INTERNATIONAL
FINANCIAL
MANAGEMENT
Fifth Edition
EUN / RESNICK
McGraw-Hill/Irwin Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
International Equity
Markets
13
Chapter Thirteen
Chapter Objective:
This chapter continues discussion of international
capital markets with a discussion of both the
Fifth Edition
primary and secondary equity markets throughout
EUN / RESNICK
the world.
13-2
Market Capitalization of Developed
Countries
At
year-end 2006, total market capitalization of
the worlds equity markets stood at $54,195
billion.
Of this amount, 81 percent is accounted for by the
market capitalization of the major equity markets
from 29 developed countries.
13-3
Market Capitalization of
Developing Countries
The
other 19% is accounted for by the market
capitalization of developing countries in
emerging markets.
13-4
Latin America
Asia
Eastern Europe
Mideast/Africa
Emerging Markets
Standard
& Poors 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.
13-5
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 investors focus should be on
the long term.
13-6
Measures of Market Concentration
Emerging Markets tend to be much more concentrated than
our markets.
13-7
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.
Market Structure,
Trading Practices, and Costs
Primary
Markets
Shares offered for sale directly from the issuing
company.
Secondary
13-8
Markets
Provide market participants with marketability and
share valuation.
Market Consolidations And Mergers
There are approximately 80 major national stock markets.
13-9
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.
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.
13-10
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.
13-11
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.
13-12
Yankee Stock Offerings
The
direct sale of new equity capital to U.S.
public investors by foreign firms.
13-13
Privatization in South America and Eastern Europe
Equity sales by Mexican firms trying to cash in
following implementation of NAFTA
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 ADRs
13-14
American Depository Receipts
There
are many advantages to trading ADRs as
opposed to direct investment in the companys
shares:
13-15
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.
Volvo ADR
A good
example of a familiar firm that trades in a
U.S. as an ADR is Volvo AB, the Swedish car
maker.
Volvo trades in the U.S. on the NASDAQ under the
ticker VOLVY.
The depository institution is JPMorgan ADR Group.
The custodian is a Swedish firm, S E Banken Custody.
Of
course, Volvo also trades on the Stockholm Stock
Exchange under the ticker VOLVB.
13-16
Mechanics of Issuance and Cancellation of ADRs
NYSE
OTC
NASDAQ
U.S. Broker
Broker
orders
shares for
new ADR
Foreign Broker
Foreign broker buys shares
Foreign Exchange
13-17
Depository
issues new
ADR
Foreign broker
deposits shares
Depository
Depository
receives
confirmation
of share
deposit
Broker buys existing ADR
Delivery
Place order
ADR Investor
Custodian
International Equity Market
Benchmarks
North
America
Europe
Asia/Pacific Rim
13-18
North American Equity Market
Benchmarks
13-19
European Equity Market
Benchmarks
13-20
Asia/ Pacific Rim Equity Market
Benchmarks
13-21
i Shares MSCI
Country-specific
baskets of stocks designed to
replicate the country indexes of 22 countries.
i Shares are exchange traded funds that trade on
the American Stock Exchange and are subject to
U.S. SEC and IRS diversification requirements.
13-22
Low cost, convenient way for investors to hold
diversified investments in several different countries.
Factors Affecting
International Equity Returns
Macroeconomic
Exchange
Factors
Rates
Industrial Structure
13-23
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.
13-24
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.
13-25
Industrial Structure
Studies
examining the influence of industrial
structure on foreign equity returns are
inconclusive.
13-26
