GCM LATEST TWO UNITS
Syllabus
Unit 1: Impact of globalization on the Capital Markets
[Image] Growing International integration[Image] Role of Media and Technology in Capital mobility[Image] Diversification benefit of global investment
Unit 2: Global international Bond Market
[Image] Domestic Bonds, Euro Bonds and Foreign Bonds[Image] Participants in global bond markets[Image] Credit Rating Agencies and their role[Image] Procedure for issuing Euro Bonds
Unit 3: Global Equity Markets
[Image] Major Stock Markets of the world[Image] Emerging Stock Markets[Image] International Equity Trading – Multiple listing[Image] Depository receipts
Unit 4: Obstacles of International Investments
[Image] Information Barriers[Image] Foreign Exchange Risk[Image] Political Risks[Image] Taxation[Image] Other Regulatory barriers
References:
A History of the Global Stock Market: From Ancient Rome to Silicon Valley, B.M. Smith, University of Chicago Press, 2004 Inter Market Technical Analysis, John Murphy, John Wiley & Sons, 1991 Global Portfolio Management for Institutional investor, Jeff Madura, Greenwood Press, 1996 Global Asset Allocation, Robert Klein and Jess Lederman, John Wiley & Sons, 1994.
Global capital markets: Entering a new era
The financial crisis and worldwide recession has abruptly halted a nearly three-decade-long expansion of global capital markets. After nearly quadrupling in size relative to GDP since 1980, world financial assets—including equities, private and public debt, and bank deposits—fell by $16 trillion last year to $178 trillion in 2008, the largest setback on record. MGI research suggests that the forces fueling growth in financial markets have changed. For the past 30 years, most of the overall increase in financial depth—the ratio of assets to GDP—was driven by rapid growth of equities and private debt in mature markets. By 2007, the total value of global financial assets reached a peak of $194 trillion, equal to 343 percent of GDP. But the upheaval in financial markets in late 2008 marked a break in this trend.
Although the full ramifications of the financial crisis will take years to play out, it is already clear that the financial landscape has shifted in several ways. Most notably, MGI finds that:
Falling equities accounted for virtually the entire drop in global financial assets. The world's equities lost almost half their value in 2008, declining by $28 trillion. Markets have regained some ground in recent months, replacing $4.6 trillion in value between December 2008 and the end of July 2009. Global residential real estate values fell by $3.4 trillion in 2008 and nearly $2 trillion more in the first quarter of 2009. Combining these figures, we see that declines in equity and real estate wiped out $28.8 trillion of global wealth in 2008 and the first half of 2009. Credit bubbles grew both in the United States and Europe before the crisis. Contrary to popular perceptions, credit in Europe grew larger as a percent of GDP than in the United States. Total US credit outstanding rose from 221 percent of GDP in 2000 to 291 percent in 2008, reaching $42 trillion. Eurozone indebtedness rose higher, to 304 percent of GDP by the end of 2008, while UK borrowing climbed even higher, to 320 percent. Financial globalization has reversed, with cross-border capital flows falling by more than 80 percent. It is unclear how quickly capital flows will revive or whether financial markets will become less globally integrated. Some global imbalances may be receding. The U.S. current account deficit—and the surpluses in China, Germany, and Japan that helped fund it—has narrowed. However, this may be a temporary effect of the crisis rather than a long-term structural shift. Mature financial markets may be headed for slower growth in the years to come. Private debt and equity are likely to grow more slowly as households and businesses reduce their debt burdens and as corporate earnings fall back to long-term trends. In contrast, large fiscal deficits will cause government debt to soar. For emerging markets, the current crisis is likely to be no more than a temporary interruption in their financial market development, because the underlying sources of growth remain strong. For investors and financial intermediaries alike, emerging markets will become more important as their share of global capital markets continues to expand.
GLOBAL CAPITAL MARKETS
1. Global financial stock is now $140 trillion and growing. The value of total global financial assets—including equities, government and corporate debt securities, and bank deposits—expanded to $140 trillion by the end of 2005, an increase of $7 trillion from a year earlier.
2. The depth of world financial markets rose to an all–time high of 316 percent – more than three times world GDP. With few exceptions, deeper financial markets create better access to funding for companies, a theme confirmed by our survey of business executives.
3. Equities are the top source of recent growth, increasing by $7.1 trillion and accounting for nearly half of growth in global financial assets in 2005. The vast majority of equity market increases worldwide were due to increased earnings and new issuance rather than increases in P/E ratios
4. Global cross–border capital flows topped $6 trillion, a new record and more than double their level in 2002. Our data shows that foreign investors hold one in four debt securities and one in five equities, suggesting that national financial markets are increasingly integrating into a single global market for capital.
5. 80% of capital flows are between the US, UK, and euro area. Although global capital flows to emerging markets are growing rapidly, they still account for just 10 percent of global capital flows.
[Image] Growing International Integration:
INTRODUCTION
Capital markets are in the process of rapid evolution. Capital flows — which were formerly directed towards banks and controlled by Governments — are now held by individuals, institutions or private mutual funds and can circulate freely and instantaneously to projects which will yield the maximum profit. Electronic computerized data transmission now gives them an unprecedented mobility on all the financial markets on the planet. Moreover, the volume of such flows has grown — tripling or increasing tenfold in the past few years — mainly as a result of the success of mutual funds, whose assets often exceed those of many Governments.
We will examine, in turn, the current evolution of capital markets and the attempts made by Governments and international organizations to regulate them, as well as the political and economic consequences of the globalization of capital movements. Lastly, we will consider the future prospects in an attempt to find an answer to the fundamental question:
Will the sole purpose of the globalization of capital markets be speculation, or can this globalization be mobilized to promote economic growth, social progress and development?
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EVOLUTION OF CAPITAL MARKETS
A. Previous situation
In the past, rivalries between nations were resolved by means of armed conflicts in which empires or ideologies clashed. Today, the wars being waged seem increasingly to be removed from the principal events taking place on the economic and financial front.
During the Cold War, the super-powers provided assistance in the form of official financial flows or subsidies to centralized economic systems and developing countries whose survival they ensured. Today, these flows and subsidies have been considerably reduced or have even, in some cases, disappeared, giving way to the laws of the market place which govern growth, development, employment or decline.
B. Current situation
Today, the main problem facing Governments is how to attract new investment with a view to creating jobs and promoting sustained economic growth. Governments compete for capital.
To this end, nations vie with each other through variations in their interest rates or their rates of exchange, and through the competitiveness of their markets. The world has become capitalist and the ever-increasing financial movements can reward savings and productivity and thus strengthen a country’s economy. Conversely, foreign capital can also abandon an economy or withdraw abruptly if an unfavorable fiscal policy drives it away. Speculators may attack a weak currency to weaken it still further. Capital movements may penalize unproductive expenditure and thus help to destroy a country’s economy. Governments and heads of enterprises therefore strive to attract this capital by offering it favorable conditions and to utilize it more productively than their rivals.
With the end of the Cold War, official subsidies and other financial flows dried up in countries such as the Democratic People’s Republic of Korea, Myanmar and Cuba, while investors preferred to steer their capital to countries where the climate was more favorable to them, such as the Republic of Korea, the Taiwan province of China and other emerging countries. Capital has thus become more mobile and more difficult to stabilize and control.
CONCLUSION:
The globalization of capital markets and the growth of trade will help to create new surpluses which could meet the world demand for capital. However, these financial resources, in search of an attractive rate of remuneration, will be invested in countries which achieve a fundamental balance in their public finances and introduce economic and financial measures aimed at reducing budget deficits and current payments, the rationalization and privatization of public enterprises, the development of private savings and of the capital market, and the liberalization of trade.
During the past decade, a growing number of developing countries, emerging countries and economies in transition have introduced the reforms necessary for the restoration of financial equilibrium. However, the need to attract external financial flows which could contribute to the creation of jobs and the growth of their economy required, in particular, in the context of the globalization of capital markets, a greater effort in favor of national capital markets. The development of such markets, combined with national capacity building and the establishment of institutions connected to the international financial centres, would help to enhance the effectiveness of financial mediation in the allocation of resources, to channel external flows, and to increase and diversify the volume of medium and long term financial resources necessary for the economic development of these countries. Lastly, these flows, both internal and external, cannot fail to constitute a source for the mobilization of additional resources through appropriate taxation
[Image] Role of Media and Technology in Capital mobility
Capital mobility and comparative advantageSome descriptions of comparative advantage rest on a necessary condition of capital immobility. If financial or labor resources can move between countries, then comparative advantage erodes, and absolute advantage dominates. For instance, the Heckscher-Ohlin model derives comparative advantage from differing relative abundances of capital and labour between countries. Capital mobility and the competitive drive for the highest return on investment would give all countries identical relative abundances for new investment, eliminating comparative advantage and trade.Other conceptions of comparative advantage are sound in all instances where the factors of production not homogenous between the parties notwithstanding mobility factors.Given the liberalization of capital flows under free trade agreements of the 1990s, the condition of capital immobility no longer holds. David Korten argues that the theory of comparative advantage "is replaced by that of downward levelling". However, capital immobility is only one route to comparative advantage, useful to basic models, but not essential to it.Basic models assuming capital immobility were convenient and not essential to the principle. Although greater capital mobility is likely to reduce comparative advantage, barriers to capital flows are not the only way to derive it.Early qualitative descriptions of the principle were based on the greater ease of producing different commodities in one country than another, and not on capital mobility. The comparative advantage of France over Iceland in wine production is not based on capital immobility. Comparative advantage can be derived from more complicated models including capital mobility (i.e. international borrowing, lending, and labor movement) and often posit movement of capital as analogous to the movement of goods
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Unit 2: Global international Bond Market
[Image] Domestic Bonds, Euro Bonds and Foreign Bonds[Image] Participants in global bond markets[Image] Credit Rating Agencies and their role[Image] Procedure for issuing Euro Bonds
Global Bond Market Size:
Amounts outstanding on the global bond market increased 10% in 2009 to a record $91 trillion. Domestic bonds accounted for 70% of the total and international bonds for the remainder. The US was the largest market with 39% of the total followed by Japan (18%). Mortgage-backed bonds accounted for around a quarter of outstanding bonds in the US in 2009 or some $9.2 trillion. The sub-prime portion of this market is variously estimated at between $500bn and $1.4 trillion. Treasury bonds and corporate bonds each accounted for a fifth of US domestic bonds. In Europe, public sector debt is substantial in Italy (93% of GDP), Belgium (63%) and France (63%). Concerns about the ability of some countries to continue to finance their debt came to the forefront in late 2009. This was partly a result of large debt taken on by some governments to reverse the economic downturn and finance bank bailouts. The outstanding value of international bonds increased by 13% in 2009 to $27 trillion. The $2.3 trillion issued during the year was down 4% on the 2008 total, with activity declining in the second half of the year.
[Image] Domestic Bonds, Euro Bonds and Foreign Bonds
Domestic Bonds:
Domestic Bond is -
“a bond denominated in the currency of the country where it's issued.”
Indian Debt Market –
The Indian debt market is composed of government bonds and corporate bonds. However, the Central government bonds are predominant and they form most liquid component of the bond market.
In 2003, the National Stock Exchange (NSE) introduced Interest Rate Derivatives.
The instruments traded can be classified into the following segments based on the characteristics of the identity of the issuer of these securities:
MARKET SEGMENT ISSUERS
INSTRUMENTS
Government Securities Central Governments
State Governments
Zero Coupon Bonds, Coupon Bearing Bonds, Treasury Bills, STRIPS
Coupon Bearing Bonds
Public Sector Bonds Government Agencies / Statutory Bodies
Public Sector Units
Govt. Guaranteed Bonds, Debentures
PSU Bonds, Debentures, Commercial Paper
Private Sector Bonds Corporates
Banks
Financial Institutions
Debentures, Bonds, Commercial Paper, Floating Rate Bonds, Zero Coupon Bonds, Inter-Corporate Deposits
Certificates of Deposits, Debentures, Bonds
Certificates of Deposits, Bonds
Price determination in the debt markets
The price of a bond in the markets is determined by the forces of demand and supply, as is the case in any market. The price of a bond also depends on the changes in:
l Economic conditionsl General money market conditions, including the state of money supply in the economy.l Interest rates prevalent in the market and the rates of new issuesl Future Interest Rate Expectationsl Credit quality of the issuer
Debt Instruments in India are categorized as:
l Government of India dated Securities (G-Secs) are 100-rupee face-value units/ debt paper issued by the Government of India in lieu of their borrowing from the market. They are referred to as SLR securities in the Indian markets as they are eligible securities for the maintenance of the SLR ratio by the banks.
l Corporate debt market: The corporate debt market basically contains PSU bonds and private sector bonds. The Indian primary Corporate Debt market is basically a private placement market with most of the corporate bonds being privately placed among the wholesale investors, which include banks, financial Institutions, mutual funds, large corporate & other large investors.
The following debt instruments are available in the corporate debt market: Ø Non-Convertible Debentures Ø Partly-Convertible Debentures/Fully-Convertible Debentures (convertible into Equity Shares) Ø Secured Premium Notes Ø Debentures with Warrants Ø Deep Discount Bonds
Main participants in the retail debt market include mutual funds, provident funds, pension funds, private trusts, state-level and district-level co-operative banks, housing finance companies, NBFCs and RNBCs, corporate treasuries, Hindu Undivided Families (HUFs), and individual investors.
The Indian bond market, however, is today at par with some of the leading markets of Asia like Korea. The grapevine is that in a few years, the Indian bond market will be counted as a renowned market of the world .
We feel proud to recognise the bond market of India better than that of China. And this is definitely an evidence of Indian economy’s quick progression. Moreover, the Indian bond market is profitable to almost anyone and everyone. The new business houses especially find the Indian market profitable from an operational point of view. That is pretty obvious as they have been able to initiate business in a very short time span and generate capital easily.
Foreign Bonds:Foreign Bond means –
A bond that is issued in a domestic market by a foreign entity, in the domestic market's currency.
Since investors in foreign bonds are usually the residents of the domestic country, investors find them attractive because they can add foreign content to their portfolios without the added exchange rate exposure.
Foreign bonds are a type of international bond. If a company issues bonds in another country using any currency, the bonds are considered to be international bonds. Foreign bonds are issued in a country other than the originating country of the company issuing the bonds, using the currency of the country in which the bond is issued. A bond traded outside the company's country of origin but in the company's currency is not usually considered to be a foreign bond. When they are not traded in Europe, foreign bonds are often given names specific to the country of issue that identifies where the bond is issued, especially if the country has a strong market for bonds.A bond is essentially a note of debt from the borrower to the lending party. Whether a bond is foreign depends on the lender's country of residence, the currency in which the bond is sold, and the country of origin of the financial institution creating the bond. Bonds usually include periodic interest payments that are paid to the buyer of the bond, which means that the lender who received the bond will get a steady return in interest paid from the bond if she carries the bond to the end of the term. Borrowing entities using foreign bonds are often companies, but foreign bonds can also be issued by governments, including countries, cities, and states.
Foreign bonds are regulated by the domestic market authorities and are usually given nicknames that refer to the domestic market in which they are being offered.
A foreign bond (called Yankee bond in the US, Samurai bond in Japan, Bulldog bond in the UK) is a bond issued in a country's national bond market by an issuer not domiciled in that country where those bonds are subsequently traded.Regulatory authorities in the country where the bond is issued impose rules governing the issuance of foreign bonds.
Issuers of foreign bonds include national governments and their subdivisions, corporations, and supranationals (an entity that is formed by two or more central governments through international treaties).
They can be denominated in any currency.
They can be publicly issued or privately placed.
Euro-Bonds
Eurobonds have the following features:
underwritten by an international syndicate. offered simultaneously to investors in a number of countries at issuance. issued outside the jurisdiction of any single country. Therefore, they are not registered through a regulatory agency. in practice they are typically registered on a national stock exchange. Why? Some institutional investors are prohibited from purchasing securities that are not registered on an exchange. The registration is mainly intended to overcome such restrictions. However, most of the Eurobond trading occurs in the over-the-counter market. Make coupon payments annually. Types of Eurobonds:There are a large variety of Eurobonds with different features. For example, deferred-coupon bonds, step-up bonds, dual currency bonds, etc. If an Eurobond is denominated in US dollars, it is called Eurodollar bond. Example: A US$ bond issued by Ford and sold in Japan. "Plain vanilla", fixed rate coupon bonds are called Euro straights, which are unsecured bonds. A global bond is a debt obligation that is issued and traded in both the USYankee bond market and the Eurobond market. Issuers of global bonds typically have high credit quality, and have large fund needs on a regular basis. The first global bond was issued by the World Bank. Example: A US$ bond issued by the Canadian government, and sold in the US and Japan.Sovereign debt is the obligation of a country's central government. Compared withgovernment debt obligations by entities in a particular country, sovereign debtof that country have lower credit risk and greater liquidity. Government canraise funds by issuing foreign bonds, Eurobonds and domestic bonds, or byborrowing from banks through syndicated bank loans.
Governments use the following methods to issue new debt:
Regular auction cycle/single-price method: this is the same method used by the US Treasury. Regular auction cycle/multiple-price method: this method is similar to the one used by the US Treasury, except that winning bidders are awarded securities at the yield they bid, not at the stop yield. Ad hoc auction method: auctions are announced when market conditions are favorable. Tap method: bonds from a previously outstanding issue are auctioned.
[Image] Participants in Global Bond Market
Bond market participants are similar to participants in most financial markets and are essentially either buyers (debt issuer) of funds or sellers (institution) of funds and often both.Participants include:
Institutional investors Governments Traders Individuals
Because of the specificity of individual bond issues, and the lack of liquidity in many smaller issues, the majority of outstanding bonds are held by institutions like pension funds, banks and mutual funds. In the United States, approximately 10% of the market is currently held by private individuals.
[Image] Credit Rating Agencies and their role
Credit rating is an important element for bond valuation. Rating agency are external companies charged to assess the overall credit of a given company and or bond issue. The two main companies are:Ø Standard & Poor'sØ Moody's
Other less influential companies includes:Ø Fitch/IBCAØ Thompson BankWatch.
Consulting the rating from these services ratings helps to determine the issue's safety and security. Although it is not compulsory to rate an issue, most issues are rated as they provide valuable market information to potential investors. Rating agency may not be able to rate a given issue if a company is to new and consequently does not have sufficient credit history
Table 1 provides the rating convention of Standard & Poor's and Moody's.
CREDIT QUALITY
S & P
Moody’s
High quality bonds
AAA+/AAA/AAAA+/AA/AAA+/A/A
Aaa1/Aaa2/Aaa3Aa1/Aa2/Aa3A1/A2/A3
Medium grade
BBB+/BBB/BB- BB+/BB/BB- B+/B/B-
Baa1/Baa2/Baa3Ba1/Ba2/Ba3B1/B2/B3
Poor grade
CCC+/CCC/CC-CC+/CC/CC-C+/C/C-
Caa1/Caa2/Caa3Ca1/Ca2/Ca3C1/C2/C3
Default
D
C
Table 1: Rating convention of Standard & Poor's and Moody's
International Bond Market Credit Ratings:
w Fitch IBCA, Moody’s , Standard & Poor’s and DBRS sell credit rating analysis.w Focus on default risk, not exchange rate risk.w Assessing sovereign government debt focuses on political risk and economic risk.w Economic risk: external debt, BOP flexibility, economic structure & growth, management of the economy, and economic prospects.
Standard & Poor's is a credit rating agency (CRA), which issues credit ratings for the debt of public and private corporations. It is one of several CRAs that have been designated a Nationally Recognized Statistical Rating Organization by the U.S. Securities and Exchange Commission.
It issues both short-term and long-term credit ratings.
Role of Credit Rating Agencies
A credit rating agency (CRA) is a company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves. In some cases, the servicers of the underlying debt are also given ratings. In most cases, the issuers of securities are companies, special purpose entities, state and local governments, non-profit organizations, or national governments issuing debt-like securities (i.e., bonds) that can be traded on a secondary market.A credit rating for an issuer takes into consideration the issuer's credit worthiness (i.e., its ability to pay back a loan), and affects the interest rate applied to the particular security being issued. (In contrast to CRAs, a company that issues credit scores for individual credit-worthiness is generally called a credit bureau or consumer credit reporting agency.)
The value of such ratings has been widely questioned after the 2007/2009 financial crisis. In 2003 the Securities and Exchange Commission submitted a report to Congress detailing plans to launch an investigation into the anti-competitive practices of credit rating agencies and issues including conflicts of interest.
Credit rating agencies (CRAs) play an important role in most modern capital markets. The IOSCO Report on the Activities of Credit Rating Agencies notes that CRAs assess the credit risk of corporate and government borrowers and issuers of fixed-income securities by analyzing relevant information available regarding the issuer or borrower, its market, and its economic circumstances.5 The information processed by the CRA, while generally available to the public, may be costly and time-consuming to collect and analyze. Some CRAs also may obtain non-public information from borrowers and issuers as part of the rating process. The conclusion derived from this analysis is reflected in a credit rating. This rating represents an opinion as to the likelihood that the borrower or issuer will meet its contractual, financial obligations as they become due and is not a recommendation to buy or sell a security. It also does not address market liquidity or volatility risk.
CRAs first issued ratings for mortgage-backed securities in the mid-1970s. In subsequent years, they began rating other types of asset-backed securities, including those collateralized by credit card receivables, auto loans, student loans, and equipment leases. They started rating cash CDOs in the late 1990s and synthetic CDOs in the early 2000s. Not all structured finance products are rated by CRAs. Indeed, for many particularly complicated or risky CDOs, credit ratings are unusual. Further, some issuers create structured products specifically for a particular investor that does not require a credit rating because it relies solely on internal analytics to assess the credit risk of the security. As with corporate debt securities, many investors require that a structured finance debt security be rated by a CRA before they will purchase it.
[Image] Procedure for issuing Euro BondsEurobonds are named after the currency they are denominated in. For example, Euroyen and Eurodollar bonds are denominated in Japanese yen and American dollars respectively. A Eurobond is normally a bearer bond, payable to the bearer. It is also free of withholding tax. The bank will pay the holder of the coupon the interest payment due. Usually, no official records are kept.The first European Eurobonds were issued in 1963 by Italian motorway network Autostrade. The $15 million loan was arranged by London bankers S. G. Warburg How MNCs Issue Eurobonds ??
To increase investor interest, a MNC can have its eurobond issue underwritten by a bank, which obligates those banks to provide any shortcoming in principal. In addition, banks are paid fees to distribute the eurobonds to investors, to attend road shows to generate investor interest and to prepare an information memorandum and prospectus, setting out details of the eurobond, the MNC and the purpose for the funds.
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