Download Global Bargain Hunting

Emerging Financial Markets
Lecture 1: The Big Picture
Prof. Zhiwu Chen
The Rise & Fall of Historical Powers
 3000
BC,
Kingdom of Egypt
Then
 2500
BC, The Greek Civilization
 2000
BC, Shang Dynasty in China
 500
BC, The Roman Empire
Then
 Middle Ages:
China, Aztec in Mexico and
the Incas of Peru
 1500 AD,
Spanish Adventurers
 1700-1900 AD,
 1900 AD
British Empire
- ?, The United States of America
Financial Markets also emerge,
submerge and re-emerge
Argentina’s
stock market:
–Founded in 1872
–Submerged in 1965
–Re-emerged in 1975
Peru:
1941-52, 57-77, 88-
What is an Emerging Market?
•The IFC Definition: Income less than $9,000
•21% GDP, 85% Population, 76% Area, And 11%
Market Capitalization in the World (1995)
•Higher growth rates & high avg returns in many
countries
•Time Taken to Double Per capita Output (10 years
but unstable)
3
The Emerging Markets
Share of World Population, 1996
Share of World GDP, 1996
Emerging
19%
Developed
16%
Developed
81%
Share of World Equity market Capitalization
Emerging
9%
Developed
91%
Emerging
84%
Annual Real GDP Growth1987-1996
12.0%
9.9%
10.0%
8.5%
7.7%
8.0%
6.0%
5.1%
4.0%
3.1%
3.0%
2.3%
2.0%
0.0%
China
Tiger Cubs Four Tigers
India
Latin
America
Japan
United
States
Average Annual Returns for the
Twelve Years Ended December 1998
Source: International Finance Corporation. Returns include capital gains and dividends.
Argentina
27.0%
Chile
25.4%
Greece
23.5%
Mexico
19.1%
Hong Kong
17.1%
US
16.6%
Taiwan
15.8%
Brazil
10.4%
8.9%
Singapore
Thailand
5.1%
Malaysia
Korea
-5.0%
2.1%
-1.3%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
Table. PRODUCTIVITY GROWTH
Time Taken to Double Per-capita Output (Selected periods)
Country
Period
Years
China
1977-1987
10
South korea
1966-1977
11
Brazil
1961-1979
19
Turkey
1857-1877
20
Japan
1855-1919
34
U.S.
1839-1886
48
U.K.
1780-1838
59
Sources: For U.K., Crafts 1981; for Japan, Moddison, for others, World Bank data
Why Do Countries Differ?
The Puzzles of Economic Growth
Why
growth differs across
countries?
Why
growth does not always
translate into stock returns?
Why
capital flow is so small?
Why Good Opportunities in
Emerging Markets?
Privatization and Incentives
 Have
shown a high correlation between economic
freedom and growth.
 Privatization
of SOEs leads to great improvement in
efficiency and profits.
 Low
Tax Rates provide more incentives for
entrepreneurs.
 Free
trade and market opening allows
multinationals to leverage their strength,
outsourcing production, and expand their markets.
4
Effective Corporate Tax Rates
Data Source: Goldman Sachs
Japan
US
China
Thailand
Singapore
Hong Kong
0%
10%
20%
30%
40%
50%
60%
An Educated And Low Cost Labor Pool
 High
Literacy Rates Make Training
Less Costly.
 Young
 Cost
and Energetic
Of Labor Is Low
 Technology
Leap-frog Allows for
Dramatic Improvement in Efficiency.
5
World Labor Costs in U.S. Dollars per Hour
Manufacturing Sector
Germany
Japan
France
United States
Italy
Canada
Britain
Spain
South Korea
Singapore
Taiwan
Hong Kong
Brazil
Chile
Poland
Argentina
Malaysia
Mexico
Czech
Russia
Thailand
Indonesia
China
India
1995
Cost (US $)
1997
Cost (US$)
31.88
23.66
19.34
17.20
16.48
16.03
13.77
12.70
7.40
7.28
5.82
4.82
4.28
3.63
2.09
1.67
1.59
1.51
1.30
0.60
0.46
0.30
0.25
0.25
27.80
19.08
16.91
18.17
15.81
16.24
14.08
n/a
4.29
7.05
4.98
5.31
n/a
n/a
n/a
n/a
1.81
n/a
n/a
n/a
0.39
0.22
0.33
0.26
Source: Morgan Stanley Research (End of Year Estimates)
Bulge Bra ck
Asian countries, % of population aged 25-59
(source: Higgins and Williamson; * represents forecast)
1990-1992
2005*
2025*
55
50
45
40
35
30
25
Indonesia
Malaysia
Thailand
Bangladesh
Pakistan
Domestic Savings And Foreign
Capital Flow (FDI)
 People
are thrifty (high saving rates) in many
markets. But high domestic savings cannot fully
cushion the flow of foreign capital.
 The
composition of capital flows is healthy (more
private than public flows) but there is a problem
of duration mismatch.
6
Foreign Investment
$140
$120
$100
$80
EQUITY
FDI
$60
$40
$20
$86
87
88
89
90
91
92
93
94
95
96
97
6
Economic Impact On Developed Countries
 Raising
demand of baby boomers in EM vs.
falling demand in many western countries
 Rising
 Badly
demand for western technology
needed infrastructure projects create
huge demand for capital and expertise.
7
Comparison of Population Growth
Data Source: United Nations
Over the last five years, Japan’s population grew only at a miniscule 0.2% a year. In comparison,
the population of other Asian grew at much higher rates, with some growing at over 2% a year.
3.0%
2.5%
Population Growth
2.0%
1.5%
Series1
1.0%
0.5%
0.0%
Japan
U.S.
China
Thailand
Indonesia
Mexico
Brazil
Hong Kong
India
Malaysia
Annual GDP Growth Projection 2000-2025
Data Source: “Asia’s Bright Future” (Steven Radlelet and
Jeffrey Sachs ), United Nations, and Financial Times
8.0%
7.0%
7.0%
6.7%
6.3%
6.0%
5.3%
5.0%
4.4%
4.5%
4.2%
4.1%
4.0%
3.0%
2.2%
2.0%
1.0%
0.0%
China
Indonesia
Malaysia
Thailand
Hong
Kong
South
Korea
Singapore
Taiwan
Japan
Of course, what can go wrong?
 Past
Success has little persistence (Brazil & Asian
Tigers).
 Excessive
public and private borrowing increase the
risk of financial crisis.
 Currency
instability resulted from week financial
system.
 Overbuilding
of production capacity leads to low
returns. (Real estate speculation)
 Strong
special interest groups can block badly
needed reform.
8
Nobody says it is easy to
invest in EMs!
Can you handle it?