Emerging Markets, American Depository Receipts and International Diversification
Dal O. Didia, Ph.D.

American Depository Receipts (ADRs) are financial instruments that facilitate the ownership of foreign securities without taking physical possession of such securities. These receipts indicate investors’ claim on the underlying foreign securities. In addition to other benefits, several studies suggest that investments in emerging market ADRs provide superior benefits of international diversification as compared to European ADRs. Hence, ADRs from emerging markets in the “BRIC” countries (Brazil, Russia, India, and China) have caught the attention of international investors mainly because of the recent spectacular performance of their equity markets which have on many occasions, outperformed the U.S and European markets. In spite of the acknowledged benefits of ADRs, Sub-Saharan Africa (SSA) remains under-exploited in the utilization of ADRs even when the equity markets of countries such as Nigeria and Kenya have equally shown that they are capable of spectacular returns as observed recently. Consequently, SSA has not received a commensurate inflow of capital in the form of ADRs as witnessed in the “BRIC” and other emerging markets. This study therefore explores international portfolio diversification and highlights the precise potential of ADRs especially in emerging markets in SSA. With the spectacular growth rate of some of their economies, burgeoning middle class and democracies that have been deepened, SSA equities deserve a second and in-depth examination with respect to the potential of ADRs, not only for the returns for international investors, but also for the added benefit that the growth of the equity market creates positive externalities for the overall growth of the economy. By not utilizing ADRs in SSA, investors in U.S., Europe and other countries seeking to maximize the return on their portfolios may be inadvertently limiting the performance of these portfolios.

Full Text: PDF     DOI: 10.15640/jibe.v3n2a3