QUESTION

 

Given the current state of the US stock market your firm has decided to diversify its fund by
investing internationally. Your manager understands the best way to do this is by investing in
IShares. Your team is tasked with providing a recommendation as to which International IShares
your firm should invest in. You may only recommend one IShare and you must justify your
recommendation. Your manager has asked that you complete the following as part of your analysis
by the deadlines given.

1. Select 3 country IShares from the list provided below for your team to analyze.

2. Evaluate the performance of the selected IShares for 2018, 2016-2018, and 2014-2018. Your
team should compare the three IShares and should also make comparison with the
performance of the S&P 500. (Note your evaluation should be completed
by gathering data on your IShares from finance.yahoo.com or from Bloomberg (BAS
N127). Each team is to complete their own performance calculations using excel and
all are encouraged to support analysis with charts and tables. In addition to the excel
file, each team should submit a 3 to 4 page paper (page count does not include
charts and tables) assessing the 1 year, 3 year, and 5 year performance of the IShares
being evaluated).

3. Select the “best” 2 of 3 IShares options from your performance evaluation and conduct a
country SWOT analysis to provide additional support for potential investment.

(Each group is to submit a 5 to 6 page paper and this paper should include a
final recommendation as to which IShare your team recommends for investment).

4. Each team will give a 10-minute presentation on the project – this presentation should
address parts of the project. (Presentations will be on 2/26/19)
All sources, text and data, must be properly cited. In addition to submitting a hard copy of each
paper and the presentation at the beginning of class on the due dates noted above, each group
should upload their paper/presentation and supporting excel file to D2L prior to the start of class
on that date.

IShares that may be considered for evaluation:

• EWJ – IShares MSCI Japan ETF
• EZU – IShares MSCI Eurozone ETF
• EWZ – IShares MSCI Brazil ETF
• INDA – IShares MSCI India ETF
• EWY – IShares MSCI South Korea ETF
• MCHI – IShares MSCI China ETF
• EWT – IShares MSCI Taiwan ETF
• EWC – IShares MSCI Canada ETF
• EWG – IShares MSCI Germany ETF
• EWH – IShares MSCI Hong Kong ETF
• IEV – IShares Europe ETF
• EWU – IShares MSCI United Kingdom ETF
• EWA – IShares MSCI Australia ETF
• ILF – IShares Latin America 40 ETF
• EWW – IShares MSCI Mexico ETF
• AIA – IShares Asia 50 ETF
• EWL – IShares MSCI Switzerland ETF
• EWQ – IShares MSCI France ETF
• EWM – IShares MSCI Malaysia ETF
• TUR – IShares MSCI Turkey ETF
• ERUS – IShares MSCI Russia ETF
• EWS – IShares MSCI Singapore ETF
• EZA – IShares MSCI South Africa ETF
• EIDO – IShares MSCI Indonesia ETF
• ECH – IShares MSCI Chile ETF
• EWD – IShares MSCI Sweden ETF
• KSA – IShares MSCI Saudi Arabia ETF
• EIS – IShares MSCI Israel ETF
• QAT – IShares MSCI Qatar ETF
• EDEN – IShares MSCI Denmark ETF
• EWK – IShares MSCI Belgium ETF

 

ANSWER

 

iShares Evaluation

2018 was the year of uncertainty and it started with a fall in markets all over the world. Among the looming tensions of a forthcoming trade war all the markets saw an increase in risk and a decrease in returns. The markets recovered eventually but the overall impact of the risk remained throughout the year as there was again an year-end decrease in returns. However, the Chinese iShares have shown growth in 2018. The year 2018 was an exceptionally good year for the Chinese iShares where they gave an overall growth of 18.22% year-on-year. The growth seems exceptionally well when compared to the year on year growth of a negative of 6.24% of S&P 500. The uncertainty in the Chinese iShares remained low with the standard deviation of the daily market return fluctuating at 2.62%. This was a little higher compared to 1.07% standard deviation of S&P 500 index but at the same time the index reported a decline in its value.

When compared over 3-year horizon investors are bound to prefer the S&P500 index and stay clear of the iShares of China. The MSCI iShares China index fell by 14.87% over the three-year period with a standard deviation of 2.58% on the daily returns. At the same time the S&P 500 index grew by 22.65% with a standard deviation of 0.82%. The same results are seen in the longer time period of 5-years where the MSCI -Shares China index fell by 44.23% and S&P500 rose by 35.63%. The standard deviations also followed a similar pattern.

It can be clearly seen that the iShares have recently shown a potential of growth, but it has to continue the trend for a longer run to gain more market acceptance. A risk averse investor will choose the S&P 500 index over the Chinese iShares not just due to the superior returns but also due to more stability in the market, as the risk and uncertainty is clearly more in the MSCI China iShares index [3].

The difference in the performance of the MSCI iShares China index and S&P 500 index is much more clearly visible when both the indexes are rebased to 100 on 31 December 2013. We can see that the China iShares index saw a major dip in its valuation in the second half of 2015 when it fell from close to 140 points to just over 65 points. There was a gradual decline in the complete year of 2017. The index has consolidated back in 2018. In contrast the S&P 500 index shows a much smoother and constant growth with dips only in the last year in 2018.

The rebased indexes do show a decrease in the gap between both the index in the recent one and a half year pointing towards better future prospects of the iShares than the present. This might lead to an increase in the cash inflow in the iShares. The same can be better evaluated from the trading volumes of both the indices.

The increase in the iShares index can partially be attributed to the inclusion of the A-shares of the Chinese mainland to the MSCI EM index. The rise in the iShares index is close to the announcement date of the news when MSCI declared its intentions to include the A-Shares to its EM index. However, the point of concern here is that the index actually took a dip after the actual inclusion of those shares to the EM index [4].

The S&P 500 index has almost had the same average daily trading volume in the last year as it has in the previous 3-year time horizon and the 5-year time horizon. This shows a stagnation in the major index whereas the MSCI iShares China index has shown potential growth and the trading volumes have seen a growth. In the 5-year horizon the trading volumes averaged to a daily value of around 7 million. The same average increased to 8.5 million in the recent 3-year horizon and saw a further increase of half a million reaching a total of 9 million in the last year.

The increase in trading volumes show that there is an increase in the investment in the iShares of China which means that if the index( and hence the underlying exchange traded funds) is able to maintain growth in the coming year, it will definitely see increased capital inflow and can turn into a highly traded index. Obviously when seen in actual numbers the volumes of the iShares are less than 0.3% of that of S&P 500 index.

Overall, we can say that the MSCI iShares China index has seen an increased interest from global investors in 2018. This has slowly developed in the recent years and the trends show that it will increase. With the increased returns of the iShares (which beat the S&P 500 index) it should be able to attract more investors in the future and show sustained growth.

CHINA – SWOT

Strength

• Even with the announcements of the new tariffs on Chinese imports by the Us president, it was estimated that the total damage was contained between 0.1% and 0.2% of its GDP.

• The value of Chinese currency has consolidated against Dollar even as China started to move towards a free float currency in the end of 2016.

• The largest change that has fuelled the growth in China is the movement of its market from loss-making state-owned enterprises to profit making private companies which are driven by profit margins. This has also allowed the SOEs to move to the same business model.

• China has been world pioneer in maintaining its GDP growth rate among the highest in the world. The GDP growth of China for the year 2017 was 6.8% which is the highest growth the country has seen since 2010. It was even more than the government’s target of 6.5%

• The country has utilised its high population perfectly using it as a source of cheap labour and thereby making it a manufacturing hub for many other nations [2].

Weakness

• The high population of China is also one of its major weaknesses where only 71% of its population currently finds employment. Being able to find jobs for the entire population is the continuous challenge that the government faces.

• Initially the heart of the nation’s growth, its rural sector is now facing problems with respect to continued growth. With time more and more people rely on the services sector to provide them with employment.

• There is also a dire need of capital inflow in the banking sector of the country. The banks are currently undercapitalised.

• Sale of property in China is a complicated affair where many local governments of China have imposed restrictions on the sale of property and mortgages. This has led to a slowdown in the real estate sector of the country. There is a spill-over effect on industries like steel as well.

Opportunity

• The country has shown potential to quickly shift from rural to urban population. As the population of the country urbanises it will form the perfect economy for businesses from various countries to shift their businesses to China

• Recently the A shares of china were added to the MSCI EM (Morgan Stanley Capital International – Emerging Markets) Index. Such moves create opportunities for the inflow of huge funds into the Chinese economy which it can capitalise on.

• There has been an increased growth in the services sector of the country as the organisations privatise and focus on a profit-making business model. The country now forms a business hub for various multinational and some of the largest tech giants like Alibaba are based out of the nation.

Threats

• The economic zone dispute in East China Sea between China, South Korea and Japan have created regional tensions for long in the region. This also creates unfavourable environment for trade in the East china sea. Such disputes reduce the trading potential of the giant economy.

• China controls a major portion of the information that is released from the nation to the outside world. Due to that there can be no audit of the information and a major portion of investments in China have to depend on speculations. This create an environment of distrust on the nation which hampers the investors’ confidence in the nation. It also creates a bad image of the nation in the mind of different cultures in the world [1].

• The growing economies of other nations like Poland pose as an economic competitor to the Chinese labour market as some businesses favour the European nation over China for their new business centres.

Appendix

	1 Year		3 Year		5 Year
	S&P500	Ishare China	S&P500	Ishare China	S&P500	Ishare China
Actual Return	-6.24%	18.22%	22.65%	-14.87%	35.63%	-44.23%
Std Deviation	1.07%	2.62%	0.82%	2.58%	0.83%	2.25%
Average Daily Return	-0.02%	0.10%	0.03%	0.01%	0.03%	-0.02%

	1 Year		3 Year		5 Year
	S&P500	Ishare China	S&P500	Ishare China	S&P500	Ishare China
Average Trading Volume	3612410319	9120457.371	3643662586	8611916.313	3588191908	7103718.124

REFERENCES

1. Fan, T., & Xue, D. (2018). Sustainable development of cultural industry in shaanxi province of northwest china: A SWOT and AHP analysis. Sustainability, 10(8), 2830. doi:10.3390/su10082830

2. Hossain, K. A., Zakaria, N. M. G., & Sarkar, M. A. R. (2017). SWOT analysis of china shipbuilding industry by third eyes. Paper presented at the , 194 241-246. doi:10.1016/j.proeng.2017.08.141

3. GuruFocus.com: Glen point capital LLP buys iShares MSCI emerging index fund, iShares china large-cap, sells (2018). . Chatham: Newstex.

4. Ticker report: IShares china large-cap ETF (FXI) position decreased by arbor investment advisors LLC (2019). . Chatham: Newstex.

 

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