized over 200% cumulative gains from 1994 to 1999, (Dow Jones index increased from 3,800 to 9,000, and NASDAQ100 index increased from 775 to 1928), however, in the past 5 years from 1999 to 2003, the United States stock market gained only 10% for the Dow Jones and 0% for the NASDAQ (Dow Jones index moved from 9,000 to 9,800 and NASDAQ 100 index remained unmoved at 2000). In contrast, from 1999 to 2003, the cumulative five-year stock returns across nine Asia-region financial markets was 56% vs. 10%(Dow Jones) vs. 0% (Nasdaq). As for the future, it is unknown whether US financial markets will under-perform or out-perform the Asia-region financial markets, however this thesis provides American investors keen on investing internationally a logical and profitable strategy.
The strategy applied in this thesis requires the knowledge and calculation of the weighted-average of the top twenty companies on a country’s stock exchange in terms of market capitalization: Price (P), Earnings(E), Dividends(Div), and each country’s expected annual GDP growth for the next year (G). These factors are combined to create an “indicator value” (known as “EG/(P+Div)” in this paper) calculated as E multiplied by G divided by the sum of P and Div, which assists investors in deciding which country to invest in. Risk and accounting reporting differences across countries are taken into consideration. In total, this thesis offers five strategies and compares then against each other in terms of annual returns, risk, corporate governance, etc.
Analysis of the five strategies reveals a higher return on investment compared to averages ranging from 163% to 288% of average return, with a risk higher than the averages ranging from 18.3% to 21.68% standard deviation. When returns is divided by standard deviation, strategy #1 proves to be the best in terms of % return per % risk (standard deviation).
The concepts in this thesis are easy to understand, logical and simple. Its innovative methodology integrates previously existing concepts, thus only subject-related previous work could be found, but little previous research could be found directly related to this field. In conclusion, the author feels there is further research that can be done to verify and build upon this basic structure and strategy.
Subjects
公司治理
International Investing Strategies
GDP Growth
Earnings-to-Price Ratios
Risk
Corporate Governance
Type
thesis