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International Equity Market FINAL
International Equity Market FINAL
A Term Paper
In
International Financial Management
Under the Guidance of
Mr. M.V.S. Kameshwar Rao
(Associate professor)
SUBMITTED BY
Mr. Goutam Dash (1224108128)
Mr. Hardik Shah (1224108129)
Mr. Kaushalendra Kumar (1224108131)
Mr. L. V. Srikanth (1224108134)
Ms. Rubina Rizwan (1224108148)
Ms. S. Naseema Tasneem (1224108151)
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CONTENTS
SUBJECT PAGE NUMBER
1. Introduction 2 to 6
1.1. Equity
2
1.2. Equity market
1.3. International equity markets 2
1.4.Statistical perspective on international
equity 3
2. Market structure 6
7. Conclusion 19
8. Bibliography 21
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INTRODUCTION
EQUITY
The term equity or stock has different meanings in different contexts. A stock or any
other security representing an ownership interest; on a company's balance sheet -
the amount of funds contributed by the owners (the stockholders) plus the retained
earnings (or losses), also referred to as "shareholders' equity". In the context of
margin trading, the value of securities in a margin account minus what has been
borrowed from the brokerage. In the context of real estate, the difference between
the current market value of the property and the amount the owner still owes on the
mortgage. It is the amount that the owner would receive after selling a property and
paying off the mortgage. In terms of investment strategies, equity (stocks) is one of
the principal asset classes. These are used in asset allocation planning to structure a
desired risk and return profile for an investor's portfolio.
EQUITY MARKET
An equity market is most commonly known as the Stock Market. The equity market
is a public market for the purpose of trading stock and derivatives at agreed prices
set by the buyers and sellers. Some securities are traded on the stock exchange
whereas the others are traded privately. There are several stock exchanges in the
equity market (stock market). Exchanges are entities of mutual organizations, which
specialize in the business of bringing buyers and sellers together to a certain selected
group of stocks and securities. Some of the stock exchanges are the Bombay Stock
Exchange (BSE), and the National Stock Exchange (NSE) in India and the New York
Stock Exchange, Cincinnati Stock Exchange at the international forum. Investors use
these equity markets to buy stocks for investment purposes, or to sell them inorder
to raise capital. Stock markets are divided into two namely the primary market as
well as the secondary market. The primary markets are where new issues are sold
and the secondary markets are where all other trading occurs. They are an extremely
essential part of the capitalist system because each stock represents a piece of
ownership in a company.
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The major international equity market is mainly divided into TWO parts:-
In the case of a developed market, the investment is less risky than the emerging or
developing market. There are many players who rate the countries as a developed or
developing market based on various parameters.
2. Developing Market: - Like BRIC countries i.e. Brazil, Russia, India & China
also known as Emerging Market.
The term emerging markets is used by investment analysts to categorize countries that
are in a transitional phase between developing countries that are just beginning to
industrialize and countries that are fully developed. The main significance of the use
of the term is that investments in emerging markets are assumed to carry greater risk
and offer less safety in investment. The term is often used interchangeably with
developing markets, though this is somewhat inaccurate. Examples of emerging
markets include the BRIC countries (Brazil, Russia, India, and China), several
Southeast Asian countries, Eastern Europe, and parts of Africa and Latin America.
Emerging markets are characterized by strong economic growth, resulting in an
often marked rise in GDP and disposable income.
For measuring the International Equity market we mainly used market capitalisation
method. Market capitalisation refers to the value or capitalization the market puts on
a company. It is calculated by multiplying the price of the stock by the number of
stocks issued.
The total market capitalization of all publicly traded companies in the world was
US$51.2 trillion in January 2007 and rose as high as US$57.5 trillion in May 2008
before dropping below US$50 trillion in August 2008 and slightly above US$40
trillion in September 2008. In 2003 - Total Mkt. Capitalization of world equity
markets was more than $32T. 89% of this ($28.29T) was from 31 developed
countries. And the other 11% of this was from developing countries. Some of these
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countries have larger equity markets than smaller developed countries, e.g., Russia,
China, Brazil, S. Africa, Korea, and Taiwan are larger than New Zealand, Austria,
Ireland, Luxembourg, Finland, etc. High growth markets have been in the emerging
markets, like China (50% per year), Russia (90% per year), and they have attracted
increasing amounts of capital.
In 1990s the trend started for investment in emerging equity markets, and some
investment advisors suggest 50% of an ideal portfolio by 2005 should be in emerging
markets like Asia, Latin America and Eastern Europe (Russia). Prediction: "In 20
years China, Russia and India will be the biggest stock markets in the world, bigger
than the U.S. and Japan." As per the McKinsey report on BRIC countries by 2050
China and India will the major service provider and Brazil and Russia will the major
raw-material provider to the world.
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From the data available we can clearly see that the Capitalization of Equity Markets
in Developed Countries have been decreasing after 1993 continuously that means
more investment flowing towards the emerging market and the developing nation
like the countries in Latin America and Asia pacific region. That can be seen from the
table below as the data little old we cannot able to portray the current situation but
from different article it can say that due to global economy downturn many
investors have withdraw their money. So, the current situation is almost as per
2004.market capitalisation is a method where we can see the trend in the market.
One measure of stock market liquidity is the Turnover Ratio = Total Value of All
Market Transactions / Total Stock Market Value. Example: Total stock market value
is $5m, and there is $100m of market transactions during the year, the turnover is
$100m/$5m or 20x. The average stock has turned over 20 times during the year, or
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about every 2.5 weeks. In general, higher the Turnover Ratio, greater is the liquidity
of the secondary equity market. U.S. was one of the world's most liquid markets, along
with Sweden, Spain, Italy, etc. Most of the developed markets had turnover ratios of 50 or
higher (50-150). Some of the emerging markets have very low turnover ratios (Colombia,
Philippines, Nigeria, etc.), especially the smaller markets. The larger markets have higher
turnover (Taiwan, India, Korea, China, Turkey, Brazil, etc.) Also, liquidity is improving for
many emerging markets (India, Russia, Egypt, etc) over time.
MARKET STRUCTURE
The market is divided into two major parts. Primary Markets i.e. shares offered for
sale directly from the issuing company and, Secondary Markets i.e. provide market
participants with marketability and share valuation.
1. Dealer Market - OTC, dealer network, like NASDAQ, where about 450
dealers ("market makers") specialize in buying/selling certain stocks. You are
buying (selling) the stock from (to) the dealer, not from (to) another investor, who
holds the stock in his/her account. Bid (dealer buys)- Ask (dealer sells) Spread is the
dealer's commission, e.g., $5(bid)-$5.05(ask), 1% spread. There are about 20 active
dealers/market makers for the average, actively traded stocks, close to 100 dealers
for high volume stocks. Only quotations are automated, actual trades do not take
place through the computer system, but require direct contact between the dealer
and a broker.
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2. Agency Market - like NYSE, AMEX. The broker takes a buy (sell) order
from a client/investor/trader, and matches it with a sell (buy) order from another
client/trader. Both OTC and exchange markets are Continuous Markets, where
trading takes place continually during the trading day. It is considered to be the
most efficient one, especially for actively traded issues. Non-continuous trading
systems include the call market in France and the crowd trading in Spain.
meant to reflect the risk/return characteristics of the large cap universe. Companies
included in the index are selected by the S&P Index Committee, a team of analysts
and economists at Standard & Poor's. The S&P 500 is a market value weighted index
each stock's weight is proportionate to its market value.
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The S&P 500 is one of the most commonly used benchmarks for the overall
U.S. stock market. The Dow Jones Industrial Average (DJIA) was at one time the
most renowned index for U.S. stocks, but because the DJIA contains only 30
companies, most people agree that the S&P 500 is a better representation of the U.S.
market. Other popular Standard & Poor's indexes include the S&P 600, an index of
small cap companies with market capitalizations between $300 million and $2
billion, and the S&P 400, an index of mid cap companies with market
capitalizations of $2 billion to $10 billion.
Calculated since 1969, the indices have become integral tools in the investment
process of international investors and are used:
for research
as the basis of index linked products such as indexed funds, exchange traded
funds (ETFs), OTC and non-OTC derivatives, and futures and options
contracts.
To be useful tools in the investment process, indices must reflect the relevant market,
and be replicable and investable. To address this, MSCI Barra has evolved its index
methodology over time. Examples include enhancing the methodology to reflect
free-float adjusted market capitalization weighting in 2001/2002, and introducing
comprehensive market cap segmentation and adding Emerging Markets Small Cap
Indices in June 2007.
Since 1969, MSCI Barra's local research experts have applied a rigorous approach to
data collection and quality control. Today the company has over 50 research and
index specialists, gathering data and constructing indices across 70 markets.
The MSCI International Equity Indices consist of several index families, spanning
74 markets, designed to address the indexing and benchmarking needs of
institutional investors across a range of investment styles. They are mainly:-
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iii) MSCI Global Small Cap Indices: - Indices covering small cap securities for 23
developed markets, 22 emerging markets & 6 GCC countries.
(Source: - http://www.mscibarra.com/products/indices/equity/index.jsp)
3. Dow Jones Global Indexes - The Dow Jones Global Indexes (DJGI)
is a family of international equity indexes, including world, region, and country
indexes and economic sector, market sector, industry-group, and subgroup indexes.
The indexes are constructed and weighted using free-float market capitalization.
They provide 95 percent market capitalization coverage of developed markets and
emerging markets. In all, more than 3000 DJGI indexes provide real time and
historical data on more than 5500 companies around the world. Market
capitalization is float-adjusted. Indexes for the United States, Canada, Japan, Hong
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World Equity Benchmark Shares: - World Equity Benchmark Shares (WEBS) were
introduced for trading on the American Stock Exchange in March, 1996. WEBS are
an excellent way for investors to internationally diversify their investment portfolio.
With the purchase of a WEBS unit, an investor achieves exposure to a diversified
equity portfolio within a specific country. Country-specific baskets of stocks
designed to replicate the country indexes of 20 countries and 3 regions. WEBS are
subject to U.S. SEC and IRS diversification requirements. Low cost and convenient
way for the investors to hold diversified investments in several different countries.
Global
The Global Dow 24.4 2186.63 1139.9 -13.2 0.3
(World)
The Global Dow 17.5 1403.64 849.42 -13.4 -4.2
(Euro) (World)
DJ Global Index 26.1 236.85 130.29 -8.4 -4.9
(World)
DJ Global ex U.S. 32.3 205.21 111.8 -5.4 -3.7
(World)
MSCI EAFE* 25.6 1701.36 911.39 -8.7 -5.9
(World)
DJ CBN China 600 67.3 29890.92 12886.57 40 29.6
(China)
Dow Jones China 88 61.1 327.69 149.53 29.2 29.8
(China)
Shanghai 56.7 3471.44 1706.7 24.2 18.3
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Composite (China)
Hang Seng (Hong 46.3 21768.51 11015.84 11.2 6.2
Kong)
Bombay Sensex 73.9 16886.43 8160.4 23.9 11.1
(India)
Jakarta Composite 82.2 2468.9 1111.39 32 17.8
(Indonesia)
Nikkei 300 (Japan) 9.4 235.94 140.76 -18.8 -14.7
From the above table we can clearly able to identify that which stock market is doing
well and also have a positive growth in the last three year. It was clear that the BRIC
countries have did well in the last three year.
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From the above graphs we can infer that all the major equity markets are recovering
from economic downturn.
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1. Cross-Listing of Shares
2. The European Stock Market
3. American Depository Receipts
Cross-Listing of Shares is when a firm (MNC) lists/sells its shares on one or more
foreign exchanges in addition to the domestic exchange. Example: GM might list on
NYSE, and on the exchanges in London and Paris. Honda, Toyota and Yamaha list
on the NYSE, in addition to Tokyo. Cross listing of shares become famous because
of many reason:-
1. Increased liquidity, broader investor base. Increased global demand
may support a higher stock price.
2. Cross-listing improves name recognition globally in new capital
markets. May make it easier in future to raise additional equity or debt
capital globally, get a higher price for stock, lower interest rate for debt.
3. Company may benefit as more consumers and investors become
familiar with the company and it products. Consumers who like the
company's products may be more likely to invest in the company, and
investors in the company may be more likely to become consumers of
the company's products.
4. May make it harder for an unwanted, hostile takeover due to the
diversified, global stockholder base.
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b) Foreign firms can bypass these requirements through rule 144A (private
placement) sales to qualified institution buyers. These buyers are generally
pension funds, asset managers, or insurance companies
b) The role of corporate governance and the role of those who manage corporate
governance have changed substantially. Requires management certification of
financial statements.
3) Fees as set by the foreign exchange: - Listing and annual fees are charged
The European Stock Market includes the various Stock Exchanges spread all across
Europe. Every European Stock Exchange is significant in molding the European
Stock Market into a profitable as well as investor-friendly Stock Market.
Some of the Stock Exchanges that have made the European Stock Market what it is
today are:
Euronext N.V. - This pan-European Stock Exchange is the fifth in the world in terms
of market capitalization. Headquartered in Paris, it also has branches in Belgium,
Netherlands, Portugal and the United Kingdom (LIFFE) and deals in equities and
derivatives besides offering clearing and information services. This Stock Exchange
of the European Stock Market merged with NYSE Group to constitute the first global
stock exchange - NYSE Euronext.
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2. CAC 40 London Stock Exchange (LSE) - a hugely profitable Stock Exchange, from
time to time the LSE has rejected takeover bids from Deutsche Börse (Frankfurt
Stock Exchange operator), Macquarie Bank and NASDAQ . These go to prove the
demand that this Exchange from the European Stock Market enjoys in the global
scenario.
European Stock Market can be classified into four main types according to their
methods of The LSE is segregated into:
1) Main Market
4) The FTSE Group, an independent organization, evaluates the LSE through the
following indexes(indices):
American Depository Receipts (ADRs) - the most efficient and common method of
selling foreign stocks in the U.S. market. ADRs are an example of financial
engineering, the creation and marketing of new securities from underlying
securities, e.g., stripped zero coupons, Mortgage Backed Securities (MBSs) like
CMOs and pass-throughs. ADR process:
2. The ADRs are then traded in the U.S. stock market, on NYSE or NASDAQ,
like stocks (Level II).
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Advantages of ADRs:
1. ADRs are priced in dollars, trade on a U.S. exchange, and can be purchased
through a regular broker. If foreign shares were purchased directly, it would
involve a) working with a broker in Russia or China, b) foreign currency
exchange, and c) arrange for shipment of stock certificates.
2. Dividends for ADRs are collected and converted to dollars by the custodian.
4. ADRs are registered shares, not bearer securities like many foreign shares,
offering greater protection of ownership rights.
6. ADRs typically trade at a multiple of the underlying shares, to adjust the price
up (or down) to a normal trading range for U.S. ($5-$50), e.g., ratios of 1:10 or
1:.25.
ADR trading: OTC (Level I) - more than 1,000 ADRs are traded, Level IIs: NASDAQ
(300 ADRs), NYSE (350 ADRs), and AMEX (3 ADRs). Note: One company can have
several ADRs listed at once, and can also be listed on more than one exchange.
Level I ADRs are sold OTC. Easiest, least expensive and least regulated way for
foreign companies to market ADRs in U.S., require minimal SEC registration.
Foreign companies can build a presence here and generate interest among investors.
Level I ADRs cannot be used to raise new capital. Not as liquid as Level II ADRs.
Level II ADRs are sold on NASDAQ, NYSE and AMEX, stricter SEC requirements,
more liquid market.
Level III ADRs are used to raise new equity capital in U.S. markets.
Typical countries represented in ADR markets: Russia, Brazil, China, Turkey, South
Africa, Mexico, India, etc. Typical industries: Banking, mining, chemicals, textiles,
oil and gas, airlines, electric utilities, machinery, real estate, etc. S&P now has the
S&P ADR Index of 260 U.S.-listed ADRs, at levels II and III and global shares.
Mutual funds can be set up to buy the S&P ADR Index, just like the S&P 500 Index.
Global Registered Shares (GRS) started as new equity shares. A share issued and
registered in multiple markets around the world. Global registered shares represent
the same class of shares. Also known as a "global share". These shares are issued in
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the U.S. and registered in different countries, thereby making them foreign
securities. They provide shareholders across the globe with equal corporate rights.
Global registered shares should not be confused with American depositary receipt
(ADRs) or global depositary receipts (GDRs), which are domestic securities
representing a foreign (outside the U.S.) interest.
2) Exchange Rates
3) Industrial Structure
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CONCLUSION
In terms of investment strategies, equity (stocks) is one of the principal asset classes.
These are used in asset allocation planning to structure a desired risk
and return profile for an investor's portfolio.
The major international equity market is mainly divided into two parts developed
market (Like USE, EU, JAPAN etc.) and developing market (BRIC countries i.e.
Brazil, Russia, India & China) it is also known as Emerging Market.
The total market capitalization of all publicly traded companies in the world was
US$51.2 trillion in January 2007 and rose as high as US$57.5 trillion in May 2008
before dropping below US$50 trillion in August 2008 and slightly above US$40
trillion in September 2008.
From the analysis of global stocks available from Standard & Poor we found that the
Capitalization of Equity Markets in Developed Countries has been decreasing after
1993 continuously. That means more investment flowing towards the emerging
market and the developing nation like the countries in Latin America and Asia
pacific region.
Turnover Ratio is also a method to measure liquidity of the market. Higher the
Turnover Ratio, greater is the liquidity of the secondary equity market. U.S. was one
of the world's most liquid markets, along with Sweden, Spain, Italy, etc. Most of the
developed markets had turnover ratios of 50 or higher (50-150). Some of the emerging
markets have very low turnover ratios (Colombia, Philippines, Nigeria, etc.), especially the
smaller markets as compared to the larger markets that have higher turnover ratios.
The market is divided in to two major parts. Primary Markets i.e. shares offered for
sale directly from the issuing company and the Secondary Markets i.e. provide
market participants with marketability and share valuation.
Secondary market for equity serves two purposes marketability and share price
valuation of the equity.
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Global integration of world equity markets have been increased due to liberalization
of most of the world economy after 1990.
American Depository Receipts (ADRs) is one of the most efficient and common
method of selling foreign stocks in the U.S. market. ADRs are an example of
financial engineering, the creation and marketing of new securities from underlying
securities, e.g., Stripped Zero Coupons, Mortgage Backed Securities (MBSs) like
CMOs and pass-through. The other efficient way is Global Registered Shares. They
provide shareholders across the globe with equal corporate rights. Global Registered
Shares should not be confused with American Depositary Receipt (ADRs) or global
depositary receipts (GDRs), which are domestic securities representing a foreign
(outside the U.S.) interest.
The study of the International Equity Market concluded that the factors affecting
International Equity Returns are macroeconomic factors like International monetary
variables (such as interest rate differentials, change in domestic inflation
expectations), Exchange Rates movements and Industrial Structure of that country.
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BIBLOGRAPHY
1. http://www.investopedia.com/terms/e/equity.asp
2. http://www.teenanalyst.com/glossary/e/equitymarket.html
3. http://epaper.timesofindia.com/Default/Client.asp?Daily=ETD&showST=tr
ue&login=default&pub=ET&Enter=true&Skin=ETNEW&GZ=T
4. http://www.mscibarra.com/products/indices/equity/index.jsp
5. http://www2.standardandpoors.com/spf/pdf/index/093008_worldbynumber
s_rpt.pdf?vregion=us&vlang=en
6. http://www.crosslisting.com/
7. http://www.tradingeconomics.com/
8. http://www.economywatch.com/market/stocks/european.html
9. http://www.euronext.com
10. http://www.adr.com
12. http://www.dowjones.com/
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