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  1. 1. International equity MarketsCopyright © 2010 Pearson Education,Inc. publishing as Prentice Hall
  2. 2. Capital MarketSystem that allocates financial resources according to their most efficient uses Debt: Repay principal plus interest  Bond has timed principal & interest payments Equity: Part ownership of a company  Stock shares in financial gains or losses International Business 5e Chapter 9 - 2
  3. 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 Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 21-3
  4. 4. International Capital Market Network of people, firms, financial institutions, and governments borrowing and investing internationally Borrowers Expands money supply Reduces cost of money Lenders Spread / reduce risk Offset gains / losses International Business 5e Chapter 9 - 4
  5. 5. International Capital Market Drivers Information technology Deregulation Financial instruments International Business 5e Chapter 9 - 5
  6. 6. International Bond Market Market of bonds sold by issuing companies, governments, and others outside their own countries Eurobond Foreign bond Interest ratesBond that is Bond sold outside a Driving growth areissued outside the borrower’s country differential interestcountry in whose and denominated in rates betweencurrency the bond the currency of the developed andis denominated country in which it developing nations is sold International Business 5e Chapter 9 - 6
  7. 7. Eurocurrency Market Unregulated market of currenciesbanked outside their countries of origin Governments Commercial banks International companies Wealthy individuals International Business 5e Chapter 9 - 7
  8. 8. International Capital MarketsThe 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. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 21-8
  9. 9. 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. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 21-9
  10. 10. International Capital Markets (cont.)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. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 21-10
  11. 11. International Capital Markets (cont.)• Because of international capital markets, policy makers generally have a choice of 2 of the following 3 policies: 1. A fixed exchange rate 2. Monetary policy aimed at achieving domestic economic goals 3. Free international flows of financial capital Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 21-11
  12. 12. International Capital Markets (cont.)• 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. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 21-12
  13. 13. Offshore Financial Centers Operational center Extensive financial activity and currency trading Country or territory whose financial sectorfeatures few regulations and few, if any, taxes Booking center Mostly for bookkeeping and tax purposes International Business 5e Chapter 9 - 13
  14. 14. 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. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 21-14
  15. 15. 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. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 21-15
  16. 16. 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. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 21-16
  17. 17. International Equity Market Market of stocks bought and sold outside the issuer’s home country Privatization Developing nationsInvestment banks Electronic markets International Business 5e Chapter 9 - 17
  18. 18. Global equity markets• Where investors can buy/sell stocks• Made up of manyStock exchanges around the world 11-18
  19. 19. 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
  20. 20. Emerging Markets – 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.13-20
  21. 21. 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
  22. 22. 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
  23. 23. 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
  24. 24. 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
  25. 25. 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
  26. 26. 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
  27. 27. 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
  28. 28. 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 ADRs13-28
  29. 29. 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
  30. 30. International Equity Market Benchmarks • North America • Europe • Asia/Pacific Rim13-30
  31. 31. North American Equity Market Benchmarks NAME SYMBOL Dow Jones Industrial Average DJIA NASDAQ Combined CCMP Composite S&P 500 SPX TSE 300 TS300 Mexico BOLSA Index MEXBOL13-31
  32. 32. 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 BEL2013-32
  33. 33. 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 AS30013-33
  34. 34. Factors Affecting International Equity Returns • Macroeconomic Factors • Exchange Rates • Industrial Structure13-34
  35. 35. Macroeconomic Factors Affecting International Equity Returns • 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.13-35
  36. 36. 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
  37. 37. Industrial Structure • Studies examining the influence of industrial structure on foreign equity returns are inconclusive.13-37
  38. 38. Foreign Exchange MarketMarket in which currencies are bought and sold and their prices are determined  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 International Business 5e Chapter 9 - 38

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