Global economy, Financial Management

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Global Economy:

The size of the world stock market grew steadily in the 1970s and 1980s and crossed the $12 trillion figure in 1993. The share of the US market decreased tremendously to less than 35% from more than 50%. In recent years, the importance of Asia has grown dramatically and its share in the world market has multiplied three times. During the 1980s, the stock markets emerged rapidly in the developing countries. In Africa, stock markets opened in Egypt, Morocco and Ivory coast, but with limited growth. The growth has been faster in Latin America, especially in Brazil and Mexico. However, the most dynamic growth was experienced in Asia, particularly in India, Indonesia, Malaysia, Thailand, Korea and Taiwan. The growth in Asian markets has been vastly due to economic liberalization resulting in improved liquidity. Most of these markets were closed to the foreign investors, but after 1994 these markets have progressively opened to the international investors. According to various reports since 1990 the market liquidity has more than doubled in relation to the GDP. Since the early 1990s, the economies such as Thailand, China, Korea have been gradually raising caps on portfolio investment by non-residents. In the Pacifica Oceania region Japan, Australia and Singapore have opened their gates for cross-border equity flows by non-residents. According to reports of International Finance Corporation released in 2005, the Inflows of foreign direct investment into the emerging markets have grown by an average of 23 percent per year during 1990-2000. Flows slumped between 2000 and 2002 and have recovered since. According to the reports, for every $1 dollar in official development aid to the governments of developing countries, some $4 in cross-border private investment takes place in the emerging market countries. The market capitalization of emerging market countries has more than doubled over the past decade, growing from less than $2 trillion in 1995 to more than $5 trillion in 2006.

In 2006, the total market capitalization of emerging markets represented around 12% of the world market capitalization. Again the transaction volumes in some of these countries were very large. For example, Taiwan's transaction volume in 1993 was larger than that of France or Germany, which signifies the rapid growth these countries witnessed. In early 1990s, due to a wave of liberalization, countries falling under Eastern Europe such as Hungary and Poland opened their markets to attract foreign investments. The New York Stock Exchange is in the top position, in terms of transaction volume followed by the Tokyo Stock Exchange and the London Stock Exchange. However, depending on the market activity, turnover on major stock exchanges can vary widely from one year to the next. Therefore, comparison of national market liquidity based on this variable could lead to different conclusions if different years were observed. Moreover in any given year, the United States, Japan, the United Kingdom, Germany, Hong Kong, France, and some other countries may turn out to be the most active equity markets. Another informative scale is the degree of concentration of the market capitalization found in the developed markets. Any investor would like to know the constituent of the markets by comparing the proportion of top ten firms' market capitalization with respect to the total market capitalization of the national market. If the national market is dominated by smaller firms, institutional firms will not be willing to invest, for fear of poor liquidity. Again it will be more convenient for an investor to watch the performance of larger firms if the market is dominated by larger firms. But larger firms offer less opportunity for diversification and active portfolio management. American market is not confined to some larger firms because the top 10 firms represent less than 15% of the total market capitalization. The largest firm in the United States represents less than 2% of the total market capitalization of the NYSE. On the other hand, the top 10 Dutch firms account for more than 70% of the Amsterdam Stock Exchange. Similarly, top ten firms of Singapore, Italy, Hong Kong, Australia and Malaysia account for more than 40% of total market capitalization of their respective national stock markets.

 


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