Download Comparative Study of Market Capitalisation from Macro-economic Perspective in Five Asian Stock Markets

Comparative Study of Market Capitalisation from Macroeconomic Perspective in Five Asian Stock Markets
Rajib Lochan Das1
Abstract
Market Capitalisation is one of the most common indicators for studying
a market performance. Percentage of the capitalisation to GDP of a
country gives a macro-economic perspective, which is also linked with
the socio economic behavior of the nation. Social and economic
indicators of a nation include indices of savings, purchasing capacity and
willingness to investment. These are the driving factors of performance
and growth of a capital market in the country. Based on respective
correlation and regression coefficients between market capitalisation and
GDP, this study compares the relevant factors of Dhaka Stock Exchange
(DSE) of Bangladesh with other four markets in Pakistan, Philippines, Sri
Lanka and Thailand, which are chosen from the Asian region according
to comparable respective market size to that of DSE and the per capita
GDP among the countries.
Field of Study: Finance
Key Words: Market Capitalisation, Market Performance, Gross Domestic
Product, Foreign Direct Investment, Portfolio Investment, Correlation,
Regression, Economic indicator.
1. Introduction
Market capitalisation is the product of number of securities and their
corresponding market prices of all issues in a capital market. Issues are sold and
bought according to public interest based on the economic and social status of
the country, also on the global economic condition. Thus market capitalisation
represents the public consensus on the value of the company’s equity. The total
market capitalisation of all publicly traded companies in the world was US$51.2
trillion in January 2007 and rose as high as US$57.5 trillion in May 2008 before
dropping below US$50 trillion in August 2008 and slightly above US$40 trillion in
September 2008. [World Federation of Exchanges Report and Investopedia,
2007, 2008] Sizes of markets in different economies are different. A commonly
used categorisation includes that over $100Bn market is Mega, $10-$100Bn
market is Large, $1-$10Bn market is Medium, $100Mn-$1Bn market is Small,
$10Mn-$100Mn market is Micro, and below $10Mn market is Nano. Generally,
market capitalisation is bigger in size in developed countries. In other words
1
Rajib Lochan Das is an Assistant Professor, as on October 2012, at Eastern University,
Bangladesh under the Faculty of Business Administration. email: [email protected]
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developed country markets contain more percentage of Gross Domestic Product
(GDP) of the nation. This is a very common phenomena that nearly 100% or
even more than 100% of GDP is the capitalisation in developed countries
including United States, Canada, United Kingdom, Germany, Switzerland,
Australia, Japan, Hong Kong, Singapore. In South Asian region market sizes are
medium or small except India. Parameters with Dhaka Stock Exchange (DSE)
are comparable with some other South Asian and Asian countries. Foreign Direct
Investment is one influencing factor for market capitalisation with other internal
economic indicators.
2. Research objective
Theoretically we are convinced that the capital markets in a country reflects the
economic conditions of the nation. It is logically established as the capital
markets trade securities of most healthy companies in the country, and also with
transparent financial disclosures. So the trend in changes in GDP and lifestyles
of the people are expected to be related to the changing pattern in market
capitalisation.
Hypotheses are:
- Growths in market capitalisation and GDP are directly related phenomena.
- Growths in market capitalisation and indicator of public lifestyle are directly
related.
3. Stock exchanges in this study
Comparing to the size of market capitalisation and rate of growth in the continent
of Asia five specific countries are selected as Bangladesh, Pakistan, Philippines,
Sri Lanka and Thailand. India is deliberately taken out of the study because of its
huge, thus incomparable, market size and growth. It is generally and logically
accepted that India has many direct and indirect influences on the socioeconomic conditions in Bangladesh. Though there is hardly any influence of
Indian stock market on the stock markets in Bangladesh. The briefs about
selected five countries regarding their stock markets are stated below:
3.1 Bangladesh
There are two stock markets in Bangladesh: Chittagong Stock Exchange (CSE)
and Dhaka Stock Exchange (DSE). In terms of number of securities, their traded
volumes, and market capitalisations the CSE is very small compared to those in
the DSE. This paper sticks its study on the DSE only. Both of the stock
exchanges in Bangladesh are under the legal supervision of Securities and
Exchange Commission (SEC) of Bangladesh, which is a constitutional
autonomous regulatory body.
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DSE is physically located in Dhaka, the capital city of Bangladesh. It is a public
limited company regulated by SEC Act 1993 and Companies Act 1994. Number
of securities and market capitalisation at DSE are as follows:
DSE summary in year >>
No. of securities
Market capitalisation (mn
BDT)
2006
310
2007
350
2008
412
323368
742196
1059530
2009
443
1312773
2010
445
3471109
3.2 Pakistan
The Karachi Stock Exchange (KSE) is the oldest stock exchange in Pakistan.
KSE was established in 18 September 1947 just two months after Pakistan
became an independent state. The other exchanges in Pakistan, the Lahore
Stock Exchange (LSE) and the Islamabad Stock Exchange (ISE). According to
Javed Iqbal (2008), a recent estimate shows that approximately 85% of the total
turnover occurs at KSE, 14% at LSE and 1% at ISE. So we reasonably focused
on KSE for this study as it is the most dominating market of Pakistan.
The primary regulator of corporate business and the non-banking financial sector
in Pakistan is the Security and Exchange Commission of Pakistan (SECP) which
was created by legislation in 1997. The SECP is an autonomous body which
replaced the former Corporate Law Authority, a division of the Ministry of
Finance. Number of securities and market capitalisation at KSE are as follows:
KSE summary in year >>
No. of securities
Market capitalisation (mn
PKR)
2006
651
2007
654
2008
653
2766584
4329910
1858699
2009
651
2705880
2010
644
3268949
3.3 Philippines
The Philippine Stock Exchange (PSE) is the national stock exchange of
the Philippines. It is one of the oldest stock exchanges in Southeast Asia, having
been in continuous operation since its inception in 1927. The Philippine Stock
Exchange was formed from the country’s two former stock exchanges, the
Manila Stock Exchange (MSE), established on August 8, 1927, and the Makati
Stock Exchange (MkSE), which was established on May 27, 1963. In December
23, 1992 both exchanges MSE and MkSE were unified to become the presentday Philippine Stock Exchange. In October 2004, the Securities Clearing
Corporation of the Philippines (SCCP), later became a wholly owned subsidiary
of the PSE. In 2005, the PSE adopted an online daily disclosure system (ODiSy)
to improve the transparency of listed companies and ensure full, fair, timely and
accurate disclosure of material information from all listed companies. On July 26,
2010, the PSE launched its new trading system, PSEtrade, which replaced the
MakTrade system, once acquired from the New York Stock Exchange.
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In June 1998, the Securities and Exchange Commission (SEC) granted the PSE
a "Self-Regulatory Organization" (SRO) status. In 2001, one year after the
enactment of the Securities Regulation Code, the PSE was transformed from a
non-profit, non-stock, member-governed organization into a shareholder-based,
revenue-earning corporation headed by a president and a board of directors.
Number of securities and market capitalisation at PSE are as follows:
PSE summary in year >>
No. of securities
Market capitalisation (mn
PPP)
2006
2007
2008
2009
238
242
244
246
251
2337800
3972900
7296500
717300
797800
2010
3.4 Sri Lanka
Colombo Stock Exchange annual report in 2007 depicts that share trading in Sri
Lanka commenced in 1896 with the hand of then Colombo Share Brokers
Association, when British Planters needed funds to set up Tea Plantations in Sri
Lanka. “Colombo Securities Exchange (GTE) Limited” was established in 1985,
which took over the operations of the stock market from the Colombo Share
Brokers’ Association and ultimately renamed as ‘Colombo Stock Exchange’
(CSE) in 1990. CSE has a strong effective governance on its online trading
system that gained the ‘second best performing stock exchange in the world’ in
2009 (Annual Report 2009).
The CSE is a company limited by guarantee, established under the Companies
Act No. 7 of 98 and is licensed by the Securities & Exchange Commission of Sri
Lanka (SEC). The policy making body of the CSE is the Board of Directors
composed of nine members. Five directors are elected by the 5 member firms
while the Ministry of Finance nominates other four. Number of securities and
market capitalisation at KSE are as follows:
CSE summary in year >>
No. of securities
Market capitalisation (mn
SLR)
2006
237
834800
2007
235
820700
2008
235
488800
2009
232
1092100
2010
242
2210500
3.5 Thailand
The modern Thai capital market developed in two phases. The privately owned
Bangkok Stock Exchange operated from 1962 to the early 1970s and the
Securities Exchange of Thailand established by the National Economic and
Social Development Plan (1967-1971). The group later became a limited
company and changed its name to the "Bangkok Stock Exchange Co., Ltd."
(BSE) in 1963. Despite its well-intended foundation, the BSE was rather inactive.
Annual turnover was only 160 million baht in 1968, and 114 million baht in 1969.
Trading volumes continued to fall sharply thereafter to 46 million baht in 1970
and 28 million baht in 1971. It is generally accepted that the BSE failed to
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succeed because of a lack of official government support and a limited investor
understanding of the equity market. After one year of study, in 1970, Professor
Robbins of Columbia University produced a comprehensive report entitled "A
Capital Market in Thailand". This report became the master plan for the future
development of the Thai capital market. In 1972, the government took a further
step in this direction by amending the "Announcement of the Executive Council
No. 58 on the Control of Commercial Undertakings Affecting Public Safety and
Welfare".
The changes extended government control and regulation over the operations of
finance and securities companies, which until then had operated fairly freely.
Following these amendments, in May 1974, long-awaited legislation establishing
"The Securities Exchange of Thailand" (SET) was enacted. Number of securities
and market capitalisation at TSE are as follows:
TSE summary in year >>
No. of securities
Market capitalisation (mn
THB)
2006
2007
2008
2009
518
475
476
535
2010
541
5078700
6636100
3568200
5873100
8334700
4. Methodology
This study is based on the design with comparative non-experimental research
method. It is planned to compare instances with specific parameters in selected
capital markets of 5 Asian countries. Fundamental statistical analyses are used
after collecting the intended set of data. By using common software tools
statistical analyses were done and summerised with the aid of tables and
suitable charts.
4.1 Sample data and design
All necessary data, the required pool of only secondary data, on stock markets
are collected from the respective web sites of the stock markets in the five
selected countries Bangladesh, Pakistan, Philippines, Sri Lanka and Thailand.
Data on lifestyle indicators and GDP are collected from respective national data
banks and international research resources. All data collected were of the period
of years from 2006 to 2010. Quantitative monetary data are converted into the
common currency the U.S. Dollar by using the currency conversion factor of the
respective time of each figure of a certain point in time.
In a few and obvious cases the data were assumed as the trend of the same in
immediate previous years as suggested by the IMF. In a few cases currency
conversion rate was used as the average rate of the respective year as when the
rate at the middle of the year is missing.
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5. Analyses and findings
Stock price fluctuates with various economic indicators of a country. Overall
lifestyle, socio-economic condition, political situation, willingness to invest attitude
of savers, environment and climatic condition, balance in export and import,
foreign direct investments are the significant influencing factors to make changes
with the stock prices. Some factors are internal and some others are external of
the country. Thus, market capitalisation depends on both domestic and global
economic factors. In this study we tried to represent market capitalisation of each
country mostly influenced by internal factors of the respective country. Because,
this study is focused on the relationship between market capitalisation and GDP.
Foreign direct investment is net inflows of investment to acquire a lasting
management interest in an enterprise operating in the country other than that of
the investor. The net FDI of a country is calculated as from all foreign sources
less net FDI by the country to the rest of the world. The full FDI amount is never
invested in the capital market in any country. So, exclusion of FDI from market
capitalisation seems not to be justified always. To make our focus narrower we
could consider the portfolio investment from foreign fund sources. Portfolio
investment amount is the figure excluding liabilities constituting foreign
authorities' reserves covers transactions in equity securities and debt securities.
But this is not the only influence, rather FDI in various economic sectors other
than capital market also affect the internal economy that ultimately may facilitate
changes in the market prices. Therefore, in all respect, we have considered
excluding FDI from market capitalisation for recognising only internal macro
economic factors for influencing the market.
In the following table-1 by countries, market capitalisations are shown as the
figures excluding foreign direct investments from usual capitalisation values of
each corresponding market. All figures are shown in billion US dollars converted
with current exchange rates of the country.
Table-1: Statistical parameters of M.Cap. and GDP of Bangladesh
2006
2007
2008
2009
2010
Average
MC-GDP(%)
M.Cap
4.00
10.33
14.46
26.62
48.85
20.85
26.23%
GDP
60.38
68.84
79.68
89.19
99.34
79.49
on avg.
Regression
1.0807
Correlation
0.9492
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Statistical parameters of M.Cap. and GDP of Pakistan
2006
2007
2008
2009
2010
Average
MC-GDP(%)
M.Cap
41.36
66.05
21.85
30.95
36.21
39.28
25.26%
GDP
133.55
154.64
159.89
156.20
173.30
155.52
on avg.
Regression
-0.2509
Correlation
-0.2161
Statistical parameters of M.Cap. and GDP of Philippines
2006
2007
2008
2009
2010
Average
MC-GDP(%)
M.Cap
10.71
17.88
50.82
80.94
156.09
63.29
41.32%
GDP
113.73
143.85
165.13
159.54
183.55
153.16
on avg.
Regression
1.9207
Correlation
0.8539
Statistical parameters of M.Cap. and GDP of Sri Lanka
2006
2007
2008
2009
2010
Average
MC-GDP(%)
M.Cap
7.58
6.82
3.85
9.12
19.03
9.28
24.66%
GDP
26.94
29.86
40.96
41.99
48.41
37.63
on avg.
Regression
0.3852
Correlation
0.5972
Statistical parameters of M.Cap. and GDP of Thailand
2006
2007
2008
2009
2010
Average
MC-GDP(%)
M.Cap
124.61
201.89
102.29
171.83
256.14
171.35
64.67%
GDP
205.58
270.04
271.62
265.85
311.78
264.97
on avg.
Regression
1.1126
Correlation
0.6894
Here we see correlations between GDP and market capitalisation are quite
strong in all countries except Pakistan. Due to political instabilities in Pakistan the
market capitalisation moves inversely to the GDP of the country. The regression
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coefficients show that the capitalisation moves almost in a same rate as the GDP
moves in Bangladesh. In Thailand the change in capitalisation is little more than
the change in GDP, which is even more for that case of Philippines. In Sri Lanka
the change is directly influenced, but in a very smaller rate. For Pakistan it is
again inversely related though in a small rate of change.
At the end of year 2010 we see the following facts. In the bigger markets,
Philippines and Thailand, market capitalisation is more than 80% of the GDP. In
other three smaller markets, market capitalisations are less than or around 50%
of the GDPs. Also in the bigger markets, and Sri Lanka in addition, GDP per
capita is at least US$2000. Sri Lanka is an exception because of less population.
In other countries of this study the GDP per capita is less than or around
US$1000 only. Table-2 and two following charts show the facts.
Table-2: Comparative figures of 5 Asian countries at the end of year 2010
At the end of 2010
Population
GDP (Bn $)
GDP per capita ($)
Mkt Cap. (Bn $)
MktCap to GDP (%)
Bangladesh
140437142
99.34
707.34
48.85
0.50
Chart-1: Per capita GDP
Pakistan
173264496
173.30
1000.22
36.21
0.22
Philippines
94106716
183.55
1950.43
156.09
0.86
Sri Lanka
20401000
48.41
2373.14
19.03
0.40
Thailand
63880000
311.78
4880.72
256.14
0.82
Chart-2: Mkt.Cap. as % of GDP
6. Conclusion
Market capitalisations are positively and notably correlated to respective GDPs in
the 4 out of 5 Asian countries in this study. That is, more GDP more market
capitalisation. Pakistan is an exception, which has more GDP and less market
capitalisation. More research can be done on probable causes, for example
political instability and lack of confidence of investors on the capital market, of
this exception. Countries with higher per capita GDP have higher market
capitalisations as percentage of respective GDPs. Here, Sri Lanka is an
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exception, which has higher per capita GDP but lower percentage of GDP as its
market capitalisation. More research can be done on probable causes, for
example less population and extra-ordinary government control on the capital
market, of this exception.
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