Global Equity Markets

Equity Capitalization Around The World

Market Cap: measures how large a firm is.

Market Cap = (# number of shares outstanding) (share price)

To measure equity market caps on each national market, sum the market caps for all stocks listed on the national exchange. Transactions Price NOS Dollar value EX:
Permco 3m Luis industries LBU Market Cap 32.25 150.4 23.6 10.63 50,000 shares 23,000 shares 10,000 shares 75,000 shares 1,612,500 3,459,200 236,000 797,250 6,104,950

Equity Capitalization in Developed Countries

Equity Capitalization in Developed Countries

Equity Capitalization in Developed Countries

Equity Capitalization in Developing Countries

Trends in Market Capitalization

Notice that market cap decreases for almost all countries over the period. What cause the drop between 1999 and 2003?
In the United States the dot.com bubble peaked in 2001. The subsequent drop cause a loss in confidence, which resulted in a flight to safety.

Graph of National Equity Markets

Global Equity Market Progression

In the1980s international equity investment was limited to trade among developed countries. Equity markets in emerging economies suffered from illiquidity, uncertainty and poor reporting requirements. Furthermore, most companies in developing countries were not cross listed. In the 1980s emerging market funds didnt exist. In the 1990s investors began to take advantage of benefits for international diversification. By 2000 there where 170 emerging market equity funds and 27 fixed income funds

Market Liquidity

Liquidity refers to the ease with which investors can buy and sell stock at quoted prices. One measure of liquidity is the turnover ratio.
Turnover = Value of Market Transactio ns Total Market Cap

Market liquidity can be considered a measure of market health. That is in high turnover countries, investor confidence is high and trades occur frequently.

Liquidity: Turnover in developed country

Trends in Liquidity

In many European countries liquidity increases from 1999 to 2003. Why would we seen an increase in liquidity around this time?
The EU introduced the Euro in 1999 and by 2002 it had replaced all domestic currencies. The elimination of FX risk among EU countries reduced the risk of individual companies. It also increased the ease with which investors could trade.

Liquidity: Turnover in developed country

Properties of Turnover

Higher ratios indicate more liquid secondary markets Turn over is the percent of the market cap on that exchange that is bought/sold each year. Turnover ratios vary substantially across countries and over time

Liquidity: Turnover in developed country

Liquidity in Emerging Markets

Turnover ratios in emerging markets have extreme values. Countries like Colombia and Nigeria have very low turnover Countries such as Korea, Pakistan, and Taiwan report extremely large turnover.
During this time period, several emerging market funds were investing in expanding countries such as Pakistan, Taiwan, and Korea.

Liquidity: Turnover

Several of the large markets show relatively low turnover, and some of the small markets have relatively high turnover. This could just be an artifact of how turnover is measured, large/small denominators produce small/large ratios Before drawing conclusions you should look at several measures of liquidity.

Secondary Equity Markets

The secondary market serves two major rolls.

1. It provides continuity to the primary market. If secondary markets do not exist there would be little to no demand for initial offerings. 2. Price competition in the secondary market provides a forum to where fair market prices can be determined.

Types of orders:
Market order: This order is executed by the broker at the current market price Limit order: This order is executed by the broker when the stock price reaches a certain amount (the limit)

Market Structure

Dealer Markets:
customer Broker Dealer

Customers take orders to the broker brokers trade with dealers and dealers buy or sell on their own accounts.

Agency Markets:
customer customer

Broker

Agent

Broker

Market Structure

Agents match brokers, but they can also trade on their own accounts. OTC market: The OTC market is an electronically linked network of dealers. This network is called the National Association of Security Dealers Automated Quotation System (NASDAQ)

Market Structure

Organized Exchanges: in the us the major exchanges are the NYSE and Amex. Each exchange has its own listing requirements. These organized exchanges are agency markets. With specialists who make the market in certain stocks.

Organized Markets

Each specialist has a desk on the floor. Brokers bring orders for a specific stock to the specialists desk. Specialists are required to post bid and ask prices and to trade on his/her own account to satisfy orders at these prices.

Assessing Performance of International Stocks

Should the performance of a Brazilian stock be compared to the US S&P 500?

Marco economic factors vary for different countries, and these factors effect stock returns differently across different countries. Therefore the benchmark index Should be specific to each country.

Morgan Stanley Capital International (MSCI) publishes a series of value weighted country indices. 24 national market indexes for developed countries
27 national market indexes for developing countries 1 world index

ishare MSCI indexes

This product was introduced by Barclay Global investments. ishares are funds that made up of exchange traded stocks that mimic the MSCI indexes. ishares offer investors an easy low cost way to hold internationally diversified portfolios

Cross-listing Stocks

Cross-listing refers to a firm having its shares listed on one or more foreign exchanges. Cross-listing adds a premium to the companies stock return.

Reasons for cross listing

1. 2. 3. 4. 5.

Increase in investor base which increase demand and increase the stock price. Name recognition in new countries may lower the cost of capital for future projects International diversification is easier if foreign stocks trade on investors home exchanges Cross listing onto exchanges in developed markets increase reporting requirements and transparency. Broader investor base may protect against hostile takeover.

Yankee Offering

In the past many foreign companies have cross listed on US markets to facilitate Yankee offerings. A Yankee offering is the direct sale or foreign stock to US investors.

American Depository Receipts (ADR)

ADR is a depository receipt for a certain number of shares. These shares are kept on deposit with the US depository custodian in the issuers home country. ADRs give companies another way, besides direct listing, to cross-list shares.

Advantages of ADRs
1.

2.

3.

ADRs are dollar denominated securities on the US exchanges. These securities can be purchased though regular brokers. If foreign shares where directly traded, investors would have to setup accounts with foreign brokers. Dividends on the underlying shares are collected and converted to dollars by the custodian and then distributed to holders of ADRs

Advantage of ADRs conted

3. 4. 5. 6. 7. 8.

Trades clear in 3 business days Prices are quoted in US dollars These are registered securities that provide some owner protection. ADRs can be traded as an ADR in the us market or underlying shares can be traded in the home country Usually represent a multiple of the underlying security Voting rights are passed though the depository bank

Types of ADRs

Sponsored: are usually issued or under written by an investment bank that usually provides several services on the issue. These are the only types of ADR that can be listed on US exchanges. All new ADR issues must be sponsored. These are ADR issued by a bank with out the companys involvement. Usually no services are offered.