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Research Project -II

“A COMPARATIVE ANALYSIS OF A SELECT SET OF COUNTRIES

FOR THEIR FUTURE INVESTMENT PROSPECTS

Submitted to

for the Project 2 in T.Y B.Sc (Finance), Semester V

by

Abhigyaan Saikia (A003)

Simran Mehrotra (A040)

Sneha Rai (A041)

Guided by

Dr. Akshay Damani

Nandip Vaidya

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As a part completion of the B.sc (Finance) program

Date: 10th October, 2016

Place: Mumbai

Name SAP ID

Abhigyaan Saikia 74105140067

Simran Mehrotra 74105140046

Sneha Rai 74105140061

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Declaration

I hereby declare that the project entitled, “A Performance Appraisal Of Two Public Sector
And Two Sector Banks In India Using Ratio Analysis For The Period 2010-2015”, is our
original work.

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CERTIFICATE

Certified that the work incorporated in the project, “A Performance Appraisal Of Two
Public Sector And Two Sector Banks In India Using Ratio Analysis For The Period 2010-
2015”, was carried out by the candidates under my supervision. Such material as has been
obtained from other sources has been duly acknowledge in this project.

Dr. Akshay Damani

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ACKNOWLEDGEMENT

While writing this research paper we had to take the help and guideline of certain people,
without whom we could not have written it. We are thankful for their aspiring guidance,
invaluably constructive criticism and friendly advice during the project work.

We express our deepest gratitude to, Mrs. Sangita Kher, (I/C Dean, Anil Surendra Modi
School of Commerce) without whom we would never the opportunity to learn so much. Our
heartfelt thanks to Prof. Akshay Damani and Prof. Nandip Vaidyafor guiding us
throughout and helping us understand this topic in the best way possible. They helped us
walk through the entire procedure and inspired us to give in our best.

A heartfelt thank you to each and every person who helped us write this paper.

AUTHORS OF THE RESEARCH PAPER:

Abhigyaan Saikia (A003)

Simran Mehrotra (A040)

Sneha Rai (A041)

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Index

Sr. No. Topic Page No.

1 Introduction 7

2 Review of Literature 16

3 Research Design and Methodology 19

4 Findings and Summary 23

5 Conclusion 32

6 Scope and Limitations 32

7 Bibliography 34

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“A COMPARATIVE ANALYSIS OF A SELECT SET OF COUNTRIES

FOR THEIR FUTURE INVESTMENT PROSPECTS”

ABSTRACT
This study provides a comparative analysis of top ten countries as ranked by A.T. Kearney FDI
Confidence Index for their future investment prospects for Foreign and Domestic Investors. For
this analysis, three macro- economic parameters were found to be statistically significant to
evaluate each country over a time period of five years (2011-2015) and to predict for the
consecutive two years (2016-2017). The parameters are broadly classified as: 1) Financial
Stability, 2)Financial Infrastructure, 3)Competitive Advantage. Each country were ranked; 1)on
the basis of the selected parameters,2) with respect to the annual stock returns, for the given
time period. Ultimately the ranks for parameters were correlated with the annual stock returns'
ranks and then with the ranks given for the 2016 A.T. Kearney FDI Confidence Index. The
findings of the paper highlight that when the countries are correlated to their individual stock
market returns, the resultant correlation is significantly high and when correlated to the ATK FDI
index the result is a significantly low correlation. Thus, proving with substantial proof that the
methods used were accurate and this research is a dependable source of information for
foreign and domestic Investors to make sound investment decisions.

1. INTRODUCTION
Global Investing is “investing on a worldwide scale, reconciling or taking commercial advantage
of global market differences, similarities and opportunities in order to meet global objectives in
terms of diversification and generating higher returns.”
Global Investing is not a progressive move, it is a transformative procedure. While this does not
have any significant bearing to all, it applies most to those that start as household financial
specialists. Global responses in the form of speculations has increased and is clear for roughly
almost all parts of shopper's day by day life. Neighbourhood locales or national limits are no
more confined to the domestic powers. To be effective in today's globalized economy, it is an
absolute necessity for the organizations to all the while be receptive to nearby and additionally
worldwide economic situations and fluctuating viewpoints identified with the global investing
process.
The international markets have been changing rapidly as of late through movements in
exchanging methods, models and practices. The internationalized marketplace has been
transformed very quickly in recent years by shifts in trading techniques, standards and
practices. These changes have been reinforced and retained by new technologies and evolving
the economic relationships between the companies and the organizations which are working

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for the trade across the globe.This study is an attempt to integrate these developments and an
attempt in the field of the market journalism into the burgeoning literature on international
investing process. The research emphasis within the subject has evolved alongside changes to
the key aspects of international trade market such as Financial Stability: Inflation - GDP deflator,
Financial Infrastructure: Market capitalization, Competitive Advantage: Real effective exchange
rate index.

1) COMPETITIVE ADVANTAGE

Real Effective Exchange Rate

How can one figure out if cash is in general sense underestimated or exaggerated? This
question lies at the centre of universal financial aspects, numerous exchange debate, and the
new IMF observation exertion.
The REER (Real Effective Exchange Rate) is utilized to gauge the estimation of a particular
money in connection to an average of real monetary standards. The REER considers any
adjustments in relative costs and shows what can really be purchased with a currency. This
implies the REER is ordinarily exchange weighted.
It can be obtained considering a country's nominal effective exchange rate (NEER) and adjusting
it in order to add price indices and other trends. Thus we notice that the REER is essentially a
country's NEER after removing price inflation or labour cost inflation.
A nation's REER can likewise be inferred by taking the normal of the reciprocal genuine trade
rates (RER) amongst itself and its exchanging accomplices and afterward weight it utilizing the
exchange assignment of every accomplice.
Assessing equilibrium REERs can be troublesome in light of the fact that costs are to some
degree sticky in the short run and the ostensible exchange scale is not (at any rate in nations
where trade rates are market decided). So REERs ordinarily show impressive short-run
instability in light of news and clamour trading, and it's not astonishing that numerous market
members what's more, policymakers misunderstand things—now and then extremely off-base.
That can prompt monstrous realignments with crushing outcomes, for example, the 1992 ERM
emergency. Flawed in spite of the fact that they might be, REERs have flagged expansive
conversion standard over valuations in the keep running up to numerous money related
emergencies, making it imperative for the IMF and others to screen reciprocal RERs and
multilateral REERs.

2) FINANCIAL STABILITY

Inflation
Inflation is the percentage change in the value of the Wholesale Price Index (WPI) on a year-on
year basis. It effectively measures the change in the prices of a basket of goods and services in a
year.
Inflation happens because of an imbalance amongst demand and supply of money, changes in
production and appropriation cost or increment in charges on items. At the point when

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economy encounters inflation, i.e. at the point when the value level of merchandise and
enterprises rises, the estimation of money lessens. This implies that now every unit of currency
purchases less products and ventures.
The inflation rate is widely calculated by calculating the movement or change in a price index,
usually the consumer price index. The inflation rate is the percentage rate of change of a price
index over time.

GDP Deflator:
It is "a measure of the level of prices of all new, domestically produced, final goods and services
in an economy'. GDP stands for gross domestic product, the total value of all final goods and
services produced within that economy during a specified period.
The GDP deflator is a measure of price inflation/deflation with respect to a specific base year;
the GDP deflator of the base year itself is equal to 100. Unlike the Consumer Price Index, the
GDP deflator is not based on a fixed basket of goods and services; the "basket" for the GDP
deflator is allowed to change from year to year with people's consumption and investment
patterns.

Formula:
GDP Deflator =(Nominal GDP/ Real GDP) x 100

It is important because an economy's nominal GDP differs from its real GDP as nominal GDP
contains inflation, while real GDP does not. The GDP price deflator thus measures the
difference between real GDP and nominal GDP, which can also be used as a measure for price
inflation.

3.FINANCIAL INFRASTRUCTURE

The financial Infrastructure of a country comprehensively contains the fundamental

establishment for a nation's budgetary framework. It incorporates all establishments, data,
advances, guidelines and benchmarks that empower money related intermediation. Poor
infrastructure in numerous developing nations represents a constraint on the financial service
institutions to extend their offering of services to the minority sections of the population and
the economy. It shows the dangers of the money related framework in general, as poor
instalment and settlement frameworks may compound budgetary emergencies, while the non-
appearance of credit bureaus in conjunction for solid credit development may prompt one. Key
financial infrastructure components that the market can depend on are, for example, credit
agencies, authorization of guarantee and working instalment, securities settlement, and
settlement frameworks. These key components are imperative to encouraging more
noteworthy access to fund, enhancing transparency and administration.
The equity market is where shares are issued and exchanged, either through trades or over-
the-counter markets. Otherwise called the share trading system, it is a standout amongst the
most indispensable zones of a market economy since it gives organizations access to capital and
financial specialists a cut of proprietorship in an organization with the possibility to

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acknowledge increases in view of its future performance. A case of an equity instrument would
be basic stock shares, for example, those exchanged on the BSE.
The debt market is the market where debt instruments are exchanged. Debt instruments are
resources that require a fixed instalment payment to the holder, with interest. Some cases of
debt instruments incorporate bonds and mortgages.

The preoccupation of early investment specialists with exports and selling is being supplanted
by a more adjusted view which gives expanding weight to the previously mentioned parameters
and the traditional ethnocentric conceptual view of international marketing trade is being
counterbalanced by a more accurate global view of markets.

Disclosures in money related financial matters in the course of the most recent 20 years or so
gives us motivation to surmise that profits are somewhat unsurprising when watching out over
the medium-to-long term horizons. In the short term, force appears to assume a part, maybe
an overwhelming part. The catch is making sense of how to mix these bits of knowledge into
one vital vision. One trick of the game is watching out for the advancing relationship of asset
classes through time.

For starters, there is an exchange rate risk. For instance, a U.S. financial specialist's arrival on a
stock from a foreign nation is attached to changes in the money values between the U.S. dollar
and that nation's cash. On the off chance that you purchase a Japanese stock and the Japanese
yen ascends against the dollar between the time you purchase and offer the stock, your return
is worth more. Then again, if the yen debilitates, your speculation return debilitates.

Beyond upheavals in currency markets, there is country risk. Numerous nations experience the
ill effects of political, social and monetary flimsiness, which makes putting resources into those
spots dangerous. Country risks includes-

Financial Risk: This risk alludes to a nation's capacity to pay back its obligations. A nation with
stable accounts and a more grounded economy ought to give more dependable speculations
than a nation with weaker funds or an unsound economy.

Political Risk: This risk alludes to the political choices made inside a nation that may bring about
an unforeseen misfortune to financial specialists. While financial hazard is frequently alluded to
as a nation's capacity to pay back its obligations, political hazard is now and then alluded to as
the eagerness of a nation to pay obligations or keep up a neighbourly atmosphere for outside
venture. Regardless of the possibility that a nation's economy is solid, if the political
atmosphere is unpleasant (or turns out to be threatening) to outside speculators, the nation
may not be a decent contender for venture.

In the wake of choosing where to invest, an investor must choose which speculation vehicles to
put resources into. Speculation choices incorporate sovereign obligation, stocks or obligations
of organizations domiciled in the country(s) chosen, stocks or bonds that derives a significant
portion of its revenues from the country(s) selected, or an internationally focused ETF or

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mutual fund. The decision of venture vehicle relies on upon every financial specialist's
individual information, encounter, hazard profile and return destinations. If all else fails, it
might bode well to begin by going out on a limb; more hazard can simply be added to the
portfolio later.
Notwithstanding altogether examining planned ventures, a worldwide speculator likewise
needs to screen his or her portfolio and modify possessions as conditions direct.

There are two noteworthy advantages of adding worldwide resource classes to: the possibility
to expand add up to return and the possibility to enhance the aggregate portfolio.

Keeping in mind the above views this research paper provides in-depth analysis of ten countries
on the basis of a few key parameters in order to help investors make a sound investment
decision.

1. CHINA
China is the second-largest economy in the world, and is the one of the top destinations for
many international firms looking to grow. China is also home to many of the world's up-and-
coming businesses, which are increasingly looking to expand in other emerging markets and
also in Western Europe and the US.

INDEX: SHANGHAI COMPOSITE STOCK MARKET INDEX

As of February 2016, Shanghai Stock Exchange is the fifth largest stock index in the world and
the second largest in Asia. The current exchange was reestablished 26 November and started
operating on 19th December in the year 1990. It is directly managed by the China Securities
Regulatory Commission (CSRC). It is one among the two stock exchanges which operate
independently in China, the other being Shenzhen Stock Exchange. In all, the index includes 861
companies as of February 2008 with a total market capitalization of RMB 23,340.9 billion
(US$3,241.8 billion; US$1 = RMB 6.82).

The Chinese stock market has had a history of inflated price bubbles and extreme crashes. Post
the 2008 crisis, the prices recovered in 2010.

(Source: Economic Intelligence Unit)

2.CANADA

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There is still an argument with Canada being an emerging market or developed market. As a
result of Canada's asset orientation, the market is more in harmony with developing markets
than developed nations. But classification between am emerging and developed market is done
on the basis of GDP per capita with the cut off being USD $ 25000 which Canada certainly
surpasses.

As indicated by Forbes and Bloomberg, it is the best country in the G20 to do business withIt
has a solid development record as it lead all G7 nations in financial development over the years
2006-2015The country has a low business tax cost- being the lowest in the G7 and 46% lower
than the United States of America. It has workforce which is extremely educated with half of
population which is working having tertiary level education

(Source: Forbes and Bloomberg, Organization for Economic Co-operation and Development,
KPMG)

INDEX: TORONTO STOCK EXCHANGE

Toronto Stock Exchange is the main stock exchange of Canada and the eight largest stock
exchange in the world and is operated as subsidiary of the TMX group for the trading of the
senior equities. This index has a majority of mining and oil and gas companies, a sign of the
huge natural resource of Canada. It consist of 235 constitutes with the combined adjusted
market cap of C$1.679 trillion (April 2016). The index is maintained by S&P Dow Jones
Indices. In April 2016, annual total return of Canadian stock market 2016 was -9.9% and annual
dividend yield was3.24%.

3.JAPAN
Japan comes under the basket of the developed markets. Some of the reasons making Japan
attractive is its sophisticated Market, it being an Innovation hub, its business friendly
infrastructure and the country’s re-emergence.

(Source: JETRO)

INDEX: NIKKEI 225

NIKKEI 225 is a stock market index for the Tokyo stock index. It started on 7 the September
1950.The Japanese stock market started gaining speed by the end of 2012. NIKKEI 225’s value
doubled in three years. By August 2015 the index price reache0d the same level as it was in

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April 2000. But the end of 2015 was extremely difficult for the Japanese stock market and the
market has remained the same in the first of 2016. Japanese companies have always been
among the in the world. Between 2005 and 2015, the annual average yield has been only
1.32%.

4.THE UNITED KINGDOM

It is one of the developed markets in the world which has a very diverse economy. It offers a
wide range of opportunities for investors.
It is a very attractive for investing as it has a good tax regime, the labour market is efficient and
has a comprehensive regime to support the development of intellectual property.
(Source: UK Trade & Investment)
INDEX: FTSE 100
This is the most followed indicator of the London Stock Exchange with a combined market value
of £1,777,667 million. (Sep 30th 2016). The biggest weightage is that of oil and gas and personal
and household goods. The largest components are that of HSBC Holdings, British American
Tobacco, BP, Royal Dutch Shell and GlaxoSmithKline. Currently, there is a lot of speculation
about the value of the British pound which has reached a 31 year low after the country’s exit
from EU which might have a negative effect in the long and short term growth of the country.
The weakening of the country’s currency might have a big effect on the dollar values of the
British companies but will also have positive effect on its exports.

5.THE UNITED STATES OF AMERICA

The United States of America is the largest in the world in terms of national economy. The U.S.
dollar is the money most used for international trade and is the world's principal reserve
currency.

INDEX: S&P 500

The largest sector currently in the S&P 500 is that Information Technology and Healthcare while
the smallest being Telecommunications and Materials sectors which contributes around 3 % of
the index. It is the most commonly followed equity index, and is thought of as one of the best
representations of the U.S. securities exchange. The S&P 500 was created and by S&P Dow
Jones Indices.

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6.SINGAPORE
It is a developed market. Singapore as a country has an inspiring regulatory framework, robust
infrastructure and connectivity, low income tax and zero capital gain tax regime making it a
very attractive country for investment.

INDEX: STI

The exchange started in1966 and was constructed Singapore exchange and a consultant
professor from the Singapore Management University called TseYiuKuen. The exchange was
reconstructed in the year 2008 and the number of stocks in it was reduced to 30. The method
of calculation was also changed and FTSE’s methodology was adopted.

7. FRANCE
It is a developed market. It is indeed a very attractive market to invest as it has a diversified and
advanced industrial base is in a very cost effective location, and it patronizes research,
development and innovation.

(Source:IFA)

INDEX:CAC 40

It is one of the main indexes in Europe. It is a capitalization weighted index. It basically includes
the most important 40 in the highest 100 market caps in the Euronext Paris.

8.INDIA
It is one of the biggest emerging markets. Some of the reasons making it attractive an
investment are: Indian Government's continually developing investment friendly policies, Lower
production cost because of lower work rates ,high availability of labor abundance of natural
resources, English as one of the main dialects, Government's accentuation on changing
infrastructure and India being located near business sectors of South East Asia, Middle East
furthermore Europe.

(Source: Turkish Indian Chambers of Commerce and Industry (TICCI))

INDEX: SENSEX

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It was established in 1875 as Asia’s first stock exchange. It ranks as the 11 th largest stock
exchange in the world and has a market capitalization of $ 1.7 trillion (as of January 2015).it
consists of more than 5500 companies which are traded in it publicly.The launch of SENSEX in
1986 was later followed up in January 1989 by the launch of the BSE National Index. It involved
100 stocks recorded at five indexes in India – Mumbai,Calcutta, Delhi, Ahmedabad and Madras.
The BSE National Index was renamed BSE-100 Index from 14 October 1996.

9. GERMANY
It is developed market. It is attractive because of its secured investment framework,
competitive tax regimes, first class infrastructure, innovative power and excellent workforce.

INDEX: DAX (DeutscherAktienindex)

It consists of the 30 biggest German companies. The prices are taken from the Xetra. As
indicated by Deutsche Börse, the administrator of Xetra, DAX measures the execution of the
Prime Standard's 30 biggest German organizations in book volume and market capitalization.

10.AUSTRALIA
This developed market is attractive as it has innovation, talented workforce and a good
connection with Asia.

INDEX:ASX 200

The ASX has a market capitalization of $1.6 trillion.It is a public company that was formed on 1st
April 1987 under its parliament when six state securities came together and was merged in
2006 with the Sydney Future exchange.

(Source:MSCI World Index)

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2. REVIEW OF LITERATURE

(Goetzmann, Lingfeng, & Rouwenhorst., January 2005)

The study breaks down the correlation structure of the worldwide value showcase in the course
of the most recent 150 years. The finding reveal that the worldwide connection structure
moves significantly after some time. The study takes note of that the advantages of worldwide
broadening are brought on by the increment in the quantity of business sectors accessible to
worldwide speculators and the low normal relationship among the accessible markets. The
study additionally finds that the advantages of broadening depend progressively on
presentation to developing markets.

(Richard O. Michaud, Gary L. Bergstrom, Ronald D. Frashure, & Wolaha, 1996)

Experimental proof demonstrates that including universal resources builds the mean–variance
proficiency of household value portfolios. The study observes that detached worldwide
contribution adds to diminished risk and that dynamic administration may build returns. The
study concludes that universal value expansion can and has enhanced risk–return connections
for worldwide financial specialists, with dynamic administration contributing more to higher
returns.

(Cao, Michael J. Brennan, & Henry, 1997)

The study introduces a model of the stream of worldwide value venture in light of the
distinctions in data accessible to local and outside speculators. The model predicts that financial
specialists tend to purchase non-domestic stocks when profits for outside stocks are high and
tend to offer when returns are low. They test the model by utilizing information on buys by
inhabitants of created nations and of developing business sector values by U.S. financial
specialists.

(Schill, 2006)
The research demonstrates that, in spite of the fact that the central conduct of members in
capital markets is the same, developing markets contain one of a kind legislative and other
institutional elements that make particular contrasts in the way speculators must approach
their venture procedures.This survey of late scholastic research in developing business sector
back represents the special elements of developing business sector contribution and the impact
of these components on conventional standards of contribution. The impact of data disparities,
illiquidity, poor financial specialist insurance, and expanded joining on speculation choices in
developing markets are highlighted in the study.

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(Gumus & Kurt, 2015) The study analyses the relationship between FDI and FII and
macroeconomic indicators in Turkey over 2003-2013. The findings reveal a bi-directional
relationship between FII and stock market and FII and real exchange rate and one-directional
relationship between FII and interest rates; a bi-directional relationship between FDI and real
exchange rate and FDI and interest rates and a one-directional relationship between FDI and
stock market.

(Plachý & Rasovec, 2015) The research studied the indicators which directly or indirectly affect
the stock values of a country. They compared how dependent the equity indices are, with the
selected indicators. The countries were divided into homogenous groups based on partial
dependencies. The research concluded that the strength of dependence of countries on the
indicators and the stock exchanges are different for different countries depending on the
characteristics of the economy.

(Mohanasundaram, 2015) The research studied the determinants of Foreign Institutional

Investments (FII) in India and the macro economic factors impacting it, from April 2001 to
March 2014, for which Connection and Autoregressive Distributed slack (ARDL) limits testing
approach was used. The study found that FII inflows are directly related to Exchange Rate,
Producer Price Index of USA, Return on S&P 500, Return on Nifty, and Market Capitalization of
NSE and have a negative association with Wholesale Price Index of India. Thus concluding that
FII inflows in India are majorly dependent on macroeconomic factors.

(Gumus, Duru, & Bener, 2013) The research studied the relationship between foreign portfolio
investment to Istanbul Stock Exchange and principal macroeconomic factors by utilizing
monthly information for the period 2006 – 2011. Vector Auto regression technique, Var
Granger Causality Tests, Impulse Responses furthermore, Variance Decomposition were utilized
with the prospect of finding the effects of these factors on the level of portfolio investments in
Turkey. From variance decomposition it was found that variation in Istanbul Stock Exchange
Price Index and variation in Exchange Rates resulted from foreign Portfolio Investments. Other
variations of variables result from their own shocks.

(B.S. Bodla, Ashish Kumar, 2009)Studied FIIs and their connection with financial factors. To
carry this out, a month to month information sets relating to securities exchange capitalization,
exchanging volume, FIIs streams and other related factors were taken for a period of 15 years
from January 1993 to December 2007. The Granger Causality Test was used to decide the
connection of FII investments, deals and investments with securities market capitalization and

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volume. The study found that investments made in Indian securities exchange directly related
to Market Capitalization yet in the event of exchanging volume, FIIs speculation turned as a
consequence of exchanging volume. The study also revealed that sales by FIIs in Indian stock
market have a bidirectional causality with market capitalization.

(Muhammad Sarfraz Anwer, Rajan K Sampath, 1999)used root and co-integration methods to
decide the long run relationship in GDP and investments for 90 nations utilizing information
from World Bank for the period 1960-1992. Firstly, they discovered GDP and investments for 33
nations and found no co-integration amongst them for the 25 nations .The other 7 nations
were in long run connection and hence didn’t need co-integration test. To demonstrate the
bearing of causal impact they used Granger causality test. They discovered causality 15 nations
in the short run and for 23 nations in the long run. Bi-directional causality was found for 10,
unidirectional causality for GDP to investment in18 countries and from investment to GDP for
10 nations. The causality from GDP to investment was true for 11 nations. The causality of
investment to GDP for 6 nations. Bi-directional causality was positive between the two factors
in most cases.

(Agarwal, 1997) The research studied the determinants of outside portfolio speculation (FPI)
and its effect on the national economy in six Asian nations. The results of regression
demonstrated that the four important determinants of FPI are real exchange rate, index of
economic activity and the share of domestic capital market in the world stock market
capitalization and inflation rate. The inflation had a negative coefficient while the others had a
positive coefficient. With respect to effect of FPI on the national economies, it was found that
the index of economic activities and inflation rate had an upward trend. It was found that the
volatility had not increased over time and the ratio of foreign debt has come down along with
the debt servicing to GDP ratio. It was found that Indonesia and India had crossed upper
bounds of debt ratios.

(Patrick Enu,Emmanuel Dodzi K. Havi,Prudence Attah-Obeng, 2013) The paper examined the
determinants of foreign direct investment inflows to Ghana. The main objective was to find out
the major macroeconomic determinants of foreign direct investment in Ghana. The period
taken was 1980 to 2012. The variables considered were integrated by using the Johansen's co-
integration. It was concluded that the variables were not co-integrated. The vector
autoregressive model was then estimated. The paper analyzed the determinants of outside
direct speculation inflows to Ghana.

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3. RESEARCH DESIGN AND METHODOLOGY

3.1 Research Objectives:

a) To compare and rank the selected set of ten countries with respect to the three
parameters taken for the given period of 2011-2015.
b) To compare and rank the selected set of ten countries with respect to the annual stock
returns generated for the given period of 2011-2015.
c) To find a correlation between the rankings generated for the parameters and for the
annual stock returns for the given period.
d) To find a correlation between the rankings generated for the parameters and for the
2016 A.T. Kearney FDI Confidence Index.

3.2 Hypothesis identified:

I) There is a significant correlation between the rankings generated for the parameters
and for the annual stock returns for the given period.
II) There is a significant correlation between the rankings generated for the parameters
and for the 2016 A.T. Kearney FDI Confidence Index.

3.3 Variables Observed:

1. The annual GDP deflator (%) for inflation, as a quantitative measure for Financial
Stability for each of the selected ten countries for the given period 2011- 2015.
2. The annual Real effective exchange rate index with year 2010 as the base year
(2010=100), as a quantitative measure for Competitive Advantage for each of the
selected ten countries for the given period 2011- 2015.
3. The Market capitalization of listed domestic companies as a % of annual GDP, as a
quantitative measure for Financial Infrastructure (Equity)for each of the selected ten
countries for the given period 2011- 2015.
4. The annual lending interest rate (%), as a quantitative measure for Financial
Infrastructure (Fixed Income Market) for each of the selected ten countries for the given
period 2011- 2015.

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5. The annual stock returns (net gain/loss %) for each of the selected ten countries for the
given period 2011- 2015.
6. The currency exchange rates for each of the selected ten countries vis-à-vis the Unites
States Dollar as on 31st December each of the five years for the given period 2011-2015.

3.4 Research Design:

The study is an observational study where the performance of ten countries taken as sample
was observed and compared over a given period. The data collected, in relation to this
observation for the three macroeconomic parameters - Financial stability, Competitive
advantage and Financial Infrastructure (Equity and Fixed Income Market) and the annual stock
returns as on 31st December of each year is linear. Therefore, this is a descriptive (observational
type) longitudinal (linear data) study.

3.5 Data collection method:

The period of study is from 2011-2015 (5 years). All the data in this study has been collected
from secondary sources. The sample of the study consists of ten countries:-
 The United States of America
 China
 Canada
 Germany
 The United Kingdom
 Japan
 Australia
 France
 India
 Singapore
The selection for the ten countries was done on the basis of the top ten ranked countries on
the 2016 A.T. Kearney FDI Confidence Index.
(Source:www.atkearney.com)

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The selection of the three criteria on the basis of which the future investment prospects of the
selected ten countries have been evaluated, compared and ranked, have been done on the
basis of intensive prior research done in the area of investment analysis of a country and
independent evaluation of the factors that would directly affect the foreign investment. The
macroeconomic factors thus chosen are as follows:

1. Financial Stability
 GDP deflator (%) for inflation

2. Competitive Advantage Index

 Real Effective Exchange Rate/ Purchasing Power Parity

3. Financial Infrastructure
 Equity
Market Capitalization of listed domestic companies as a % of annual GDP
 Fixed Income Market
Lending interest rate (%)
(Source: www.worldbank.org)
The annual stock returns collected for each of the selected set of ten countries have been
adjusted for currency appreciation/depreciation over the given period.

(Source: www.1stock1.com, www.x-rates.com )

3.6 Sampling
The period of the study is from 2011- 2015 (5 years). The sample includes a set of ten top
ranked countries on the 2016 A.T. Kearney FDI Confidence Index. The annual data for the
parameters selected- Financial stability, Competitive advantage and Financial Infrastructure
(Equity and Fixed Income Market) has been adjusted for exchange rate (USD) as prevailing on
the 31st December of each of the five years in the given period. The annual stock returns for
each of the ten countries and the quantitative measures for the parameters- Financial stability

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and Financial Infrastructure (Fixed Income Market) have been adjusted for the currency
appreciation/depreciation over the given period.

3.7 Data Analysis

i) Compounded Annual Growth Rate (CAGR)

It is a mean growth measure for a period of time on a compounded basis.

CAGR= [{(Ie/ Ii)n} -1] x 100

Ie– Investment at the end of the given period

Ii– Investment at the beginning of the given period

n- The number of years in the given period

A positive value denotes growth and a negative value denotes fall.

ii) Geometric Mean (G.M)

It is a type of mean calculation where, unlike CAGR, all values in the period taken are taken
into calculation. It is on a compounded basis.

G.M = [{(a x b x c x …..)n} – 1] x 100

a, b, c…- values in the given period

n- The number of years in the given period

iii) Spearman’s rank of correlation

It is a measure of correlation between two sets of ranks.

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SRC= 1-(6∑D2/{N3 – N})

D- Difference between the corresponding ranks

N- The number of years in the given period

iv) T-calculation
It is calculated for T- test, a standardized parametric test. It is then compared with the notional
value and tested for its position within the set parametric limits given at a given level of
confidence. It is used in testing hypothesis.

Tcal =r/[{(1-r2)/(n-2)}0.5]

r - Value for Spearman’s Rank of Correlation

n- No. of data points

If Tcal>Ttab, we accept Alternate Hypothesis (H1)

If Tcal<Ttab, we reject Null Hypothesis (H0)

4. FINDINGS AND SUMMARY

4.1Objectives

Currency appreciation/ depreciation (in USD)

Table 1:

Base year
Country (2010) 2011 2012 2013 2014 2015 CAGR
Canada 0.994737 1.0216 1.1591018 1.063229 1.159102 1.3847424 6.8%
China 6.5916 6.294296 6.2066697 6.053965 6.20667 6.4952357 -0.3%
Australia 0.976931 0.979672 1.2223086 1.120079 1.222309 1.3709805 7.0%

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Germany 0.746163 0.771664 0.8257481 0.725893 0.825748 0.920257 4.3%

India 44.700001 53.05884 63.18716 61.85822 63.18716 66.203244 8.2%
Japan 81.107803 77.11289 119.76048 105.2742 119.7605 120.30799 8.2%
United Kingdom 1.560923 0.644185 0.6415841 0.60335 0.641584 0.6773521 -15.4%
United States 1 1 1 1 1 1 0.0%
Singapore 1.283085 1.296501 1.3242087 1.262373 1.324209 1.4159051 2.0%
France 0.746163 0.771664 0.8257481 0.725893 0.825748 0.9997201 6.0%
(Source: www.x-rates.com )

Table 1 depicts the exchange rates of the ten countries, against the USD (1USD = how much of
the local currency), prevailing as on the 31st December of every year. Year 2010 has been taken
as the base year to calculate the CAGR (currency appreciation/depreciation), where a negative
value depicts appreciation of the local currency against the USD and vice-versa.

4.1.1 Objective a)to compare and rank the selected set of ten countries with
respect to the three parameters taken for the given period of 2011-2015.

Ranking (parameters):
i) FINANCIAL STABILITY: Inflation, GDP deflator (annual %)

Table 2:

COUNTRY 2011 2012 2013 2014 2015 CAGR RANK

Canada 3.24205 1.22125 1.55395 1.75649 -0.5531 -165.75% 2
China 8.13921 2.39215 2.23497 0.81667 -0.4531 -156.29% 4
Australia 6.18684 2.05591 -0.1994 1.41362 -0.6396 -159.36% 3
Germany 1.07048 1.50282 2.09024 1.73427 2.05885 9.31% 10
India 5.24269 7.85168 6.22662 3.29962 0.99462 -33.70% 6
Japan -1.8534 -0.9302 -0.5598 1.67156 2.01429 -193.98% 1
United Kingdom 2.09619 1.62571 1.98503 1.83753 0.27314 -34.21% 5
United States 2.06463 1.84205 1.63009 1.64266 1.00212 -13.46% 7
Singapore 1.11034 0.73033 -0.7003 0.04342 1.63982 6.02% 9
France 0.94361 1.15765 0.77664 0.55188 1.22997 4.03% 8
(Source:www.worldbank.org)

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ii) COMPETITIVE ADVANTAGE: Real effective exchange rate index (2010 = 100)

Table 3:

Country 2011 2012 2013 2014 2015 CAGR

RANK
Canada 102.0097 101.7164 98.38434 92.10615 83.98683 -3.81% 9
China 102.6931 108.4426 115.2939 118.9845 131.6285 5.09% 1
Australia 107.0771 109.7985 105.1714 100.1197 92.87429 -2.81% 8
Germany 99.17311 95.64922 98.15154 98.62768 93.36511 -1.20% 5
India 101.7195 101.7164 99.11365 100.1197 93.36511 -1.70% 7
Japan 101.7195 100.5544 80.32891 75.11789 70.12408 -7.17% 10
United Kingdom 101.4789 106.8322 105.7686 113.7024 121.7991 3.72% 2
United States 95.09987 97.99898 99.11365 101.1813 113.8404 3.66% 3
Singapore 105.5 110.4 113.4 112.9 110.6 0.95% 4
France 99.4 96.4 97.7 97.1 92.4 -1.45% 6
(Source:www.worldbank.org)

iii) FINANCIAL INFRASTRUCTURE (Equity):Market capitalization of listed domestic

companies (% of GDP)

Table 4:

Country 2011 2012 2013 2014 2015 CAGR Rank

Canada 106.9418 112.9193 115.0415 117.4711 102.7644 -0.00794 10
China 45.54073 43.69582 41.61109 58.01259 75.35142 0.105957 3
Australia 86.20555 90.20449 87.34021 88.59078 88.6188 0.005537 8
Germany 31.52392 41.99086 51.69405 44.94333 51.12982 0.101557 4
India 55.46571 69.22537 61.1222 76.29604 73.12203 0.056829 7
Japan 56.27676 58.3966 92.55034 95.25338 118.7149 0.161008 1
United Kingdom 56.27676 58.3966 92.55034 95.25338 118.7149 0.161008 1
United States 100.7912 115.5558 144.2395 151.7782 139.6754 0.06743 6
Singapore 217.379 264.487 247.8993 245.7466 218.6095 0.00113 9
France 54.28667 67.4341 81.93256 73.72761 86.23415 0.096976 5
(Source:www.worldbank.org)

FINANCIAL INFRASTRUCTURE (Fixed income market): Lending interest rate (%)

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Table 5:

COUNTRY 2011 2012 2013 2014 2015 CAGR

RANK
Canada 3 3 3 3 2.775 -7.79% 7
China 6.56 6 6 5.6 4.35 -7.62% 6
Australia 7.7375 6.975 6.179167 5.95 5.575 -12.48% 10
Germany 6.043125 7.128542 5.164792 4.581458 4.85 -8.22% 9
India 10.16667 10.60417 10.29167 10.25 10.00833 -7.84% 8
Japan 1.500917 1.4075 1.30375 1.219167 4.85 16.86% 2
United Kingdom 0.5 0.5 0.5 0.5 4.85 55.78% 1
United States 3.25 3.25 3.25 3.25 3.26 0.06% 4
Singapore 5.38 5.38 5.38 5.35 5.35 -2.04% 5
France 4.315 4.315 4.315 4.3 4.85 0.99% 3
(Source:www.worldbank.org)

Tables 2, 3, 4 and 5 depict the respective parametric data for the corresponding country and
year. The CAGRs have been calculated in percentage (%) form over the period.

Ascending ranks have been given to the CAGRs calculated (Lower the CAGR number, higher the
rank) in Table 2. In Table 3, 2010 has been taken as the base year (2010 =100). Descending
ranks have been given to the CAGRs calculated in Table 3. Descending ranks have been given to
the CAGRs calculated in Table 4.Ascending ranks have been given to the CAGRs calculated in
Table 5.

The calculation of CAGR in Table 2 and Table 5 have been adjusted for the exchange rate
against the USD. For the data point 2011, the exchange rate prevailing as on 1 st January, 2011
and for the data point 2015, the exchange rate prevailing as on 31st December, 2015 (against
the USD), was used.

Table 3 had missing data points for India for all the years. Table 4 had missing data points for
the United Kingdom for all the years. Table 5 had missing data points for Germany, Japan, the
United Kingdom and France for all the years. Median, as a tool, was used to fill in the missing
values.

Average of the ranks:

Table 6:

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Rank
Fin Comp Fin Fin
Country Average based
Stab. Adv. Infra(Eq.) Infra(FIM)
on avg.
Canada 2 9 10 7 7 8
China 4 1 3 6 3.5 2
Australia 3 8 8 10 7.25 10
Germany 10 5 4 9 7 8
India 5 7 7 8 6.75 6
Japan 1 10 1 2 3.5 2
United Kingdom 6 2 1 1 2.5 1
United States 7 3 6 4 5 4
Singapore 9 4 9 5 6.75 6
France 8 6 5 3 5.5 5

Table 6 has summarised all the ranks calculated in the Tables 2, 3, 4 and 5. A Simple Average
has been calculated and ascending ranks have been allotted.

4.1.2 Objective b)to compare and rank the selected set of ten countries with
respect to the annual stock returns generated for the given period of 2011-
2015.

Ranking (stock returns):

Table 7:

Return Adj. Return Rank

USD vs Local
local (Local return based on
Country 2011 2012 2013 2014 2015 currency
currency - USD vs adj.
rate
(G.M) Local rate) return
Canada -0.1142 0.0482 0.0981 0.0907 -0.1056 0% 6.8% -6.95% 10
China 0.203 0.0317 -0.0675 0.5287 0.0941 14% -0.3% 14.42% 2
Australia -0.114 0.188 0.197 0.05 0.038 7% 7.0% -0.46% 6
Germany -0.1469 0.2906 0.2548 0.0265 0.0956 9% 4.3% 4.93% 5
India -0.2464 0.257 0.0898 0.2989 -0.0487 5% 8.2% -3.18% 8
Japan -0.1734 0.2295 0.5672 0.0712 0.0907 13% 8.2% 5.02% 3
United Kingdom -0.0555 0.0584 0.1443 -0.0271 0.0493 3% -15.4% 18.53% 1
United States -0.061 0.129 0.232 0.042 -0.0642 5% 0.0% 4.96% 4
Singapore -0.1704 0.1968 0.0001 0.0624 -0.1434 -2% 2.0% -4.00% 9
France -0.1695 0.1523 0.1799 -0.0054 0.0853 4% 6.0% -1.99% 7
(Source:www.1stock1.com)

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Table 7 depicts the net gain/loss in a non-percentage form from the respective exchange (one
with the highest market capitalization) from each country. A geometric mean has been
calculated from the returns. Currency appreciation/depreciation (USD vs Local currency) in
percentage form from Table 1 have been taken. The adjusted returns have been calculated by
subtracting the currency depreciation/appreciation from the G.M of returns. Descending ranks
have then been allotted on the basis of adjusted returns.

4.1.3 Objective c) to find a correlation between the rankings generated for the
parameters and for the annual stock returns for the given period.

Spearman’s rank of correlation (Parameters and Stock returns):

Table 8:
Rank based on adjusted
COUNTRY Rank based on avg. D D^2
stock return
Canada 7 10 -3 9
China 2 2 0 0
Australia 10 6 4 16
Germany 7 5 2 4
India 7 8 -1 1
Japan 2 3 -1 1
United Kingdom 1 1 0 0
United States 4 4 0 0
Singapore 6 9 -3 9
France 5 7 -2 4
SUM 44

 Spearman’s rank of correlation = 1-((6x44)/(10^3-10)) = 0.733333 / 73.333%

Table 8 depicts the Average rank calculated for the parameters in Table 6 and the ranks taken
for the stock returns in Table 7. The Spearman’s rank of correlation requires the calculation of
D^2 (D=the difference between the two arrays of ranks) which has been calculated accordingly
in Table 8.
The correlation between the two ranks comes out to be approximately 73%.

4.1.4 Objective d) to find a correlation between the rankings generated for the
parameters and for the 2016 A.T. Kearney FDI Confidence Index.

Spearman’s rank of correlation (Parameters andthe 2016 A.T. Kearney FDI Confidence Index):

Table 9:

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Rank based
COUNTRY A.TKearney rank D D^2
on avg.
Canada 7 3 4 16
China 2 2 0 0
Australia 10 7 3 9
Germany 7 4 3 9
India 7 9 -2 4
Japan 2 6 -4 16
United Kingdom 1 5 -4 16
United States 4 1 3 9
Singapore 6 10 -4 16
France 5 8 -3 9
SUM 104
(Source:www.atkearney.com)

 Spearman’s rank of correlation = 1-((6x104)/(10^3-10)) =

0.36969697/36.969697%

Table 9 depicts the Average rank calculated for the parameters in Table 6 and the ranks taken
from the 2016 A.T. Kearney FDI Confidence Index from www.atkearney.com. The Spearman’s
rank of correlation requires the calculation of D^2 (D=the difference between the two arrays of
ranks) which has been calculated accordingly in Table 9.
The correlation between the two ranks comes out to be approximately 37%.

4.2 Hypothesis

4.2.1 Hypothesis I)There is no significant correlation between the rankings generated for
the parameters and for the annual stock returns for the given period.

The study attempts to test the hypothesis that there is no significant correlation
between the rankings generated for the parameters and for the annual stock returns for
the given period, at 5% level of significance.

H0: There is no significant correlation between the rankings generated for the
parameters and for the annual stock returns for the given period. Correlation (P,S) =< 0
H1: There is a significant correlation betweenthe rankings generated for the parameters
and for the annual stock returns for the given period. Correlation (P,S) > 0
Where,

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a. P - Ranks for parameters

b. S–Ranks for stock returns

Data: Spearman’s rank of correlation=0.733333

n = 10
α = 0.05 (Level of significance)
Ttab= 1.83

Calculation:
Tcal = 0.73333/[((1-0.73333^2)/(10-2))^0.5] = 3.050851

Inference:
Tcal>Ttab= 3.050851 > 1.83

Since, Tcalculatedis more than Ttabulated , we reject null hypothesis (H0) and accept
alternate hypothesis (H1).Therefore, Correlation (P,S) > 0

Decision:
The rankings generated for the parameters are significantly correlated with the annual
stock returns for the given period. Therefore any change in the indicators will
significantly affect the stock returns for the same period.
We can, therefore, with 95% level of confidence, predict the parameters to be positively
correlated at approximately 73% with the stock returns in the period 2016-2017.

4.2.2 Hypothesis II) There is no significant correlation between the rankings generated for
the parameters and for the 2016 A.T. Kearney FDI Confidence Index for the given
period.

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The study attempts to test the hypothesis that there is no significant correlation
between the rankings generated for the parameters and for the 2016 A.T. Kearney FDI
Confidence Index for the given period, at 5% level of significance.

H0: There is no significant correlation between the rankings generated for the
parameters and for the 2016 A.T. Kearney FDI Confidence Index for the given period.
Correlation (P,A) =< 0
H1: There is a significant correlation between the rankings generated for the parameters
and for the 2016 A.T. Kearney FDI Confidence Index for the given period. , Correlation
(P,A) > 0

Where,
a. P - Ranks for parameters
b. A–Ranks for 2016 A.T. Kearney FDI Confidence Index

Data: Spearman’s rank of correlation=0.36979797

n = 10
α = 0.05 (Level of significance)
Ttab= 1.83

Calculation:
Tcal = 0.369797/[((1-0.369797^2)/(10-2))^0.5] = 1.125392

Inference:
Tcal < Ttab= 1.125392 < 1.83

Since, Tcalculated is less than Ttabulated , we reject alternate hypothesis (H1) and accept null
hypothesis (H0) Therefore, Correlation (P,A) =< 0

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Decision:
The rankings generated for the parameters are not significantly correlated with the
2016 A.T. Kearney FDI Confidence Index for the given period. Therefore any change in
the indicators will significantly affect the stock returns for the same period.
We can, therefore, with 95% level of confidence, predict the parameters to be positively
correlated at approximately 37%with the 2016 A.T. Kearney FDI Confidence Index in the
period 2016-2017.

5. CONCLUSION
To conclude, we can say that the analysis of ten countries based on the three
macroeconomic parameters when ranked and correlated to the annual stock returns
of the countries was found to be positively correlated at a significant 73%
(approximately) showing that these parameters are significantly correlated when it
comes to investing in the stock market of a country. The ranks when correlated with
the 2016 A.T Kearney FDI Confidence Index gave a low correlation at 37%
(approximately), further strengthening our claim.
The paper therefore concludes that the independent analysis of macroeconomic
indicators is highly correlated with the stock returns for the shared given period. The
low correlation of the analysis of the macroeconomic indicators with the 2016 A.T.
Kearney FDI Confidence Index, further strengthens our findings as the indicators
showed a high correlation with the stock returns which are aimed at FII/DI/DII while
the 2016 A.T. Kearney FDI Confidence Index aims its results at an audience that is
FDI and not FII/DI/DII. This explains the low correlation.

6. LIMITATIONS AND SCOPE

4.3 Limitations

 The study includes only ten countries. Inclusion of a bigger sample would have
strengthened the study.
 Only three macroeconomic parameters have been taken to evaluate the countries.
Inclusion of more macroeconomic factors or microeconomic factors would have
strengthened the research.
 Only the 2016 A.T. Kearney FDI Confidence Index has been used as an index.

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 Only one exchange’s returns from each of the ten countries has been taken into
account. Other exchanges have been ignored.
 The duration of the study is only five years. Longer duration would have strengthened
the findings.
 The limitation of the tools used are applied to the study.

4.4 Scope
 The study includes ten countries top ranked on the 2016 A.T. Kearney FDI Confidence
Index.
 The duration of the study is from 2011-2015.
 The findings of the study can be aimed to be used for the stock returns in the specified
countries for the period 2016-2017.
 Three macroeconomic factors that directly affect foreign investment in international
exchanges have been taken - Financial stability, Competitive advantage and Financial
Infrastructure (Equity and Fixed Income Market).

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