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International equity Markets

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

International Business 5e Chapter 9 - 2

Capital Market

Debt: Repay principal plus interest Bond has timed principal & interest payments

Equity: Part ownership of a company Stock shares in financial gains or losses

System that allocates financial resourcesaccording to their most efficient uses

Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 21-3

International Capital Markets• International capital markets are a group of markets (in

London, Tokyo, New York, Singapore, and other financial cities) that trade different types of financial and physical capital (assets), including– stocks – bonds (government and corporate) – bank deposits denominated in different currencies– commodities (like petroleum, wheat, bauxite, gold)– forward contracts, futures contracts, swaps, options contracts– real estate and land– factories and equipment


International Capital Market

Network of people, firms, financial institutions, and governments borrowing and investing internationally

Borrowers

Expands money supply Reduces cost of money

Borrowers

Expands money supply Reduces cost of money

Lenders

Spread / reduce risk Offset gains / losses

Lenders

Spread / reduce risk Offset gains / losses


International CapitalMarket Drivers

Information technology

Deregulation

Financial instruments


International Bond Market

Foreign bond Interest ratesEurobond

Bond that is issued outside the country in whose currency the bond is denominated

Bond sold outside a borrower’s country and denominated in the currency of the country in which it is sold

Driving growth are differential interest rates between developed and developing nations

Market of bonds sold by issuing companies, governments, and others outside their own countries


Governments Commercial banks International companies Wealthy individuals

Eurocurrency Market

Unregulated market of currencies banked outside their countries of origin


International Capital Markets

The participants:1. Commercial banks and other depository

institutions: – accept deposits – lend to governments, corporations, other banks, and/or

individuals– buy and sell bonds and other assets – Some commercial banks underwrite stocks and bonds by

agreeing to find buyers for those assets at a specified price.


International Capital Markets (cont.)

2. Non bank financial institutions: pension funds, insurance companies, mutual funds, investment banks

– Pension funds accept funds from workers and invest them until the workers retire.

– Insurance companies accept premiums from policy holders and invest them until an accident or another unexpected event occurs.

– Mutual funds accept funds from investors and invest them in a diversified portfolio of stocks.

– Investment banks specialize in underwriting stocks and bonds and perform various types of investments.



3. Private firms: – Corporations may issue stock, may issue bonds or may borrow from

commercial banks or other lenders to acquire funds for investment purposes.

– Other private firms may issue bonds or borrow from commercial banks.

4. Central banks and government agencies:– Central banks sometimes intervene in foreign exchange markets.

– Government agencies issue bonds to acquire funds, and may borrow from commercial or investment banks.



• Because of international capital markets, policy makers generally have a choice of 2 of the following 3 policies:

1. A fixed exchange rate2. Monetary policy aimed at achieving domestic

economic goals3. Free international flows of financial capital



• A fixed exchange rate and an independent monetary policy can exist if restrictions on flows of financial capital prevent speculation and capital flight.

• Independent monetary policy and free flows of financial capital can exist when the exchange rate fluctuates.

• A fixed exchange rate and free flows of financial capital can exist if the central bank gives up its domestic goals and maintains the fixed exchange rate.


Country or territorywhose financial sector

features few regulationsand few, if any, taxes

Country or territorywhose financial sector

features few regulationsand few, if any, taxes

Operational centerExtensive financial activity

and currency trading

Operational centerExtensive financial activity

and currency trading

Booking centerMostly for bookkeeping

and tax purposes

Booking centerMostly for bookkeeping

and tax purposes

Offshore Financial Centers


Offshore Banking

• Offshore banking refers to banking outside of the boundaries of a country.

• There are at least 4 types of offshore banking institutions, which are regulated differently:

1. An agency office in a foreign country makes loans and transfers, but does not accept deposits, and is therefore not subject to depository regulations in either the domestic or foreign country.


Offshore Banking (cont.)

2. A subsidiary bank in a foreign country follows the regulations of the foreign country, not the domestic regulations of the domestic parent.

3. A foreign branch of a domestic bank is often subject to both domestic and foreign regulations, but sometimes may choose the more lenient regulations of the two.


Offshore Banking (cont.)

4. International banking facilities are foreign banks in the US that are allowed to accept deposits from and make loans to foreign customers only. They are not subject to reserve requirement regulations, interest rate ceilings and state and local taxes.

– Bahrain, Singapore and Japan have similar regulations for offshore banks.


International Equity Market

Market of stocks bought and soldoutside the issuer’s home country

Privatization

Investment banks

Developing nations

Electronic markets

11-18

Global equity markets

• Where investors can buy/sell stocks

• Made up of manyStock exchanges around the world

11-19

Who uses these markets?

• Investors seeking to diversify their portfolios.• Companies seeking to

– Issue stock in the country– Use stock and options as a form of employee

incentives– Satisfy local ownership requirements– Create funding for future acquisitions– Increase the visibility of the company

– Standard & Poor’s Emerging Markets Data Base classifies a stock market as “emerging” if it meets at least one of two general criteria:• (1) it is located in a low- or middle-income

economy as defined by the World Bank, and/or • (2) its investable market capitalization is low

relative to its most recent GNI figures.

Emerging Markets

13-20

Measures of Liquidity

• The equity markets of the developed world tend to be much more liquid than emerging markets.– Liquidity refers to how quickly an asset can be sold

without a major price concession.• So, while investments in emerging markets

may be profitable, the investor’s focus should be on the long term.

13-21

Measures of Market Concentration• Emerging Markets tend to be much more concentrated

than our markets.– Concentrated in relatively few companies.

• That is, a few issues account for a much larger percentage of the overall market capitalization in emerging markets than in the equity markets of the developed world.

• The number of equity investment opportunities in emerging stock markets in developing countries has not been improving in recent years.

13-22

Market Structure, Trading Practices, and Costs

• Primary Markets– Shares offered for sale directly from the issuing

company.• Secondary Markets

– Provide market participants with marketability and share valuation.

13-23

Market Consolidations And Mergers

• There are approximately 80 major national stock markets. – Western and Eastern Europe once had more than 20

national stock exchanges where at least 15 different languages were spoken.

– It appears that over time a European stock exchange will eventually develop. However, a lack of common securities regulations, even among the countries of the European Union, is hindering this development.

• Today, stock markets around the world are under pressure from clients to combine or buy stakes in one other to trade shares of companies anywhere, at a faster pace.

13-24

Magnitude of International Equity Trading

• During the 1980s world capital markets began a trend toward greater global integration.

• Diversification, reduced regulation, improvements in computer and communications technology, increased demand from MNCs for global issuance.

13-25

Cross-Listing of Shares

• Cross-Listing refers to a firm having its equity shares listed on one or more foreign exchanges.

• The number of firms doing this has exploded in recent years.

13-26

Advantages of Cross-Listing

• It expands the investor base for a firm.– Very important reason for firms from emerging

market countries with limited capital markets.• Establishes name recognition for the firm in

new capital markets, paving the way for new issues.

• May offer marketing advantages.• May mitigate possibility of hostile takeovers.

13-27

American Depository Receipts

• Foreign stocks often trade on U.S. exchanges as ADRs.

• It is a receipt that represents the number of foreign shares that are deposited at a U.S. bank.

• The bank serves as a transfer agent for the ADRs

13-28

American Depository Receipts

• There are many advantages to trading ADRs as opposed to direct investment in the company’s shares:– ADRs are denominated in U.S. dollars, trade on

U.S. exchanges and can be bought through any broker.

– Dividends are paid in U.S. dollars.– Most underlying stocks are bearer securities, the

ADRs are registered.

13-29

International Equity Market Benchmarks

• North America• Europe• Asia/Pacific Rim

13-30

North American Equity Market Benchmarks

NAME

SYMBOL

Dow Jones Industrial Average DJIA

NASDAQ Combined Composite

CCMP

S&P 500 SPX

TSE 300 TS300

Mexico BOLSA Index MEXBOL

13-31

European Equity Market Benchmarks

NAME

SYMBOL

FT-SE 100

UKX

CAC 40

CAC

Frankfurt DAX Index

DAX

IBEX Index

IBEX

Milan MIB30

MIB30

BEL20 Index

BEL20

13-32

Asia/ Pacific Rim Equity Market Benchmarks

NAME

SYMBOL

NIKKEI 225 Index NKY

Hang Seng Index

HSI

Sing Straits Times Index STI

ASX All Ordinaries Index AS300

13-33

• Macroeconomic Factors• Exchange Rates • Industrial Structure

Factors Affecting International Equity Returns

13-34

• The data do not support the notion that equity returns are strongly influenced by macro factors.

• That is correspondent with findings for U.S. equity markets.

Macroeconomic Factors Affecting International Equity Returns

13-35

Exchange Rates

• Exchange rate movements in a given country appear to reinforce the stock market movements within that country.

• One should be careful not to confuse correlation with causality.

13-36

Industrial Structure

• Studies examining the influence of industrial structure on foreign equity returns are inconclusive.

13-37


Foreign Exchange Market

Conversion: To facilitate sale or purchase, or invest directly abroad

Hedging: Insure against potential losses from adverse exchange-rate changes

Arbitrage: Instantaneous purchase and sale of a currency in different markets for profit

Speculation: Sequential purchase and sale (or vice-versa) of a currency for profit

Market in which currencies are bought and soldand their prices are determined

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