1 GLOBALIZATION 2008: EMERGING MARKETS & INTERDEPENDENCE Globalization The dominant trend in the world market is the globalization of the markets. This trend has emerged within the past 6 years as investors began to see the value of reaching beyond their borders and pursuing growth opportunities in international markets. With economies around the globe beginning to slow down, a direct result of saturation and tightening regulation, these new opportunities that can be found abroad have proven to be incredibly attractive. The surge in capital has resulted in a rise of Initial Public Offerings (IPOs) in 2006-2007, bolstering financial markets across the globe and creating positive capital-raising options for emerging market economies. However, in the midst of all the international optimism that has been driving world economies up until beginning of 2008, the rising oils prices and inflation rates became a subject for urgent concerns among economists, investors, and governments causing turbulence in markets across the globe including the Asian markets. Overview of Global IPO Activity in 2006-2008 • Dramatic gains in 2006-2007 but slowdown in 2008 • Diversification among investors moving into emerging markets realizing higher returns • The vast majority of companies on a global basis list domestic exchanges due to familiarity in their customer base, core management structures and a regulatory status quo • Hong Kong and London have been the world's most powerful financial centers in 2007, attracting the highest number of global IPOs • United States remains among the most stable exchanges globally • The groundbreaking merger between NYSE and Euronext, the first transatlantic exchange • The number of mergers and acquisitions continues to grow on a global basis 1 Interdependence The trend of the growing interdependence among the markets poses one of the greatest challenges investors face with regards to globalization. A variety of factors are impacting markets around the world. From the fall in markets in Asia to the continuing subprime mortgage crisis here in the United States, the world is beginning to realize the importance of controlling negative influences on the global economy 2 . One possible solution to the controlling of negative influences of interdependence is a creation of the UNPA, United Nations Parliamentary Assembly, an organization designated to support fair economic policies and political balance 3 . This creation does not come without its fair share of critics with many expressing concern regarding the potential to slow the world economy if any one group or assembly were given full responsibility for the regulation of all functional sectors. While it would seem to be a plausible option, it is unlikely that without answering some important questions first the controversy around the issue of having central controls regarding the global economy can be resolved. An educational report by PRIMEBIZNEWS, ALTANET, INC. July 14, 2008 Copyright @ 2008 ALTANET,INC. All Rights Reserved.
GlobalizationThe dominant trend in the world market is the globalization of the markets. This trend hasemerged within the past 6 years as investors began to see the value of reaching beyond theirborders and pursuing growth opportunities in international markets. With economies aroundthe globe beginning to slow down, a direct result of saturation and tightening regulation, thesenew opportunities that can be found abroad have proven to be incredibly attractive. The surgein capital has resulted in a rise of Initial Public Offerings (IPOs) in 2006-2007, bolsteringfinancial markets across the globe and creating positive capital-raising options for emergingmarket economies. However, in the midst of all the international optimism that has beendriving world economies up until beginning of 2008, the rising oils prices and inflation ratesbecame a subject for urgent concerns among economists, investors, and governments causingturbulence in markets across the globe including the Asian markets.
Overview of Global IPO Activity in 2006-2008
• Dramatic gains in 2006-2007 but slowdown in 2008• Diversification among investors moving into emerging markets
realizing higher returns• The vast majority of companies on a global basis list domestic
exchanges due to familiarity in their customer base, core management structures and a regulatory status quo
• Hong Kong and London have been the world's most powerful financial centers in 2007, attracting the highest number of global IPOs
• United States remains among the most stable exchanges globally• The groundbreaking merger between NYSE and Euronext,
the first transatlantic exchange• The number of mergers and acquisitions continues to grow on
a global basis1
InterdependenceThe trend of the growing interdependence among the markets poses one of the greatestchallenges investors face with regards to globalization. A variety of factors are impactingmarkets around the world. From the fall in markets in Asia to the continuing subprime mortgagecrisis here in the United States, the world is beginning to realize the importance of controllingnegative influences on the global economy 2. One possible solution to the controlling ofnegative influences of interdependence is a creation of the UNPA, United Nations ParliamentaryAssembly, an organization designated to support fair economic policies and political balance 3.This creation does not come without its fair share of critics with many expressing concernregarding the potential to slow the world economy if any one group or assembly were given fullresponsibility for the regulation of all functional sectors. While it would seem to be a plausibleoption, it is unlikely that without answering some important questions first the controversyaround the issue of having central controls regarding the global economy can be resolved.
An educational report by PRIMEBIZNEWS, ALTANET, INC. July 14, 2008
Copyright @ 2008 ALTANET,INC. All Rights Reserved.
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Source: PRIMEBIZNEWS
THOUGHTS ON GLOBAL
IPO TRENDS: 1995-2008
2007 was a record year for IPOs with the 1729 listings nearly eclipsing the 2000 markof 1883 when the market was at its peak. The market has seen a cyclical trend from1995 to 2008 with regards to capital raised. Estimates of the fluctuating cycles in raisedcapital over time showed that there is in fact a link between the trends in the globaleconomy and emergence of new markets. The information in Figure 1 shows capitalthat was raised over time and is based on estimations. Please note that these figuresrepresent trends as opposed to actual numbers.
0 50 100 150 200 250 300 350
1995
1997
1998
1999
2000
2001
2002
2003
2004
2006
2007
$85
$130
$145
$115
$180
$210
$95
$65
$50
$125
$165
$245
$300
Figure 1: Trends in Global IPOs
1996
2005
Capital Raised is reported in $ Billion**
** Numbers are provided as estimates only
2008/Q1, Q2 $200
Year
Emerging markets have recently begun to show their true strength impacting the globalmarkets significantly. This trend began in 2001 as rapid growth in the BRIC countries,which include Brazil, Russia, India and China, boosted investor confidence to the pointwhere a migration of capital from developed markets began to funnel into thoseconsidered emerging. This trend led to a surge in IPOs in 2006-2007. However, due tomultiple global issues affecting world market, the upward trend in IPO activity has notcontinued during the first two quarters of 2008 5, 6. The 2007 peak of IPO activity is stillhigher then the one observed in 2000. This observation may serve as an evidence ofcontinuing growth of global economy regardless of its up and down cycles. Anotherinteresting conclusion: we may experience next dip of the curve at a higher point than in2002.
Developed markets are rising >>1995-2000
Rapid Growth of BRIC markets >>2001-2007
Investors are moving capital intoBRIC markets >> 2004-2007
Outflows of capital from developedand BRIC markets >> 2008/ Q1, Q2
An educational report by PRIMEBIZNEWS, ALTANET, INC. July 14, 2008
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An educational report by PRIMEBIZNEWS, ALTANET, INC. July 14, 2008
As previously reported, 1739 companies went public from January to November of2007 with over $255 billion dollars being raised. China led the way with some 209IPOs resulting in $52.6 billion in capital raised, with the United States not far behindregistering a healthy $38.7 billion in capital raised. The United States reported 178IPOs ranking third behind Australia (189). Brazil ranked third in capital raised with$29 billion as some 14 out of 20 global IPOs came from the areas considered to beemerging markets.
In terms of stability, the United States exchanges have been far and away the moststable with higher volumes of liquidity and disclosure legislation. The Hong KongStock Exchange and the London Stock Exchange are however more popular withglobal IPOs. The two most formidable challenges the United States is facing in tryingto attract IPOs from outside of its borders would be the Sarbanes-Oxley law and otherforms of litigation that hinder investor flexibility. These challenges are both time-consuming and expensive.
THOUGHTS ON GLOBAL
IPO TRENDS: 1995-2008
2008 has not been a banner year thus far for both developed and emerging markets.Shared resources and infrastructures, both seen as positives in 2007, have turned intoshared losses as the rising costs of fuel and inflation have combined to have a de-stabilizing effect on markets around the globe.
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THOUGHTS ON EMERGING
MARKETS IPO TRENDS
Emerging markets, particularly Brazil, Russia, India, and China, collectively known asBRIC, were top performers in 2006-2007. Commodities-driven markets experiencedunforseen growth, attracting investors and capital from around the world. A chartpresented in Figure 2 shows major industries that contributed to surge of IPOs in BRICcountries. Brazil and Russia were key producers and exporters of commodities: energyand materials. Russia's financial giant, VTB, became largest IPO for 2007, raising$8 billion dollars. In India, more than half of the 2006 IPOs were energy companies,followed by the IT and R&D services industries. In China, financial institutions andinsurance companies were the two main sectors going public.
Europe• $95 billion exchanges raised in 2006 representing 35% of the total for the entireyear with the London Exchanges being the preferred medium for cross-border IPOswith lower underwriting fees and the TradeEffect system being called the catalysts forthis phenomenon.
China• Insurance and financial institutions were the two main sectors that saw IPOs in2006 with the Industrial Commercial Bank of China raising $22 billion and the Bank ofChina raising some $11.1 billion through their IPOs on the Hong Kong StockExchange. The Hong Kong Stock Exchange, unlike the Shanghai Exchange allowsforeign investors. The Shanghai Exchange on the other hand is open only to Chinesenationals.
Source: PRIMEBIZNEWS
This chart represents economicsectors responsiblefor largest number of IPOs andmost capital raisedin BRIC countries in2006-2007
Insurance
BRAZIL
RUSSIA
INDIA
CHINA
Figure 2: Emerging Markets IPOs 2006-2007
An educational report by PRIMEBIZNEWS, ALTANET, INC. July 14, 2008
Other/Services
Commodities
Energy
Commodities
Financials
Financials
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India• Energy companies formed the majority of the 78 IPOs in Indian stock marketin 2006. A total of 7.23 billion was raised with well over half of the investors beingforeign institutional investors. India has 23 exchanges and some 9,000 companies listedwith a Qualified Institutional Placements (QIP) system which allows foreign investors.
Russia• 75% of 2006 Russian listings were from commodities-based companies with$18 billion being raised off of 21 2006 IPOs. Russian regulations require that allcompanies must list 30% of their offerings domestically first. Many of them are listedon foreign exchanges, as they comply with Rule 14A in the US and GDR in Londonwith petrodollars dominating domestic exchanges.
Middle East• 2006 was a challenging year for markets in the Middle East with the SaudiExchange losing half of its value while the Dubai Exchange reporting a loss of two-thirds. Prior to 2006, the Middle Eastern markets realized incredible growth patterns inthe areas of liquidity, speculation and investments. Those areas peaked during the yearsof 2000-2005. The Middle Eastern lists only 1600 companies on its 14 exchanges.
An educational report by PRIMEBIZNEWS, ALTANET, INC. July 14, 2008
THOUGHTS ON EMERGING
MARKETS IPO TRENDS 4
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IPO: CONCLUSIONS
$0 $15 $30 $45 $60 $75 $90 $105
Figure 3: Capital Outflow from Global Markets in 2008/Q1,Q2
Source: PRIMEBIZNEWS
Emerging Markets
Developed Markets
With high growth opportunities being sought by investors, the rapidly developingemerging markets became the primary point of investor emphasis in 2006-2007.Research shows that emerging markets far outperformed developed markets in2006-2007, contributing 14 out of 20 global IPOs. According to Richard Cormack,Head of New markets, Equity Capital Markets, Goldman Sachs International, emergingmarkets as an asset class were up 30% or 40% in 2006 as opposed to global markets,which were up 15%-19%. This trend has not carried over into 2008 with the futurebeing filled with uncertainties.
Rising fuel costs and inflation are leading to a depletion of emerging market fundspresenting a new sense of urgency for Chinese and other Asian governments. Expertsare reporting that oil prices are causing problems for both corporations and consumersin the Chinese markets as well as the government 5, 6. Chart presented on Figure 3represents a trend capturing these relationships.
$13
$105
The overall 2008 performance of emerging markets was down in the first part of theyear. The MCSI Emerging Markets Index fell 12.7% so far. According to EPFRGlobal, $12.3 billion was pulled out by investors from emerging markets, while thesefunds had $2.1 billion around the same time last year. These numbers compareextremely favorably to the $104.8 billion in outflows from all developed markets 5.Optimism has risen according to the Wall Street Journal with the expectation that theUnited States stock market will make a strong turnaround in the second half of 2008while the emerging markets remain relatively unstable.
An educational report by PRIMEBIZNEWS, ALTANET, INC. July 14, 2008
Capital Outflow is reported in $ Billion
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This chart is based on estimated numbers and represents a trend only
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In 2004, when capital movement into developing economies was on the rise, suchinvestments carried rather high risks. BRIC and European countries were still anunknown territory for Western investors. Research shows that even though China is aformidable financial giant, analysts are somewhat concerned about the emergence ofChina because of unpredictible dynamics within its infrastructures 7. RegardingRussia, while the country has shown positive signs as an emerging market, it is still adifficult market to assess long-term 8. This observation was made in 2004 withanalysts still keeping a watchful eye on this market viewed by many to be the mostvolatile of the BRIC countries. In 2008, we have more investment experience abroadallowing us to make another assessment of emerging markets.
One of the most challenging aspects of the global economy is the growinginterdependence among local and global markets. With crises being felt throughout theglobal economy including the fall of the Shanghai Exchange and United Statessubprime mortgage situations, the world has come to realize the necessity of managingboth the positive and problematic aspects of globalization. Higher returns are stillcoming from rapidly growing and largely unstable economies. However, it is thesedynamic economies that have created the most attractive business opportunities withrisk taking being an inherent with the territory. To better cope with the risks involved,the worldwide investment community should possibly develop a cross-regionalforecasting tool to help control capital movements around the world.
INTERDEPENDENCE:
An educational report by PRIMEBIZNEWS, ALTANET, INC. July 14, 2008
Growing Challenges
ECONOMIC PERSPECTIVE
Analysts Views on Emerging Markets: 2004
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Interdependence among local markets continues to show its effect on regionaleconomies. Recently booming Asian markets are going through shaky times. Risingfood and oil prices as well as inflation are main factors causing manufacturers, energy,and transportation industries increase their prices 5, 6. General population is cutting onspending further reducing demand while product and service supplies are stillgrowing. High volatility in the markets is observed across the globe except few 9.Kuwait has been the best performer so far with 22% gains along with Dubai retainingstrong property market. Vietnam, China, and Turkey have been the worst performers,while Russia and Brazil were staying in between and still presenting some promisinginvestment opportunities. Interesting to note, analysts have enough historical data nowto start making quarterly predictions for performance of emerging markets. For thethird quarter of 2008, countries with high exposure to energy and materials, likeRussia and Brazil, are believed to be better investment choices while India is facing adowngrade. In the fourth quarter, China, India, and Turkey are projected to be makinga rebound 5. Among all of the uncertainty in the global markets, the US market andstock exchanges remain the most stable and predictable in terms of financial risksallowing investors benefit from the industries known to have cyclical performancetrends. A better understanding of mechanisms and factors of interdependence mayhelp us create management tools suited for optimal forecasting of global economy.
INTERDEPENDENCE:
An educational report by PRIMEBIZNEWS, ALTANET, INC. July 14, 2008
ECONOMIC PERSPECTIVE
World Outlook: 2008, Q1/Q2
One of the solutions being offered to manage the myriad of challenges that come withglobalization is the United Nations Parliamentary Assembly or UNPA. Theorganization would in theory handle multiple global issues under one umbrellaincluding economic, political, environmental and cultural. Other options exist, withconcerns being expressed regarding the slowdown of the world economy if one bodywere responsible for the regulation of all functional sectors. The question of globalleadership within UNPA is also one of the critical ones. G8 summit represents anotherapproach to handling regional challenges in the developing countries with support andoversight from leading economies. Some important decisions regarding financial helpto Africa have been made at the 34th G8 summit which took place in Japan on July6-9th of 2008. However, many other issues regarding international trade regulationsremained unsolved. While a plausible idea, at this time it is unlikely that withoutanswering first questions about global infrastructure and leadership the powers be willbe able to resolve a controversy around the issue of establishing controls centered onthe global economy.
Can World Parliament Fix Negative Aspects of Global Interdependence?
An educational report by PRIMEBIZNEWS, ALTANET, INC. July 14, 2008
REFERENCES
1. The Globalization of IPOs and the Stock Markets. Carnegie Endowment for International Peace,http://www.globalization101.org/index.php?file=news1&id=108/, July 4th, 2008
2. Garrick Utley, Global Crossroads. Interdependence.Carnegie Endowment for International Peace, http://www.globalization101.org/index.php?file=blog&id=9&type=grick, July 4th, 2008
3. Campaign for a United Nations Parliamentary Assembly. Carnegie Endowment for InternationalPeace, http://www.globalization101.org/uploads/File/What%20others%20think/CampaignUN-Assembly.doc, July 4th, 2008
4. The Globalization of IPOs and the Stock Markets. Carnegie Endowment for International Peace,http://www.globalization101.org/index.php?file=news1&id=108/, July 4th, 2008
5. Lesova, Polya. “Emerging markets may rebound, but clouds ahead”. MarketWatch. July 4th,2008. http://www.marketwatch.com/news/story/emerging-markets-may-rebound-clouds/story.aspx?guid=%7B863F8C48%2D51BE%2D41D8%2DA643%2DE82EB2886EC1%7D
6. Stephen, Craig. “Commodity inflation piles on pain in Asia”. Marketwatch.July 4th, 2008. http://www.marketwatch.com/news/story/commodity-inflation-piles-pain-sia/story.aspx?guid=%7B72E8F25A%2D1221%2D4163%2D898E%2D736C621A3A61%7D
7. The BRIC Countries (Brazil, Russia, India and China) As Analytical Category: Mirage or Myth?http://www.asianperspective.org/v31n4-abstract.html,, November 2007
8. The BRIC Countries, https://www.kgl-moent.dk/C1256BE9004F6416/side/Monetary_review_4_Quarter_2004/$file/MON4_04.pdf#page=43, May 2004
9. MarketWatch. Emerging Markets. July 11, 2008. http://www.marketwatch.com/markets/emergingmarkets
