The bottom line is that you can not make general conclusions about valuation levels in different countries without a thorough understanding of accounting and other differences between the countries. Currency risk has a stronger affect on foreign bonds than on foreign stocks because bond markets are less volatile than stock markets. There is much debate over whether nondollar bond investment is worthwhile. The risk reduction is modest and given the expense and currency risk, many have concluded that for all but the largest funds, its an opportunity that investors can afford to pass up. Central banks trade to dampen volatility.
Corporations seek to hedge currency exposure in their book of business. . . .
Their inefficiencies follow a historically reliable patter, which is consistent with what we know about global capital flows. Accordingly, we see no reason for these inefficiencies to dissipate quickly. If you include investment management fees of 50 to 100 basis points, you start 200 to 250 basis points behind the game with an active manager. The benefits of investing in emerging markets include high returns and greater diversification, while the risks are greater than investing in developed countries. Additional difficulties include political uncertainty, lack of company information, lack of liquidity, trading and custodial difficulties, confidentiality and insider trading problems, as well as even higher transactions costs compared with developed countries.