lecture series saarc chamber of commerce & industry common stock market in south asia:...
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Lecture Series
SAARC Chamber of Commerce & Industry
Common Stock Market in South Asia:
Prerequisites & Consequences
Dr. Ayub MeharDirector General
Federation of Pakistan Chambers of Commerce & Industry (FPCCI)
Karachi: FPCCI, Auditorium
March 30 , 2009
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Content:
• Wealth Maximization & Efficient Market Hypothesis
• Effects of the Monetary and Fiscal Polices
• Overview of the South Asian Economies-I:Monetary and Fiscal Policies
• Overview of the South Asian Economies-II: Financial Markets Strength and Efficiency
• From Cross Boarder Investment to Common Stock Exchange
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Wealth Maximization&
Efficient Market Hypothesis
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Wealth Maximization & Market Efficiency
• Wealth Maximization Hypothesis
• Efficient Market
- Flow of Information
- Use of Information
• Abnormal Profits
• Efficient Market Hypothesis
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Equilibrium in Financial Assets Market
Market Efficiency
Price of Risk
taking
Dividends
Risk Premium
Capital Gain
Investors Required Return
on Stocks
Risk Free Return
Volume of Risk (β)
Firms’ Potency & Strategies
Macroeconomic Fundamentals
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Required Returns and Sectoral Development
Investors’ Required Return on Stocks
Flow of Capital Cost of Capital
Patterns of Investment and
Sectoral Development
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Effects of the Monetary and Fiscal Polices
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Impact of Monetary and Fiscal Policies on Stock Market:
Simultaneity in the Model
Market Capitalizati
on
Monetary and Fiscal Policy
Factors(Demand Side
Effects)
Corporate Factors(Supply Side
Effects)
Foreign Portfolio
Investment
Public Debt
Money Supply (M2)
Equities
Use of Cash Balance
External Borrowing
Budget Deficit
Time Deposits
Change in Money Supply
Banks' Credits to Private &
Public Sectors
Foreign Exchange Reserves
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Foreign Investments and KSE-100 Index
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Weekly Net Foreign Investment since Jul-2007
(4 weeks moving average)
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Credit and Equity Prices
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Overview of the South Asian Economies-I:
Monetary and Fiscal Policies
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Comparison on Economic Status
CountriesPopulation (Millions)
Gross Domestic Product (Million $)
Per Capita Income ($)
Bangladesh 156 61897 450
India 1110 911813 820
Nepal 28 8938 320
Pakistan 159 126836 800
Sri Lanka 20 26964 1310
South Asia 1,499 1146716 768
Euro area 317 10636418 34307
U.K. 61 2376984 40560
United States 299 13163870 44710
World 6,538 48461854 7448
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Exchange Rates and Prices
Countries
Official exchange
rate
Purchasing power parity (PPP)
conversion factor
Ratio of PPP
conversion
factor to official
exchange rate
GDP implicit deflator
Consumer price index
Wholesale price index
local currency units to $
local currency units to
international $
average annual % growth
2007 2000-06
Bangladesh 68.59 23.1 0.3 4.1 5.9 -
India 39.44 15.1 0.3 4.2 4.2 4.9
Pakistan 61.22 20.2 0.3 6.1 5.6 6.7
Sri Lanka 109.13 37.6 0.4 8.8 9.7 9.7
U.K. 0.49 0.6 1.2 2.7 2.6 1.6
United States
1.00 1.0 1.0 2.5 2.6 3.9
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Central Government Revenues
Countries
Taxes on income, profits,
and capital
gains
Taxes on goods
and services
Taxes on Internatio
nal Trade
Other taxes
Social contrib
utions
Grants and
other reven
ue
% of revenue
Bangladesh 12 29 33 4 - 22
India 39 30 15 0 0 16
Pakistan 20 33 13 1 - 33
Sri Lanka 16 51 15 3 1 14
South Asia 16 33 15 2 0 32
Euro area 24 26 0 3 35 7
U.K. 39 31 - 6 21 4
United States 57 3 1 1 36 3
World 21 34 6 2 - 14
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Monetary Indicators
Countries
Money and quasi
money
Claims on
private sector
Claims on
governments and
other public
entities
annual % growth
% of M2
Bangladesh 20.2 12.2 6.3
India 21.6 16.8 2.4
Pakistan 14.6 10.6 1.6
Sri Lanka 19.0 15.9 3.1
U.K. 11.9 16.4 -1.1
United States 9.0 7.3 0.8
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Central Banks’ Policy Rates
Jan‐07 Jul‐07 Dec‐07 Jul‐08 Dec‐08
Pakistan 9.00 10.50 12.00 13.00 15.00
USA 5.25 5.25 4.25 2.00 1.00
UK 5.25 5.75 5.50 5.00 2.00
Euro zone 3.50 4.00 4.00 4.25 2.50
Canada 4.25 4.50 4.25 3.00 2.25
Australia 6.25 6.25 6.75 7.25 4.25
Japan 0.25 0.50 0.50 0.50 0.30
China 6.12 6.57 7.47 7.47 5.58
S. Korea 4.50 4.75 5.00 5.00 4.00
Malaysia 3.50 3.50 3.50 3.50 3.25
Thailand 4.75 3.25 3.25 3.50 2.75
Philippines 7.50 6.00 5.25 5.75 5.75
India 7.50 7.75 7.75 9.00 7.50
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Phases of Monetary Tightening
Note : CRR is on weekly average basis, subject to a daily minimum requirement*including Time deposits with tenor less than 6 months, revised to 1 year w.e.f. October 4, 2007**Time deposits with tenors of 6 months and above
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Financial Assets by Major Type(US$ bln.)
INDIA PAKISTAN
Public Debt Securities
559 64
Private Debt Securities
41 1
Banks Deposits 549 45
Equity Securities 819 46
1968 156
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Overview of the South Asian Economies-II:
Financial Markets Strength and Efficiency
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Stock Market Indices
Country
Index% change on
One week
Dec 31st 2008
Mar 18th 2009
in local currency
in $ terms
Pakistan (KSE) 6,266.0 +4.2 -0.8 -2.2
India (BSE) 8,976.7 -5.1 -12.4 -17.2
United States (DJIA)
7,486.6 -5.4 -21.7 -21.7
Britain (FTSE 100)
3,805.0 -5.3 -17.8 -19.3
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Financial Strength
Countries
Market Capitalization
Value of shares
Traded Number of Listed
Companies
No. of Stock Exchanges
(Million US $)% of market
capitalization
Bangladesh 6793 95.5 278 2
India 1819101 95.9 4887 22
Pakistan 70262 167.3 654 3
Sri Lanka 7553 12.3 235 1
Italy 1026640 149.7 284 1
France 2428572 119.6 717 1
U.K. 3794310 123.8 2913 1
United States 19425855 182.8 5133 7
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PE & PBV in Emerging Asia
Country PE09 (x) PBV (x)
India 11.7 3.7
China 11.2 2.5
Taiwan 10.8 1.6
Philippine 10.4 1.8
Malaysia 10.4 1.6
Indonesia 10.1 2.9
Korea 8.8 1.4
Thailand 7.8 1.4
Pakistan 6.8 1.5
Average 9.8 2
Source: Bloomberg* September 30, 2008
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Financial Access, Stability, and Efficiency
Countries
Getting credit
Bank capital
to asset
ratio
Ratio of Bank
nonperforming
loans to total gross
Loans
Domestic credit
provided by
banking sector
Legal rights Index 0-10 (weak
tostronge
r)
Credit informatio
n index
0-6(low to high)
% of adult population
Public credit
registry coverag
e
Private credit bureau covera
ge
% % % of GDP
Bangladesh
7.0 2.0 0.7 0.0 4.0 13.2 58.1
India 6.0 4.0 0.0 10.8 6.6 3.5 63.4
Pakistan 4.0 4.0 4.6 1.4 8.8 7.7 43.0
Sri Lanka 3.0 3.0 0.0 2.9 6.7 9.6 44.1
South Asia 3.9 1.9 0.7 1.9 6.6 7.7 60.6
Europe & Central Asia
5.6 3.3 2.4 14.4 10.3 3.2 37.6
U.K. 10.0 6.0 0.0 84.6 8.9 0.9 176.9
United States
7.0 6.0 0.0 100.0 10.5 0.8 230.8
World 4.6 2.7 4.6 19.6 8.9 3.0 187.9
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Stock Market Development Index
Rank (out of 52)
Score (1-7 scale)
India Pakistan India Pakistan
Financial Development Index 2008
31 34 3.6 3.5
Capital account liberalization 46 46 1 1
Domestic financial sector liberalization
38 49 3.8 3.1
Equity Markets Development 25 14 4.0 4.6
Regulation of security exchanges 23 46 5.5 4.0
Corporate tax rate (%) 39 51 33 37
Equity market turnover 17 1 93.6 374.3
Stock Market Capitalization to GDP
25 37 70.6 33.6
Stock Market value traded to GDP 19 16 70.5 98.2
Ease of access to local equity market
10 36 5.7 4.9
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Corporate Governance
Rank (out of 52)
Score (1-7 scale)
IndiaPakista
nIndia
Pakistan
Corporate governance (overall) 20 35 5.2 4.5
Extent of incentive-based compensation
32 52 4.5 3.6
Efficacy of corporate boards 25 52 5.0 3.6
Reliance on professional management
21 50 5.4 3.9
Willingness to delegate 23 44 4.5 3.7
Strength of auditing and accounting standards
21 34 5.7 4.9
Shareholder rights index 1 1 5.0 5.0
Ethical behavior of firms 34 32 4.2 4.3
Protection of minority shareholders’ interests
21 26 5.3 5
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Competitiveness Scores in Public Policy Related Fields
Country
Overall Business
Competitiveness
Index
Institutional
Governance
Infrastructure
Macroeconomic
Stability
Health & Primary Educatio
n
Higher Educatio
n
Pakistan 3.77 3.66 3.22 4.37 4.09 2.72
India 4.33 4.32 3.45 4.21 4.92 4.13
Bangladesh 3.55 2.87 2.19 4.62 4.71 2.47
Sri Lanka 3.99 3.85 3.21 3.71 5.65 3.77
France 5.18 5.09 6.46 4.93 6.31 5.38
Italy 4.36 3.77 3.91 4.46 6.08 4.55
Germany 5.51 5.83 6.65 4.93 5.88 5.33
Nepal 3.38 3.1 1.96 4.64 4.46 2.65
United Kingdom 5.41 5.31 5.71 5.18 6.16 5.42
United States 5.67 4.76 6.1 4.78 6.00 5.68
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Competitiveness Scores in Private Sector Related Fields
Country
Goods Market
Efficiency
Labor Market Efficienc
y
Financial
Market Sophist
ication
Technology
Readiness
Market
Size
Business Sophisticati
on
Innovation
Pakistan 3.95 3.86 4.32 2.77 4.56 3.85 3.15
India 4.66 4.07 4.93 3.17 6.16 4.81 3.90
Bangladesh 3.84 4.21 4.09 2.25 4.41 3.41 2.56
Sri Lanka 4.35 3.71 4.39 2.84 3.74 4.26 3.58
France 5.03 4.06 5.2 4.88 5.66 5.47 4.69
Italy 4.32 3.5 3.96 4.37 5.61 4.91 3.45
Germany 5.29 4.45 5.64 5.05 5.9 5.93 5.46
Nepal 3.73 3.62 3.64 2.41 3.06 3.29 2.49
United Kingdom
5.3 5.29 6.17 5.27 5.74 5.41 4.79
United States
5.32 5.71 5.68 5.43 6.83 5.6 5.77
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Business Environment
Countries
Regulations and taxCorrupti
onCrime Finance
Time dealing
with officials %
of manageme
nt time
Average number of
times management with tax
officials
Unofficial
payments to
public officials
% of firms
Losses due to theft,
robbery vandalism and arson % of sales
Firms using
banks to finance
investment % of firms
Bangladesh 3.2 1.4 82.2 1.2 11.6
India 6.7 3.1 47.5 0.1 19.4
Pakistan 8.7 4.2 57 0.1 3.6
Sri Lanka 3.5 5.1 16.3 0.5 16.2
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Doing Business Indicators
COUNTRY
Starting a businessRegistering
propertyDealing with
licenses
Employing
workers
Enforcing contracts
Protecting
Investors
Closing a
business
Number of
procedures
Time
require
d day
s
Cost % of
per capita income
Number of
procedures
Time
require
d days
Number of
procedures to build a wareho
use
Time required to build
a warehouse days
Rigidity of
employment index 0 (less rigid) to 100 (more rigid)
Number of
procedures
Time required
days
Disclosure index 0
(less disclosure) to 10 (more
disclosure)
Time to
resolve
insolvency years
Pakistan 11 24 14 6 50 12 223 43 47 880 6 2.8
Bangladesh 8 74
46.2
8 425 14 252 35 41 1,442 6 4
India 13 3374.6
6 62 20 224 30 46 1,420 7 10
Sri Lanka 5 39 8.5 8 83 22 214 27 40 1,318 4 1.7
Nepal 7 3173.9
3 5 15 424 52 39 735 6 5
South Asia
8 3340.7
6 134 16 247 27 44 1,047 4 5
Euro area
7 22 7.4 6 70 14 190 45 31 591 6 1.4
World 9 4461.1
6 81 18 223 34 38 605 5 3.0
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From Cross Boarder Investment to Common Stock
Exchange
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Common Stock Market:
“Stock market integration means that investors can buy and sell shares in those markets without restriction and that identical securities can be issued and traded at the same price across the markets after foreign exchange adjustment.” Phillip A. Wellons – Integration of Stock Exchanges in Europe, Asia, Canada and the U.S.
This step is the advanced stage of: - cross boarder investment - cross boarder listing.
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Experiences:
• European Capital Market • Inter-connected Stock Exchange of
India Limited • 148 Exchanges of Caribbean Countries• Integrated Stock Exchange of USA• Integrated Stock Exchange of Canada
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Participants of Common Stock Exchanges:
•Issuers •Investors •Intermediaries
Underlying factor – they all want to achieve their financial goals (wealth maximization).
Facilitator of Common Stock Exchanges:
•Regulators •Central Banks •Stock Exchanges
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Operating at Common Stock Exchanges:
• The participating Stock Exchanges would join the Common Stock Exchange
• The Common Stock Exchange will develop and launch a network
• The login and password will be issued to the brokers of all participating exchanges.
Cont…
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Operational Aspects :• Current technologies will enable brokers at each
brokerage house across the region to access securities on the other exchanges. All brokers must first log on to their local exchange in order to participate in the single regional capital market
• NO Common Trading Platform – Trades are executed in the country or exchange of
issuance • NO Central Depository or Clearing House
– Settlement is with the country of issuance • NO Cross-Border Memberships • NO Cross-Border Listings • NO New Trading / Settlement Systems required • NO need to contact/find a broker of other exchange.
Operating at Common Stock Exchanges:
Cont…
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Operating at Common Stock Exchanges:
Trading:
• Each participant exchange (and depository) would link its systems to the common stock exchange’s network
• The network would collect from each participant exchange - their quotes, orders and trade execution data
• The network would disseminate this data to all participants • Brokers can trade on any participating exchange from its own
country exchange system and settle all trades in their home country
• Buyers and sellers would settle with their local depository
Execution: • All trades would be executed by and on the trading system of the
Exchange of Corporate Issuance• A broker wishing to trade on a participating ECI would have its order routed
through the network to the appropriate exchange • The ECI would execute the order and would report the trade to the buying
and selling brokers as well as the entire network
Cont…
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Clearing and Settlement:
• The depositories would settle against each other via multi bi-lateral equal and opposite accounts
• All positions would be held in the depository of the country where the security is traded
• Trades would settle via book entry • Each depository would guarantee its members’
trades • Money Settlement can be via a common currency
(US$, etc.)
Operating at Common Stock Exchanges:
Cont…
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Advantages:
1. Optimum financing for regional firms 2. Increased investment opportunities & Wealth
Maximization3. Attractiveness of the region as an area for
investment – extra-regionally 4. No need for cross-listing 5. National identify maintained6. Local markets continue to exist in their present
form7. Improved price discovery8. Provides an international Best Bid/Offer9. Risk Diversification Opportunities
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Stock Market Index – (1969=100)
Year United India Britain USA Japan Germany
1899 -- 77.68 6.54 -- 37.62
1919 600.43 45.66 9.47 431.05 4.25
1939 238.23 40.29 13.57 167.81 15.39
Pakistan
India
1969 100.00 100.00 100.00 100.00 100.00 100.00
1989 192.76 659.59 543.78 383.88 4317.16 608.04
1998 143.72 1031.24 1257.64 1335.25
1955.97 1187.98
2004 830.33 1928.18 1012.91 1511.33
1615.90 985.72
2008 365.48 1142.43 566.17 771.71 665.08 496.16
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Value of National Currencies in Term of the US Dollar
Year United India Britain Japan Germany
1825 0.41 0.21 -- --
1858 0.76 0.21 -- --
1880 1.30 0.21 -- --
1899 3.07 0.20 2.03 4.20
1909 3.08 0.20 2.02 4.19
1939 3.33 0.25 4.27 2.49
Pakistan India
1969 10.25 11.10 0.42 376.00 3.68
1989 21.39 16.93 0.63 143.68 1.74
1998 49.02 42.50 0.60 112.88 1.67
2004 60.20 45.80 0.56 111.00 0.81
2005 59.51 44.10 0.55 110.22 0.80
2006 60.27 45.31 0.54 116.30 0.80
2007 61.22 39.44 0.49 112.25 0.69
2008 70.64 43.319 0.53 103.58 0.67
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Annualized Inflation (%)Duration United India Britain USA Japan Germany
1750-1758 0.02 0.19 -- -- --
1758-1782 1.78 0.96 -- -- --
1782-1825 0.36 0.14 -- -- --
1825-1857 0.77 2.37 -- -- --
1858-1880 1.71 -0.65 -- -- --
1880-1900 2.88 -0.12 -- -- --
1900-1910 0.10 0.33 2.50 1.77 1.84
1910-1940 -0.70 4.63 3.43 4.67 1.29
Pakistan India
1940-1970 5.27 5.27 1.00 2.30 259.33 0.73
1970-1990 9.80 5.55 12.05 5.15 6.90 3.15
1990-1998 14.75 14.13 4.75 3.75 1.61 3.38
2004 8.5 4.6 1.4 3.2 0.2 2.3
2005 8.7 5.3 2.1 3.7 -0.4 2.1
2006 7.6 6.7 2.8 2.2 0.3 1.4
2007 7.0 5.5 2.0 4.1 0.7 3.1
2008 21.5 9.2 4.6 3.1 1.9 2.4
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