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.
13-1
Market Capitalization of Developed
Countries


13-2
At year-end 2006, total market capitalization of
the world’s 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.
Market Capitalization of
Developing Countries

The other 19% is accounted for by the market
capitalization of developing countries in
“emerging markets”.




13-3
Latin America
Asia
Eastern Europe
Mideast/Africa
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:


13-4
(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.
Measures of Liquidity

The equity markets of the developed world tend to
be much more liquid than emerging markets.


13-5
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.
Measures of Market Concentration

Emerging Markets tend to be much more concentrated
than our markets.



13-6
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


Secondary Markets

13-7
Shares offered for sale directly from the issuing
company.
Provide market participants with marketability and
share valuation.
Market Consolidations And Mergers

There are approximately 80 major national stock markets.



13-8
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


13-9
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.
Cross-Listing of Shares


13-10
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.
Advantages of Cross-Listing

It expands the investor base for a firm.




13-11
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.
Yankee Stock Offerings

The direct sale of new equity capital to U.S.
public investors by foreign firms.


13-12
Privatization in South America and Eastern Europe
Equity sales by Mexican firms trying to “cash in”
following implementation of NAFTA
American Depository Receipts



13-13
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
American Depository Receipts

There are many advantages to trading ADRs as
opposed to direct investment in the company’s
shares:



13-14
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.



13-15
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.
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
13-16
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



13-17
North America
Europe
Asia/Pacific Rim
North American Equity Market
Benchmarks
NAME
SYMBOL
DJIA
Dow Jones Industrial Average
NASDAQ Combined
Composite
S&P 500
CCMP
TSE 300
TS300
Mexico BOLSA Index
13-18
SPX
MEXBOL
European Equity Market
Benchmarks
13-19
NAME
SYMBOL
FT-SE 100
UKX
CAC 40
CAC
Frankfurt DAX Index
DAX
IBEX Index
IBEX
Milan MIB30
MIB30
BEL20 Index
BEL20
Asia/ Pacific Rim Equity Market
Benchmarks
NAME
13-20
SYMBOL
NIKKEI 225 Index
NKY
Hang Seng Index
HSI
Sing Straits Times Index
STI
ASX All Ordinaries Index
AS300
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.

13-21
Low cost, convenient way for investors to hold
diversified investments in several different countries.
Factors Affecting
International Equity Returns



13-22
Macroeconomic Factors
Exchange Rates
Industrial Structure
Macroeconomic Factors Affecting
International Equity Returns


13-23
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.
Exchange Rates


13-24
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.
Industrial Structure

13-25
Studies examining the influence of industrial
structure on foreign equity returns are
inconclusive.
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International Equity Markets