Chapter 12 The Global Capital Market
What is a Capital Market? Source: http://www.goldmansachs.com/s/interactive-guide-to-capital-markets/index.html
Companies & Capital Markets Stocks (equity) raise money by issuing stock on public stock exchanges Bonds (debt) borrow money by floating corporate bonds What do companies do? Companies Buy Assets: Buy foreign currencies to do business Buy foreign stock strategic partnership or control a foreign company Buy back its own stock raise share price or prevent outside controlling interest Buy diversified stocks and bonds reduce risk by diversifying Companies Sell Assets: Sell stock in foreign exchanges to raise cash Sell foreign currencies convert to home currency Sell one currency to use in contract to reduce currency fluctuations in another Sell ownership stake in another company to end strategic partnerships Sell stock on foreign market exchanges
Trivia What is the most expensive stock in the world? How much $$ to buy one share? Source: http://www.morningstar.com Warren Buffet s company
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?
Global Capital Markets 2013
Global Capital Markets 2014 UPDATE
Global Capital Markets 2013 UPDATE South (Developing Economies) Reserves 100%=$6.5 trillion $6.5 trillion Reserves are 45 % of total Assets $14.3 trillion Most Developing of the time Country we don t Reserves hear are about total $6.5 trillion FDI stocks, we just hear about the Cash Developed of a Country country (Reserves) are $2.7 trillon If the reserves are large, What does we may this tell (incorrectly) us about these think a country countries? is rich North Advanced Economies Foreign Investment Assets (excluding FX reserves) (100%=$84.2 trillion North (Advanced Economies) Reserves 100%=$2.7 trillion $2.7 trillion Reserves are 3 % of total Assets $86.9 trillion
Foreign Reserve Balances - 2017 Is it a wise investment choice to have all of your money in a checking account? Why or why not? Think of reserves like a checking account Foreign reserves help cover for foreign expenses or impact exchange rates Buying/selling foreign currency can impact exchange rate: - Buying US Dollars can devalue a currency (increase reserves) - Selling US Dollars can appreciate the local currency (decrease reserves) Source: https://en.wikipedia.org
Top Asset Management Firms (2017) Total Assets under management - 12/31/2015 Source:
Why Capital Markets are Growing? 1. Advances in information technology 24-hour-day trading the international capital market never sleeps Shocks that occur in one financial market, spread quickly around the globe 2. Deregulation by governments Traditionally, governments limited foreign investors to purchase significant equity positions in domestic companies, and the amount of foreign investment citizens could make Since the 1980s, these restrictions have fallen in response to the development of the Eurocurrency market, and also pressure from financial services companies Began in the United States, then moved to Great Britain, Japan, and France
The Eurocurrency Market Eurocurrency - any currency banked outside of its country of origin About two-thirds of all eurocurrencies are Eurodollars (dollars banked outside the United States) Other important eurocurrencies are: Euro-yen Euro-pound, and Euro-euro London continues to be the leading center of the eurocurrency market
Why Has The Eurocurrency Market Grown? Many businesses need US$ (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)
Three reasons: Why Are Eurobonds Attractive? 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
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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
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