Chapter 12

The Global
Capital Market
 What is a Capital Market?

Source:
http://www.goldmansachs.com/s/interactive-guide-to-capital-markets/index.html
 Debt …

Debt is out of hand for the major economies…

But, especially so in China (Debt is 6 times GDP growth)
 Trivia …
What is the most expensive stock in the world?
How much $$ to buy one share?
 Global Equity Markets - November 2016
Which countries have the largest stock exchanges?

% of World

36.2%
10.1%
7.9%

Source: http://stansberrychurchouse.com
(formerly www.truewealthpublishing.asia)
Global Equity
Markets 2017
–
(CAPE)
Cyclically Adjusted
Price/Earnings
Ratios

Source:
Fortune Magazine
9/1/2017

High

Low
Global Economy – 2008 - Bottomed Out?
 What did Central Banks do???

The Central Banks of the world

responded to the financial crisis …
Write:

FILM
1. What did the central banks do? Why?
2. What happened in Japan?
 What did Central Banks do???

This puts
it all into
perspective:

• Near 0 interest rates

• Booming stocks
• Slow income recovery
Global Capital Markets 2013
Global Capital Markets 2014 UPDATE
Global Capital Markets 2013 UPDATE

$6.5 trillion
South Reserves
(Developing Economies) are 45 %
Reserves of total
100%=$6.5 trillion
Assets
$14.3 trillion

Most of the time

Developing we
Country
don’t hearare
Reserves about
total trillion
$6.5 FDI stocks, we
just hear about the
“Cash” of aCountry
Developed country
(Reserves)are
Reserves
$2.7 trillon
If the reserves are
large, does
What we may this tell
(incorrectly)
us about these think a
country is rich …
countries?

$2.7 trillion
North
North Advanced Economies North Reserves
Foreign Investment Assets (AdvancedEconomies)
(Advanced Economies) are 3 %
Reserves
Reserves of total
(excluding FX reserves)
100%=$2.7trillion
100%=$2.7 trillion
(100%=$84.2 trillion Assets
$86.9 trillion
 Trade
Patterns ?
China – U.S. Trade
Who is more dependent?

China exports to U.S.

are 56% of total to majors

U.S. exports to China

are 15% of total to majors

Trade follows investments

Let’s learn about global
investments …

Exports $Bil China U.S. Other Major

China $506 (56%) $396
U.S. $130 (15%) $720
 Why Buy U.S. Treasury Bonds?

VIDEO

Why China Buys U.S. Treasury Bonds

 Foreign Reserve Balances - 2017
Is it a wise investment choice to have all of your money in a checking account?
Why or why not?
Think of reserves like a checking account …
Foreign reserves help cover for foreign expenses or impact exchange rates
Buying/selling foreign currency can impact exchange rate:
- Buying US Dollars can devalue a currency (increase reserves)
- Selling US Dollars can appreciate the local currency (decrease reserves)

Total $4.1 trillion

in Treasury
Bonds

Source: https://en.wikipedia.org
 Top Asset Management Firms (2017)
Assume we don’t put money into checking account.
Where can we put it?

Total Assets under management - 12/31/2015

Source:
 Why Capital Markets are Growing?
1. Advances in information technology
 24-hour-day trading – the international capital market never
sleeps
 Shocks that occur in one financial market, spread quickly
around the globe
2. Deregulation by governments
 Traditionally, governments limited foreign investors to
purchase significant equity positions in domestic companies,
and the amount of foreign investment citizens could make
 Since the 1980s, these restrictions have fallen in response
to the development of the Eurocurrency market, and also
pressure from financial services companies
 Began in the United States, then moved to Great Britain,
Japan, and France
 The Eurocurrency Market
 Eurocurrency - any currency banked outside of its
country of origin

 About two-thirds of all eurocurrencies are Eurodollars

(dollars banked outside the United States)
 Other important eurocurrencies are:
Euro-yen
Euro-pound, and
Euro-euro

 London continues to be the leading center of the

eurocurrency market
Why Has The Eurocurrency Market Grown?

Many businesses need US$ (make

payments in US$)
US regulations slowed down lending
US$ to non-US residents
People outside the US who wanted to
borrow US$ then had to go to the
euromarket
 Why is the Eurocurrency Market Attractive?

The eurocurrency market is attractive

because it is not regulated by the
government
Banks can offer higher interest rates on
eurocurrency deposits than on deposits
made in the home currency
Banks can charge lower interest rates to
eurocurrency borrowers than to those who
borrow the home currency
 Why is the Eurocurrency Market Attractive?

The spread between the eurocurrency deposit and

lending rates is less than the spread between the
domestic deposit and lending rates
 Global Financial Centers 2017
London is #1 Foreign exchange trading center in the world, #1 financial center

Source: http://www.longfinance.net/images/gfci/GFCI21_05_04_17.pdf
 Drawbacks Of The Eurocurrency Market

Two drawbacks:
1. Higher risk of bank failure
(Because unregulated)
2. Foreign exchange risk
(can lose due to currency depreciation)
 The Global Bond Market
 The most common kind of bond is a fixed rate bond
which gives investors fixed cash payoffs
There are two types of international bonds:
1. Foreign bonds - sold outside the borrower’s country
and denominated in the currency of the country in
which they are issued
(British bond issued in £ for U.S. company)
2. Eurobonds - underwritten by a syndicate of banks
and placed in countries other than the one in whose
currency the bond is denominated
(British bond issued in ¥ for U.S. company)
 Why Are Eurobonds Attractive?
Three reasons:
1. No regulatory interference – with little
regulation, the cost of issuing bonds is lower
2. Less stringent disclosure requirements -
cheaper and quicker to offer eurobonds
3. More favorable taxation - eurobonds can be
sold directly to foreign investors
 BUSM 51 Project

Project coming due

Go to my homepage:
http://instruction2.mtsac.edu/rjagodka/

Click on “Courses”
Click on “Project On-Line Input Form”

Copy from your file to the

Project On-Line Input Form

Verify your project posted correctly:

Click on “Results: Verify Your Work”
- Select class, Scroll down to view
 International Investments? (S.E.C.)
TYPES OF RISKS (need to assess)
 Exchange Rate
Currencies may depreciate and lower your return
 Market Values
Volatility in markets
 Political and Social
Impacts market attractiveness
 Market Limitations
May be limits on what you can buy and to whom you can sell
 Information
May be only limited information (non-transparent)
 Legal
May be limited on law suits and legal remedies

Source: http://404.gov/investor/pubs/ininvest.htm
 How Will You Invest Internationally?
Mutual Fund Investing - FILM

Easy way to start investing internationally is by using global

stock and/or bond mutual funds …

Global Financial
Asset Portfolio (GFAP)
for 2018
International Investing – Some Do It Well

Both halves of this

graph represent an
equal amount of
global wealth.
Top half consists of the
world's eight richest
billionaires.

Bottom half represents

the poorest half of
humanity – that's 3.6
billion people.
 International Investments
Write: Which specific international investments
would you consider attractive? Why?
https://goo.gl/rsHrc1 Yahoo Mutual Fund Screener
Category - Select “World Stock”
“Add another filter” – “Annual Return NAV Year 5” – 20

https://goo.gl/7dGrPw - Everbank
http://www.mfea.com – General Investing Information