Academic journal article The International Journal of Business and Finance Research

Country & Industry Factor Influence on Investment in Latin American Emerging Markets

Academic journal article The International Journal of Business and Finance Research

Country & Industry Factor Influence on Investment in Latin American Emerging Markets

Article excerpt

ABSTRACT

In this paper, we analyze country and industry factors that influence investment strategies in Latin American emerging markets. This analysis show investors seeks different benefits from their investment, and country-specific political and economic events are very important to investors. In very recent years, the gaining importance of industry effects relative to country effects has come to light. The industry factor, studies have shown, has displaced the country factor as the main cause in the variability of equity returns. This phenomenon appears to be tied to the increase in international investment in general, as well as the ever increasing globalisation of the world economy. This study utilizes the variance approach to test the relative importance of country, industry, size and time specific sources to determine the variation between emerging Latin American markets and to assist investors in optimizing returns from their international portfolios.

JEL: G11, G15

KEY WORDS: Emerging Markets, Equity Return, Industry Factor, Investment Strategies

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

The importance of industry effects relative to country effects, in terms of diversification benefits has increased over the last dozen or so years. Studies have shown that, the industry factor seems to have displaced the country factor as the dominant explanatory variable in equity returns (Baca et al., 2000; Brooks and Catao, 2000; Cavaglia et al., 2000; Brooks and Del Negro, 2002; L'Her et al., 2002). More specifically, Baca et al. concluded that the influence of the country factor was 2 to 3 times larger than the industrial factor up to 1995, but that this ratio had dropped to 1.23 in 1999. Similarly, Cavaglia et al. and L'Her et al. reported a clear upward trend in the importance of industry effects relative to country effects in explaining the sources of variation in developed market share returns. Many of these studies have linked this phenomenon to the increasing globalisation of the world economy, as well as increased cross-border investment. In particular, it has been suggested that financial market integration and the globalisation of economic activity have impacted the relative importance of country and industry factors in explaining global share returns. There is a broad acknowledgment that the importance of country factors decreases with the increasing degree of international financial integration, while higher international financial integration increases the importance of industrial factors in explaining variations in global equity returns (Grinold et al., 1989; Beckers et al., 1996; Baca et al., 2000).

The purpose of this research is to shed some light on the underlying factors, or combination of factors, that drive diversification benefits from international investment in the emerging market equities of Latin American countries. In particular, an analysis of variance approach is applied to test the relative importance of country, industry, size and time specific sources of variation in emerging market share returns for international portfolio diversification strategies. Chiefly, the study examines the extent to which country and industry factors explain the returns of equities from the sample of Latin American emerging markets.

The reminder of this paper is organized as follows: The next section examines the related literature and the scope of this research study. Section three outlines the method and methodology adopted in this study. Section four discusses the empirical results and section 5 concludes the paper and gives suggestions for future research.

LITERTAURE REVIEW

In 2012, Latin America received approximately $174 billion of Direct Foreign Investment, an increase of 6.7% compared to the previous year. The biggest portion of this Investment, equaling 51 percent of the total, was directed to the natural resource sector, which includes mining. …

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