The document analyzes international market conditions and provides investment recommendations. It finds that the UK offers potential due to the weak pound increasing earnings for FTSE 100 companies. Japan is not recommended as the strong yen is hurting corporate earnings. Hong Kong is also not advised due to potential trade conflicts weakening China's economy and Hong Kong's exports. Overall international equities are recommended to be lowered due to growing trade war risks, though some value may still exist in the UK.

1. International Market Analysis
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November 2016
If there is one thing markets hate, it’s uncertainty. At the time of this writing in November of
2016, there seems to be a fair amount of that going around. Earlier this year the United Kingdom
voted to leave the European Union, a vote that shocked the world and caused the pound to fall
to its lowest levels against the American dollar since the 1980s. Earlier this year Japan moved to
employ negative interest rates in a struggle to create much needed inflation in the country and
to devalue the yen. On November 8th Donald Trump received the vote to become the 45th
president of the United States, completing perhaps one of the largest political upsets in modern
history. Not only did he do the unexpected but he ran on aplatform calling for an overall decrease
in globalization. He wants to renegotiate trade deals, repeatedly calling NAFTA the worst trade
deal of all time. He has also suggested putting a 45% tariff on China.2 There are many geopolitical
events that have made navigating international equities especially difficult. However, some of
these events may hold hidden winning investment strategies.
The United Kingdom and Brexit
In perhaps the most open defeat of modern globalization, the United Kingdom voted to leave the
European Union. This in essence will cause present trade deals to be renegotiated. Despite the
uncertainty that surrounds the future of the United Kingdom, the FTSE 100 (an index tracking the
100 most highly capitalized companies in the country) has done especiallywell,gaining nearly 9%
since the vote. The S&P 500 gained only 3% over the same duration. The key question to ask, is
why? While there may be multiple answers and theories about why, one possible answer lies in
the recent devaluation of the pound.1 The currency has dropped nearly 30% against the USD
since the vote. This benefits companies in the UK in two ways. First, 80% of earnings under the
FTSE 100 is derived offshore.6 Meaning that the goods and services they provide are now much
cheaper than they were before the vote. This will certainly cause an increase in earnings for the
coming months. The second benefit is that because the pound has been devalued, equities in the
country can be bought at a discount. The American dollar will buy 30% more in the UK than it
would have before the vote making many equities in the UK especially appealing.5

2. Analysis
The United Kingdom offers potential for investors using USD. Due to the GBP’s overall weakness,
the USD will stretch 30% farther when buying equities in the UK. Now couple that with increasing
earnings due to increased buying power for consumers outside of the UK. It is easy to see why
the FTSE 100 will do relatively well in the future. An investor would need to watch earning
reports. If the GBP should begin to regain some of its previous value, as the increasing strength
of the pound could causeearnings to begin to fall.However, ifthe GBP begins to increasein value
against the dollar the investor would be able to exit the equities back into USD at a premium.
Japan and Negative Interest Rates
In an effort to increase business investment and consumer spending Japan has started to use
negative interest rates. The other primary goal of negative interest rates was to devalue the yen,
hoping for similar effects seen in the UK. However, Japan has not been able to accomplish any of
those goals as of this writing.3 In fact, the yen has appreciated against other major currencies
since the move into negative territory, strengthening nearly 12% against the United States dollar
in 2016. The strengthened currency has negatively impacted corporate earnings which have
continued to fall throughout the year. A regression analysis showed an R Square value of .82
when comparing the appreciation of the yen and falling corporate earnings over the last year.
This means that there is a very high correlation to the strength of the yen and falling corporate
earnings. Japan and the UK could not be in more contrasting positions, one benefiting from a low
currency value and the other struggling because of it.
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PERCENTCHANGE
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Post Brexit Index Performance
FTSE 100 S&P 500

3. Analysis
An investment in Japan would not be wise for an investor using USD as the buying currency for
two reasons. First, an investor would need to hope that the yen will decrease in value in order to
turn corporate earnings around. Along with that, if the yen decreases in value, what was bought
at today’s price in American dollars will lose value if the yen were to deprecate against the dollar.
Hong Kong, China and President Trump
Running on a platform against modern globalization, Donald Trump received the electoral votes
necessary to be elected president of the United States. During the many months of his
unorthodox campaign he said, many times, that the United States needed to put a 45% tariff on
Chinese imports entering the United States.2 China has an economy built on manufacturing. One
of the weaknesses of its economy is its reliance on other countries. In 2015 the United States
imported 18% of China’s exports, making the United States the single largest importer of Chinese
goods.4 While there is no way to know exactly what will happen if the United States puts a 45%
tariff on Chinese imports, it will likely be a crippling blow to an already slowing economy. China
has had declining GDP growth since 2010. If China were to experience a recession, global
commodities would drastically fall in price. China is the world’s largest consumer of metals, from
aluminum to steel. This would have a rippling effect on any independent steel or aluminum
manufactures not receiving government subsidies.
The ramifications of this tariff would not only affect mainland China, it would also have drastic
consequences in Hong Kong. Nearly 40% of the listed companies on the Hang Seng Index conduct
their business in mainland China, meaning that the popular equities in the index would struggle
to be profitable with the proposed tariff in place.
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JPY/USD
JPY/USD

4. The rest of the equities in the index face internal pressures that are preventing growth. Hong
Kong has a high reliance on exports. Hong Kong’s port, once the world’s busiest, has unloaded
less cargo in the past few years as ships bypass it for mainland Chinese ports. Total exports of fell
3.6% in the first quarter, in the city, from ayear ago,widening from a 0.5% decline in the previous
quarter.
Analysis
Due to a potential trade war between the United States and mainland China, and an already
declining economic outlook, Hong Kong is not a place of investment for the near future.
Conclusion
Due to the economic uncertainties across the globe and growing trade wars between the United
States and China, most international equities experience greater risk due to uncertainties
between the two leading economic powers in the world. However, there may still be some
pockets where value investments can be made. The United Kingdom will likely do relatively well
as corporations listed under its exchanges reap the benefits of a brutally devalued pound.
Investors using USD as the starting currency stand the potential to profit not only on rising stock
prices but on differences in currency values.
Overall, it is our recommendation that the allocation in international equities be lowered. This is
based on growing systemic risk related to coming trade wars.

5. Reference
1. Lee Wild. (2016). Five expert views on FTSE 100 at 6,900. Retrieved from
http://www.iii.co.uk/articles/348036/five-expert-views-ftse-100-6900
2. Peter Navarro. (2016). Trump's 45% tariff on Chinese goods is perfectly calculated.
Retrieved from http://www.latimes.com/opinion/op-ed/la-oe-navarro-trump-trade-
china-tariffs-20160721-snap-story.html
3. JONATHAN SOBLE. (2016). Japan’s negative interest rates explained. Retrieved from
http://www.nytimes.com/2016/09/21/business/international/japan-boj-negative-
interest-rates.html
4. U.S.-china trade facts. (2016). Retrieved from https://ustr.gov
5. Tejvan Pettinger. (2016). Winners and losers from a weak pound. Retrieved from
http://www.economicshelp.org/blog/1882/economics/winners-and-losers-from-weak-
pound/
6. John Ficenec. (2016). 15 UK shares most exposed to a strong pound. Retrieved from
http://www.telegraph.co.uk/finance/personalfinance/investing/10965232/15-UK-
stocks-most-exposed-to-a-strong-pound.html