Emerging Capital Markets UNSW Semester 2 2018
FINS2622 NOTES
TABLE OF CONTENTS
WEEK 1: WHAT ARE ASIA PACIFIC MARKETS AND WHY STUDY/INVEST IN THEM? ... 5
IMPORTANCE OF ASIA PACIFIC MARKETS ... 5
DEFINITIONS AND TERMINOLOGY ... 5
Characteristics of Emerging Markets ... 5
WHY INVEST IN EMERGING MARKETS? ... 5
STOCK MARKETS IN EMERGING MARKETS ... 5
EMERGING MARKETS/FRONTIER MARKETS IN THE CONTEXT OF WORLD MARKET INDICES ... 7
THEME OF KAROLYI TEXTBOOK:RISKS ... 7
Karolyi’s Six Fundamental Risk Factors ... 7
WEEK 2: GOVERNANCE I – EFFECTS OF GOVERNANCE ON THE FIRM’S FINANCIAL DECISIONS IN ASIAN CONTEXTS ... 9
WHAT IS CORPORATE GOVERNANCE? ... 9
HOW DO COUNTRIES DIFFER IN ASPECTS RELEVANT TO CORPORATE GOVERNANCE? ... 9
DIVERSITY OF OWNERSHIP STRUCTURE ...10
Diversity in group affiliation and institutional investors ...11
IMPACTS OF CG ON FIRM’S DECISIONS AND ULTIMATELY ITS MARKET VALUE ...11
CGREFORMS ...11
WHY DON’T COUNTRIES ALWAYS REFORM THEIR CG SYSTEMS? ...12
READING:CLAESSENS AND YURTOGLU 2013,CORPORATE GOVERNANCE IN EMERGING MARKETS:ASURVEY ...12
WEEK 3: CORPORATE GOVERNANCE II – SYSTEMS, TRANSFORMATIONS/REFORMS ... 13
3.1AIMS/OUTLINE ...13
SYSTEMS OF CORPORATE GOVERNANCE ...13
3.2 Anglo-US Model (UK,US,…, Singapore)...13
3.3 The Case of CG in Singapore (One-tiered board) ...14
3.4 Insider-based Models (Germany, China) ...14
3.7 The Case of CG in Japan ...16
3.8. The Case of CG in India ...16
3.9CONCLUDING REMARKS ...17
ADDITIONAL READINGS/ARTICLES: ...17
WEEK 5: LIBERALISATION/GLOBALISATION I ... 17
5.1INTRODUCTION ...17
5.2HOW TO MEASURE A COUNTRY'S LIBERALISATION ...18
5.2.1 De Jure MEasures (Determinants) of Foreign Accessibility (Liberalisation) ...18
5.2.2 De Facto Measures of Foreign Accesibility Restrictions ...18
5.2.3 Principal Component Analysis (PCA) ...19
5.3FINANCIAL DEVELOPMENTS OF EMERGING ASIAN MARKETS:EVIDENCE OF PROGRESS CAUSED BY GLOBALISATION / LIBERALISATION ..20
Summary of Didier and Schmukler, “Financial Development in Asia” ...20
WEEK 5 (2ND LECTURE): LIBERALISATION II – FURTHER EVIDENCE OF DEVELOPMENTS, PROS AND CONS OF GLOBALISATION ... 21
5.1EAST ASIAN ECONOMIES COMPARED TO REST OF THE WORLD ...21
5.2CHANGES OTHER THAN GROWTH AS AN EFFECT OF GLOBALISATION ...22
5.3LIBERALISE OR NOT?PROS AND CONS ...23
5.3.1 Pro Globalisation (hence Growth) Arguments ...23
5.3.2 Anti-Globalisation or Reasons for Control of Flows of Funds across Countries ...23
Motives for Liberalisation ...24
EVIDENCE ...24
WEEK 6: FINANCNCIAL CRISES ... 24
6.1FINANCIAL CRISES:AFC AND GFC...24
ASIAN FINANCIAL CRISIS 1997-1998 ... 25
6.2CHARACTERISED AND HOW IT UNFOLDED...25
6.3INDICATORS THAT PRECEDED THE CRISIS ...25
6.4CAUSES OF THE AFC ...25
6.5DISCUSS THESE POINTS IN HINDSIGHT ...26
6.6DID THE WORLD LEARN FROM IT? ...26
6.7CORRECTIVE POLICIES/MEASURES UNDER IMF'S CLOSE SUPERVISION AND DIRECTIONS ...27
GLOBAL FINANCIAL CRISIS 2007-2009 ... 27
6.1AIMS ...27
6.2HISTORICAL DEVELOPMENTS OF THE GFC ...27
6.3WHY THIS CRISIS REQUIRES CLOSE SCRUTINY ...29
6.4GFC:IMPACTS ON ASIA ...30
6.5JUDGEMENTS ON THE GFC'S IMPACT ON ASIA:RECOVERY ...31
6.6WHAT NOW?...32
WEEK 7: FAMILY BUISNESS IN ASIA PART I ... 32
7.1PREVALENCE OF FAMILY BUSINESSES IN ASIA ...32
7.2DEFINITION AND BASIS OF ANALYSIS OF FAMILY BUSINESS ...32
7.3FAMILY OWNERSHIP: CONCENTRATED OR DIFFUSE? ...33
7.4IS FAMILY MANAGEMENT MORE EFFICIENT THAN EXTERNALLY-APPOINTED MANAGEMENT? ...33
7.5 ATAXONOMY OF FAMILY FIRMS USING 'ROADBLOCKS' AND ASSETS AS CRITERIA ...33
Real Life Examples ...34
7.6SOME FINANCIAL AND STRATEGIC DECISIONS THAT AFFECT FAMILY FIRMS ...35
WEEK 8: GENERAL ISSUES ... 35
8.1INVESTMENT STYLES ...35
8.2RISK FACTORS (EXAMINED UNDER KAROLYI RISK FACTORS) ...35
8.3WHAT ASIAN COUNTRIES TO INVEST IN? ...35
8.4SHORT-ORLONG-TERMINVESTMENT ...37
8.5CONSIDER THE FRONTIER MARKETS,GGCHAPTER 8 ...37
8.6VALUATION:MICRO ISSUES ...37
WEEK 8: POLITICAL RISK KAROLYI CHAPTER 9 ... 38
8.1WHY STUDY POLITICAL RISK? ...38
8.2DEFINITION ...38
8.3POLITICAL RISK IN INVESTMENTS: ADJUSTMENT TO DISCOUNT RATE ...38
8.4ADJUSTMENT TO THE CASH FLOWS IN (1) ...39
8.5OTHER METHODS OF ESTIMATING/MEASURING POLITICAL RISK ...39
8.6FURTHER EXPLANATIONS OF KAROLYI'S 13 VARIABLES ...40
WEEK 9: FDI (INWARDS – FROM DEVELOPED MARKETS TO ASIAN MARKETS)... 41
9.1FOREGIN DIRECT INVESTMENT ...41
9.2FORMS OF FDI ...42
9.3INTERNATIONAL PORTFOLIO INVESTMENT ...42
WEEK 9: INVESTMENT OUTWARDS – ASIAN SOVERIGN WEALTH FUNDS ... 42
WHAT ARE SWF AND ASIAN SWF? ...42
9.2ASIAN SWF AND SOURCES OF FUNDS ...42
9.3PURPOSES AND TYPES OF INVESTMENTS ...43
9.4ARE ASIAN SWFS DIFFERENT FROM THE WORLDS SWFS? ...43
CONCERNS OVER ASIAN SWFS ...44
9.6HOW TO TACKLE THESE CONCERNS ...44
Policy 1: The Santiago Principles ...44
Policy 2: Independent Auditor ...45
Policy 3: Restrictions on National Security Grounds ...45
9.7CONCLUSIONS ON ASIAN SWF ...45
WEEK 1: WHAT ARE ASIA PACIFIC MARKETS AND WHY STUDY/INVEST IN THEM?
IMPORTANCE OF ASIA PACIFIC MARKETS
• The size of these emerging/frontier economics: China, India
• The total of all emerging markets equates to 77% of the world’s land mass
• The total population of all emerging markets equates to 80% of the world’s population
• The total GDP of all emerging markets equates to approximately 50% of the world’s GDP.
• Australia and its future? Is it part of Asia?
o Australia may not technically be part of Asia, but Australia is regionally close enough to be affected by the workings of these Asian emerging economies e.g. in trade, services and education
DEFINITIONS AND TERMINOLOGY
• Generally, emerging markets are financial markets of economies that are in the growth stage of their development cycle and have low to middle per capita incomes
• Frontier Markets are less developed than emerging markets; early stage of development; less regulated. Hence ‘pioneer’ image/perception
CHARACTERISTICS OF EMERGING MARKETS
• In transition, increasing in size, activity, or level of sophistication, investible/less investable
• Rule of law
• Treatment of shareholders
• Absence of government interference/shadow economies
• A small increase in per capita income → disproportionately large return for investors
• Less correlated with developed markets → justifiable portfolio diversification WHY INVEST IN EMERGING MARKETS?
1. Growth and Diversification
o Emerging markets are growing at approx. 6% p.a. while developed markets are growing at 2%
p.a. These are approximates but are not far off the true figures. E.g. China grows at approx.
10% p.a.
o Why the sudden spurt of growth?
o 2001 - 10% of total world stock market capitalisation.
o 2011 - this figure was approximately 34%.
2. Emerging markets don't have to re-invent the wheel: this is an advantage because they do not have to spend time nor resources on innovation, they can simply mimic the acts of developed countries
o Examples from China, India, Thailand, Malaysia, Vietnam, Singapore
3. Technology/Manufacturing - they are quite efficient compared to developed economies.
4. Infrastructure needed: physical and institutional → this leads to an abundance of investment opportunities in these emerging economies. Opportunities to invest in:
o Institutions such as stock market/trading mechanisms: capital flows/IPOs/FDI/Portfolio investment etc.
o Physical infrastructure: roads/bridges/ports. Recall the benefits of portfolio diversification and FDI
5. Huge existing population and population growth: huge consumption markets o Population as a driver of growth in Asia
STOCK MARKETS IN EMERGING MARKETS
• Bond markets: small and infrequently traded
• General characteristics:
o Capitalisation
o Alternatives/Small & medium enterprises
