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Cover Story
They call it the eastern disturbance!
As the capital markets and stock exchanges in the developing economies become more cultured, companies from the West are now increasingly looking at them as next growth frontiers.
Issue Date - 02/02/2012
It was the 2008 US housing crisis that abruptly halted a nearly three-decade-long expansion of global financial markets (according to Mckinsey Global Institute, from 1980 through 2007, the world’s financial assets nearly quadrupled in size relative to global GDP). Not only did the total value of the world’s financial assets fall by $16 trillion, from $194 trillion in 2007 to $178 trillion in 2008 (the largest setback on record), the catastrophe also shattered the dreams and hopes of millions of investors across the globe. In fact, falling equities accounted for virtually all of the drop in global financial assets – declining by $28 trillion, the world’s equities lost almost 50% of their value in 2008 (a $12 trillion increase in debt securities and bank deposits somehow managed to restrict the fall in world’s financial assets to just $16 trillion).

Come 2011, and the growth had resumed – to the extent that the total value of the world’s financial stock magnified from $175 trillion in 2008 to about $220 trillion by the end of last year. And so has the expansion of capital markets. Although the world’s stock market capitalisation, at about $46 trillion, as on December 30, 2011 (Bloomberg data) was $19 trillion below its peak in 2007 ($65 trillion), it accounted for more than 50% of growth in global financial assets in 2011.

However, this time, interestingly, the global growth is shifting east. As capital markets and stock exchanges in developing economies become more cultured, companies from the West are now increasingly looking at them, not only to tap into their growing wealth but also as a hedge to their respective domestic disturbances. This is best illustrated by the growing dominance of Asian stock exchanges.

While in terms of electronic-order-book value, the National Stock Exchange (NSE) of India is now the fourth-largest exchange in the world, the combined market capitalisation of China’s Shanghai and Shenzhen equity markets has risen from $400 billion in 2005 to $6.21 trillion by the end of 2011. Taken together, these bourses rank a close second to the Tokyo Stock Exchange, the Asia-Pacific region’s erstwhile stock-exchange giant, which stood at $6.47 trillion in 2011. This growth has been fuelled by more than 500 IPOs in that six-year period, and the Shanghai Exchange is now home to some of China’s, and indeed the world’s largest companies. What has, however, stunned market watchers is the trend in the emerging capital markets of Indonesia, Philippines and Thailand, which, despite the global crisis, have generated superb three-year cumulative returns (for the period ending December 31, 2011) of 220.85%, 169.30% and 150.40% respectively.

While Chinese and Indian bourses dominated the equity landscape in Asia, Brazil’s BM&FBovespa led the Latin American indices from the front. In fact, for the period from January to June 2011, BM&FBovespa became the world’s tenth-largest exchange in domestic capitalisation terms, up by almost 35% in dollar valuation. However, in terms of returns, it was Peru that topped the Latin American chart, posting an excellent 3-year-cumulative return of 113.40%.

IPO deal volumes also confirm the trend. Although emerging markets represented less than 25% of global IPO volume in 2004, the figure stood tall at 67% in 2011. For instance, in Latin America, issuers raised $21.2 billion via 48 IPOs in the first half of 2011, the highest H1 volume on record and up 16% over the first half of 2010. Had the European debt crisis not weighed on Latin America’s equity markets, they would have continued their dream run through H2, 2011 as well. Agrees Martin Soler Garcia, the US-based Economist at Moody’s Analytics, as he tells B&E, “Europe’s sovereign debt crisis is weighing on what would otherwise be a good time to invest in Latin America.” If Europe comes up with a credible solution, Latin American equity markets will be among those that can stun the world with superlative returns in 2012.

No doubt, emerging markets command the lion’s share of global growth and have risen in terms of their importance in IPO markets. But then, for now at least, the US continues to drive the most business in terms of overall equity capital markets volume. In the first half of 2011, US accounted for $135.4 billion of the deal flow, up 56% yoy, the highest-ever H1 volume since 2008. Interestingly, Asia-Pacific, in contrast, was the only region to record a decrease in IPOs during the period, with deal volume down by 12% to $125.5 billion.

The reason is simple – liquidity. In a survey titled ‘Capital markets in 2025: The future of equity capital markets’ conducted by the Economist Intelligence Unit on behalf of PricewaterhouseCoopers in August 2011, 62% of respondents cited liquidity as the most important element of a market. Given a deep pool of local and international capital, developed market exchanges are still much more liquid than emerging market exchanges. While Asian institutional investors held $1.6 trillion in assets as of December 31, 2010, their UK and US counterparts had $6.5 trillion and $36.6 trillion respectively in their kitty, together representing 53.1% of global funds under management in 2010.

Although the shift to emerging market exchanges has already begun, choosing the right market to list on yet remains a hard decision that companies need to take, keeping in mind their immediate intentions as well as their continued growth ambitions. After all, one market does not fit all!

Manish K. Pandey           

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