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1 GLOBAL CAPITAL MARKETS
Unit 1: Impact of globalization on the Capital Markets
• • • Growing International integration Role of Media and Technology in Capital mobility Diversification benefit of global investment
Unit 2: Global international Bond Market
• • • • Domestic Bonds, Euro Bonds and Foreign Bonds Participants in global bond markets Credit Rating Agencies and their role Procedure for issuing Euro Bonds
Unit 3: Global Equity Markets
• • • • Major Stock Markets of the world Emerging Stock Markets International Equity Trading – Multiple listing Depository receipts
Unit 4: Obstacles of International Investments
• • • • • Information Barriers Foreign Exchange Risk Political Risks Taxation Other Regulatory barriers
1. A History of the Global Stock Market: From Ancient Rome to Silicon Valley, B.M. Smith, University of Chicago Press, 2004 2. Inter Market Technical Analysis, John Murphy, John Wiley & Sons, 1991 3. Global Portfolio Management for Institutional investor, Jeff Madura, Greenwood Press, 1996 4. Global Asset Allocation, Robert Klein and Jess Lederman, John Wiley & Sons, 1994.
Prof. Abdul K Khan
S.6 trillion in value between December 2008 and the end of July 2009. current account deficit—and the surpluses in China. The U. the largest setback on record. • For emerging markets. private and public debt. Total US credit outstanding rose from 221 percent of GDP in 2000 to 291 percent in 2008. Contrary to popular perceptions. and bank deposits—fell by $16 trillion last year to $178 trillion in 2008. with cross-border capital flows falling by more than 80 percent. MGI finds that: • Falling equities accounted for virtually the entire drop in global financial assets. declining by $28 trillion. By 2007. However.8 trillion of global wealth in 2008 and the first half of 2009. • Some global imbalances may be receding. Abdul K Khan . Most notably. the total value of global financial assets reached a peak of $194 trillion. MGI research suggests that the forces fueling growth in financial markets have changed. For the past 30 years. equal to 343 percent of GDP. we see that declines in equity and real estate wiped out $28. • Financial globalization has reversed. world financial assets— including equities. Prof. 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. and Japan that helped fund it—has narrowed. this may be a temporary effect of the crisis rather than a long-term structural shift. the current crisis is likely to be no more than a temporary interruption in their financial market development. to 304 percent of GDP by the end of 2008. Eurozone indebtedness rose higher. Combining these figures. • Credit bubbles grew both in the United States and Europe before the crisis.1 GLOBAL CAPITAL MARKETS TY-BFM (Sem-5) 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. large fiscal deficits will cause government debt to soar. credit in Europe grew larger as a percent of GDP than in the United States. The world's equities lost almost half their value in 2008. Germany. reaching $42 trillion. to 320 percent. while UK borrowing climbed even higher. replacing $4. Although the full ramifications of the financial crisis will take years to play out. Markets have regained some ground in recent months.4 trillion in 2008 and nearly $2 trillion more in the first quarter of 2009. After nearly quadrupling in size relative to GDP since 1980. But the upheaval in financial markets in late 2008 marked a break in this trend. • Mature financial markets may be headed for slower growth in the years to come. Global residential real estate values fell by $3. it is already clear that the financial landscape has shifted in several ways. It is unclear how quickly capital flows will revive or whether financial markets will become less globally integrated. 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.5. In contrast.
they still account for just 10 percent of global capital flows. With few exceptions. Global financial stock is now $140 trillion and growing. suggesting that national financial markets are increasingly integrating into a single global market for capital. Although global capital flows to emerging markets are growing rapidly. The depth of world financial markets rose to an all–time high of 316 percent – more than three times world GDP. For investors and financial intermediaries alike.1 trillion and accounting for nearly half of growth in global financial assets in 2005. 3. institutions or private mutual funds and can circulate freely and instantaneously to projects Prof. deeper financial markets create better access to funding for companies. Equities are the top source of recent growth. an increase of $7 trillion from a year earlier. Our data shows that foreign investors hold one in four debt securities and one in five equities. a new record and more than double their level in 2002. emerging markets will become more important as their share of global capital markets continues to expand. government and corporate debt securities. The vast majority of equity market increases worldwide were due to increased earnings and new issuance rather than increases in P/E ratios 4. 80% of capital flows are between the US. 2. and euro area. 5. UK. The value of total global financial assets—including equities. increasing by $7. Capital flows — which were formerly directed towards banks and controlled by Governments — are now held by individuals. a theme confirmed by our survey of business executives. GLOBAL CAPITAL MARKETS 1. Global cross–border capital flows topped $6 trillion. • Growing International Integration: INTRODUCTION Capital markets are in the process of rapid evolution.1 GLOBAL CAPITAL MARKETS TY-BFM (Sem-5) because the underlying sources of growth remain strong. and bank deposits—expanded to $140 trillion by the end of 2005. Abdul K Khan .5.
the current evolution of capital markets and the attempts made by Governments and international organizations to regulate them. development. Electronic computerized data transmission now gives them an unprecedented mobility on all the financial markets on the planet. nations vie with each other through variations in their interest rates or their rates of exchange.1 GLOBAL CAPITAL MARKETS TY-BFM (Sem-5) which will yield the maximum profit. giving way to the laws of the market place which govern growth.5. Governments compete for capital. The world has become capitalist and the ever-increasing financial movements can reward savings and productivity and thus strengthen a country’s economy. B. in turn. Today. as well as the political and economic consequences of the globalization of capital movements. Abdul K Khan . During the Cold War. employment or decline. 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. rivalries between nations were resolved by means of armed conflicts in which empires or ideologies clashed. disappeared. whose assets often exceed those of many Governments. Today. Moreover. We will examine. or can this globalization be mobilized to promote economic growth. Prof. the main problem facing Governments is how to attract new investment with a view to creating jobs and promoting sustained economic growth. and through the competitiveness of their markets. 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. the wars being waged seem increasingly to be removed from the principal events taking place on the economic and financial front. Previous situation In the past. in some cases. social progress and development? =========================================================================================================================================================================== =================================================================================================================== EVOLUTION OF CAPITAL MARKETS A. Lastly. these flows and subsidies have been considerably reduced or have even. Current situation Today. To this end. 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. Conversely.
a growing number of developing countries. cannot fail to constitute a source for the mobilization of additional resources through appropriate taxation. 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. these flows. However. these financial resources. During the past decade. in particular. Prof. both internal and external. 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. in search of an attractive rate of remuneration. in the context of the globalization of capital markets. emerging countries and economies in transition have introduced the reforms necessary for the restoration of financial equilibrium. However. to channel external flows. the need to attract external financial flows which could contribute to the creation of jobs and the growth of their economy required. such as the Republic of Korea. combined with national capacity building and the establishment of institutions connected to the international financial centres.1 GLOBAL CAPITAL MARKETS TY-BFM (Sem-5) foreign capital can also abandon an economy or withdraw abruptly if an unfavorable fiscal policy drives it away. Myanmar and Cuba. the development of private savings and of the capital market. the rationalization and privatization of public enterprises. 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. and to increase and diversify the volume of medium and long term financial resources necessary for the economic development of these countries. Capital movements may penalize unproductive expenditure and thus help to destroy a country’s economy. official subsidies and other financial flows dried up in countries such as the Democratic People’s Republic of Korea. a greater effort in favor of national capital markets. the Taiwan province of China and other emerging countries. Abdul K Khan . With the end of the Cold War. while investors preferred to steer their capital to countries where the climate was more favorable to them. Capital has thus become more mobile and more difficult to stabilize and control. would help to enhance the effectiveness of financial mediation in the allocation of resources. and the liberalization of trade. Lastly.5. Speculators may attack a weak currency to weaken it still further. The development of such markets.
then comparative advantage erodes. and absolute advantage dominates. the condition of capital immobility no longer holds. David Korten argues that the theory of comparative advantage "is replaced by that of downward levelling".5. but not essential to it. Given the liberalization of capital flows under free trade agreements of the 1990s. For instance. 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. useful to basic models. Other conceptions of comparative advantage are sound in all instances where the factors of production not homogenous between the parties notwithstanding mobility factors. Prof. the Heckscher-Ohlin model derives comparative advantage from differing relative abundances of capital and labour between countries. capital immobility is only one route to comparative advantage.1 GLOBAL CAPITAL MARKETS TY-BFM (Sem-5) • Role of Media and Technology in Capital mobility Capital mobility and comparative advantage Some descriptions of comparative advantage rest on a necessary condition of capital immobility. Abdul K Khan . If financial or labor resources can move between countries. However.
public sector debt is Prof.e. The comparative advantage of France over Iceland in wine production is not based on capital immobility. and not on capital mobility. • • Early qualitative descriptions of the principle were based on the greater ease of producing different commodities in one country than another. Euro Bonds and Foreign Bonds Participants in global bond markets Credit Rating Agencies and their role 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.4 trillion. Abdul K Khan . and labor movement) and often posit movement of capital as analogous to the movement of goods ========================End of Unit: 1=========================== Unit 2: Global international Bond Market • • • • Domestic Bonds. Domestic bonds accounted for 70% of the total and international bonds for the remainder. The sub-prime portion of this market is variously estimated at between $500bn and $1. international borrowing.5. Although greater capital mobility is likely to reduce comparative advantage. The US was the largest market with 39% of the total followed by Japan (18%). barriers to capital flows are not the only way to derive it. Treasury bonds and corporate bonds each accounted for a fifth of US domestic bonds. Mortgage-backed bonds accounted for around a quarter of outstanding bonds in the US in 2009 or some $9.2 trillion. lending.1 GLOBAL CAPITAL MARKETS TY-BFM (Sem-5) Basic models assuming capital immobility were convenient and not essential to the principle. In Europe. Comparative advantage can be derived from more complicated models including capital mobility (i.
with activity declining in the second half of the year. STRIPS Coupon Bearing Bonds Government Securities Prof. The $2. Treasury Bills. 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. However. In 2003.3 trillion issued during the year was down 4% on the 2008 total. 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 Central Governments State Governments INSTRUMENTS Zero Coupon Bonds. Coupon Bearing Bonds. Abdul K Khan . the National Stock Exchange (NSE) introduced Interest Rate Derivatives. • 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. Belgium (63%) and France (63%). the Central government bonds are predominant and they form most liquid component of the bond market.1 GLOBAL CAPITAL MARKETS TY-BFM (Sem-5) substantial in Italy (93% of GDP).5.
Debentures PSU Bonds.5.1 GLOBAL CAPITAL MARKETS Government Agencies / Statutory Bodies Public Sector Units Corporates TY-BFM (Sem-5) Govt. Commercial Paper Debentures. as is the case in any market. Inter-Corporate Deposits Certificates of Deposits. issues Debt Instruments in India are categorized as: Government of India dated Securities (G-Secs) are 100rupee face-value units/ debt paper issued by the Government of India Prof. Bonds Certificates of Deposits. Floating Rate Bonds. Zero Coupon Bonds. Guaranteed Bonds. Commercial Paper. Debentures. Bonds Public Sector Bonds Private Sector Bonds Banks Financial Institutions Price determination in the debt markets The price of a bond in the markets is determined by the forces of demand and supply. The price of a bond also depends on the changes in: Economic conditions General money market conditions. Bonds. including the state of Interest rates prevalent in the market and the rates of new Future Interest Rate Expectations Credit quality of the issuer money supply in the economy. Debentures. Abdul K Khan .
financial Institutions. Abdul K Khan . The Indian bond market. corporate treasuries. which include banks. That is pretty obvious as they have been able to initiate business in a very short time span and generate capital easily. state-level and district-level co-operative banks. The new business houses especially find the Indian market profitable from an operational point of view. is today at par with some of the leading markets of Asia like Korea. NBFCs and RNBCs. private trusts. Prof.1 GLOBAL CAPITAL MARKETS TY-BFM (Sem-5) in lieu of their borrowing from the market. Corporate debt market: The corporate debt market basically contains PSU bonds and private sector bonds. And this is definitely an evidence of Indian economy’s quick progression. Hindu Undivided Families (HUFs). provident funds.5. The following debt instruments are available in the corporate debt market: Non-Convertible Debentures Partly-Convertible Debentures/Fully-Convertible Debentures (convertible into Equity Shares) Secured Premium Notes Debentures with Warrants Deep Discount Bonds Main participants in the retail debt market include mutual funds. 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. large corporate & other large investors. The grapevine is that in a few years. mutual funds. We feel proud to recognise the bond market of India better than that of China. Moreover. and individual investors. 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. housing finance companies. the Indian bond market will be counted as a renowned market of the world . the Indian bond market is profitable to almost anyone and everyone. pension funds. however.
foreign bonds are often given names specific to the country of issue that identifies where 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. including countries. cities. When they are not traded in Europe. Abdul K Khan . investors find them attractive because they can add foreign content to their portfolios without the added exchange rate exposure. using the currency of the country in which the bond is issued. Since investors in foreign bonds are usually the residents of the domestic country. Prof. Whether a bond is foreign depends on the lender's country of residence.1 GLOBAL CAPITAL MARKETS TY-BFM (Sem-5) Foreign Bonds: Foreign Bond means – A bond that is issued in a domestic market by a foreign entity. 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. Foreign bonds are issued in a country other than the originating country of the company issuing the bonds. 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. in the domestic market's currency. and the country of origin of the financial institution creating the bond. 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.5. and states. the currency in which the bond is sold. A foreign bond (called Yankee bond in the US. the bonds are considered to be international bonds. but foreign bonds can also be issued by governments. A bond is essentially a note of debt from the borrower to the lending party. If a company issues bonds in another country using any currency. Foreign bonds are a type of international bond. Samurai bond in Japan. • Regulatory authorities in the country where the bond is issued impose rules governing the issuance of foreign bonds. Bonds usually include periodic interest payments that are paid to the buyer of the bond. especially if the country has a strong market for bonds.
Example: A US$ bond issued by Ford and sold in Japan. etc. corporations. and have large fund needs on a regular basis. and supranationals (an entity that is formed by two or more central governments through international treaties). step-up bonds. Why? Some institutional investors are prohibited from purchasing securities that are not registered on an exchange. most of the Eurobond trading occurs in the over-the-counter market. • If an Eurobond is denominated in US dollars. which are unsecured bonds. dual currency bonds. deferred-coupon bonds. it is called Eurodollar bond. Abdul K Khan . The registration is mainly intended to overcome such restrictions. Make coupon payments annually. offered simultaneously to investors in a number of countries at issuance.1 GLOBAL CAPITAL MARKETS • TY-BFM (Sem-5) Issuers of foreign bonds include national governments and their subdivisions. fixed rate coupon bonds are called Euro straights. Prof. The first global bond was issued by the World Bank. They can be publicly issued or privately placed. issued outside the jurisdiction of any single country. However. • • Euro-Bonds Eurobonds have the following features: • • • • • underwritten by an international syndicate. Therefore. A global bond is a debt obligation that is issued and traded in both the USYankee bond market and the Eurobond market. They can be denominated in any currency. they are not registered through a regulatory agency. in practice they are typically registered on a national stock exchange. For example.5. • "Plain vanilla". Issuers of global bonds typically have high credit quality. Types of Eurobonds: • There are a large variety of Eurobonds with different features.
and the lack of liquidity in many smaller issues. except that winning bidders are awarded securities at the yield they bid. Compared withgovernment debt obligations by entities in a particular country.5. Tap method: bonds from a previously outstanding issue are auctioned. Regular auction cycle/multiple-price method: this method is similar to the one used by the US Treasury. Government canraise funds by issuing foreign bonds. the majority of outstanding bonds are held by institutions like pension funds. Ad hoc auction method: auctions are announced when market conditions are favorable.1 GLOBAL CAPITAL MARKETS TY-BFM (Sem-5) Example: A US$ bond issued by the Canadian government. Abdul K Khan . • 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. sovereign debtof that country have lower credit risk and greater liquidity. not at the stop yield. approximately 10% of the market is currently held by private individuals. 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. In the United States. and sold in the US and Japan. Prof. banks and mutual funds. Sovereign debt is the obligation of a country's central government. Eurobonds and domestic bonds. Participants include: • Institutional investors • Governments • Traders • Individuals Because of the specificity of individual bond issues. or byborrowing from banks through syndicated bank loans.
5. most issues are rated as they provide valuable market information to potential investors. Rating agency are external companies charged to assess the overall credit of a given company and or bond issue. The two main companies are: Standard & Poor's Moody's Other less influential companies includes: Fitch/IBCA Thompson BankWatch. 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. Abdul K Khan . CREDIT QUALITY High quality bonds S&P AAA+/AAA/AA AA+/AA/AA A+/A/A BBB+/BBB/BBBB+/BB/BBB+/B/BCCC+/CCC/CCCC+/CC/CCC+/C/CD Moody’s Aaa1/Aaa2/Aaa3 Aa1/Aa2/Aa3 A1/A2/A3 Baa1/Baa2/Baa3 Ba1/Ba2/Ba3 B1/B2/B3 Caa1/Caa2/Caa3 Ca1/Ca2/Ca3 C1/C2/C3 C Medium grade Poor grade Default Table 1: Rating convention of Standard & Poor's and Moody's Prof. Although it is not compulsory to rate an issue. Consulting the rating from these services ratings helps to determine the issue's safety and security.1 GLOBAL CAPITAL MARKETS TY-BFM (Sem-5) • Credit Rating Agencies and their role Credit rating is an important element for bond valuation.
Abdul K Khan . In most cases.. state and local governments.S.5. Standard & Poor's is a credit rating agency (CRA). (In contrast to CRAs. bonds) that can be traded on a secondary market.. the servicers of the underlying debt are also given ratings. or national governments issuing debt-like securities (i. management of the economy. its ability to pay back a loan). 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. not exchange rate risk. Prof. 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. special purpose entities. Securities and Exchange Commission.) The value of such ratings has been widely questioned after the 2007/2009 financial crisis. Economic risk: external debt. It is one of several CRAs that have been designated a Nationally Recognized Statistical Rating Organization by the U. the issuers of securities are companies. a company that issues credit scores for individual creditworthiness is generally called a credit bureau or consumer credit reporting agency. Assessing sovereign government debt focuses on political risk and economic risk. Focus on default risk. Standard & Poor’s and DBRS sell credit rating analysis. Moody’s .e.1 GLOBAL CAPITAL MARKETS TY-BFM (Sem-5) International Bond Market Credit Ratings: Fitch IBCA. In some cases. economic structure & growth. and economic prospects. non-profit organizations. It issues both short-term and long-term credit ratings. and affects the interest rate applied to the particular security being issued. BOP flexibility. which issues credit ratings for the debt of public and private corporations. A credit rating for an issuer takes into consideration the issuer's credit worthiness (i.e.
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. its market.5. while generally available to the public. Euroyen and Eurodollar bonds are denominated in Japanese yen and American dollars respectively. Abdul K Khan . For example. A Eurobond is normally a bearer bond. including those collateralized by credit card receivables. G. As with corporate debt securities.5 The information processed by the CRA. CRAs first issued ratings for mortgage-backed securities in the mid-1970s. Indeed. They started rating cash CDOs in the late 1990s and synthetic CDOs in the early 2000s. may be costly and timeconsuming to collect and analyze. In subsequent years. payable to the bearer. and equipment leases. financial obligations as they become due and is not a recommendation to buy or sell a security. The first European Eurobonds were issued in 1963 by Italian motorway network Autostrade. It also does not address market liquidity or volatility risk. credit ratings are unusual. auto loans. for many particularly complicated or risky CDOs. Usually. and its economic circumstances. It is also free of withholding tax. no official records are kept. • Procedure for issuing Euro Bonds Eurobonds are named after the currency they are denominated in. many investors require that a structured finance debt security be rated by a CRA before they will purchase it. Not all structured finance products are rated by CRAs. The bank will pay the holder of the coupon the interest payment due. Further. Warburg Prof. This rating represents an opinion as to the likelihood that the borrower or issuer will meet its contractual. Some CRAs also may obtain non-public information from borrowers and issuers as part of the rating process.1 GLOBAL CAPITAL MARKETS TY-BFM (Sem-5) Credit rating agencies (CRAs) play an important role in most modern capital markets. The conclusion derived from this analysis is reflected in a credit rating. The $15 million loan was arranged by London bankers S. student loans. they began rating other types of asset-backed securities. 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 fixedincome securities by analyzing relevant information available regarding the issuer or borrower.
to attend road shows to generate investor interest and to prepare an information memorandum and prospectus. setting out details of the eurobond.1 GLOBAL CAPITAL MARKETS How MNCs Issue Eurobonds ?? TY-BFM (Sem-5) To increase investor interest. which obligates those banks to provide any shortcoming in principal.5. banks are paid fees to distribute the eurobonds to investors. the MNC and the purpose for the funds. Abdul K Khan . ========================End 2=========================== of Unit Prof. In addition. a MNC can have its eurobond issue underwritten by a bank.
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