I am very confused here. according to Schweser: ‘Stock market performance. When a country’s financial markets are liberalized, global investors bid up the prices of equities previously unavailable to them. After liberalization, stock returns decline, due to reduced capital costs (required returns). These country level results are also confirmed by examining ADR returns, assuming that the ADR listing is liberalization on a small scale.’ This part confuses me: 'After liberalization, stock returns decline, due to reduced capital costs (required returns). ’ According to P= D1/(r-g). Where r is required return and P is Stock returns. as r drops should P not increase??? please help
“after liberalization occurs”, stock market returns decline. Required return was 10%, now 7%. Stock price increased as the liberalization occurs, the required return dropped and investors bidded up the price. Now (with prices high), returns will decrease.
People buy stocks when they are cheap , and hold them until they appreciate. In a way it is a chicken and egg situation in the P=D1/(r-g) formula . With r lower prices are higher , but higher prices also produce lower returns to a prospective investor. The rush to EM countries stocks was due to a perception that they were cheap . ( last quarter of 2010 did proved that wasn’t a good strategy !)
liberalization causes risk to decrease…lower risk equals lower return (lower risk premium is needed), thus expected return decreases
some points to add. 1) We need H-model to value an emerging market; 2) r, the reurn, is the change of price. So as long as r is positive, the price will go up, but perhaps at a lower “speed”(declined r)
Liberization effect is when you see your passing score in August or whatwhen and you are free again to spend your afterwork time how you want it