INTERNATIONAL FINANCEMODULE – 3

TOPICS :- AMERICAN & JAPANESE CAPITAL MARKET

PRESENTED BY ,

ABHILASH ARAVINDALAN MATHEW GEORGEAKHIL P CHANDRAN

AGENDA

• TRENDS IN GLOBAL CAPITAL MARKET

• US CAPITAL MARKET STRUCTURE

• INDEXES USED IN US STOCK MARKET

• JAPANESE CAPITAL MARKET STRUCTURE

• INDEXES USED IN JAPANESE STOCK MARKET

• COMPARISON b/w US & JAPANESE CAPITAL MARKET

TRENDS IN GLOBAL CAPITAL MARKET

Raise in the level of foreign investment, Continued growth of global financial assets and Regulation of International Securities Market in Asia have collectively had an impact on capital markets and cross border trade.

• Raising capital becomes a real challenge for corporate around the world due to uncertainty in the global economy.

• Struggling credit markets, slumping stocks, and a sliding dollar have been generating anxiety among policy makers and since 2008.

• The global market had many fluctuations such as the 1987 U.S. stock market crash, the fall of British pound in 1992 and the

unravelling of Asia’s financial markets.

• A recent research by Mckinsey Global Institute (MGI) research has highlighted several trends that look set to continue during the

years ahead.

• The continued growth and deepening of global markets as investors pour money into equities, securities, bank deposits and other

assets around the world on one hand and the growth of financial markets, especially in emerging economies and the growing ties

between financial markets in developing and developed countries.

• Also, the shift of financial weight in Asia from Japan to other developing economies across Asia will have an impact on capital

markets of these countries.

Continued growth of global financial assets

• The volume of global financial assets such as government debt securities, corporate debt securities and equity

securities will continue to expand.

• In the last 25 years the financial assets have grown robustly. However bank deposits have reduced drastically.

• The past few years have seen the bank deposits see a jump of over $ 5.6 million, with significant contributions

from United States.

Depth of financial markets

• Financial markets have been growing faster than the global GDP over the years.

• Due to this the ratio of a country’s financial assets to GDP has been rising constantly over the past few years.

• In 1990, only 33 countries had financial assets whose value exceeded the value of their GDP’s. By 2006, this

figure had more than doubled to 72 countries

• Brazil, China, India are some of the few countries whose financial assets have outnumbered the country’s Gross

National Product (GNP).

Raise in the level of foreign investment

• The raise in the level of investment is making the world more financially interdependent than it was a few years

ago.

• By the end of 2006, it was around $ 74.5 trillion of assets.

Regulation of International Securities Market• The world’s capital markets have continued to undergo dynamic changes, both in terms of structure and complexity.

• The regulatory structure of the U.S. Financial system, which was created as a response to the Great Depression and the 1929

stock market crash was designed with a national market in mind.

• The global nature of modern capital markets frequently means that new regulations are imposed in one jurisdiction may have

legal and market effects in the other.

• Cross border fraud poses significant difficulties and challenges to security regulators whose legal powers stop at their own

national borders although their jurisdictions stretch globally.  

• The International Capital Market Association is also promoting the international capital market by maintaining the framework

required for cross border issuing, trading and investing through the development internationally accepted market practices and

acting as an intermediary between the governments, regulators, central banks and stock exchanges, both at national and

international level, to ensure that financial regulation promotes the efficiency and cost effectiveness of the international

capital market.

US CAPITAL MARKET STRUCTURE

US CAPITAL MARKET STRUCTURE• Fifty years ago, when the Glass-Steagall Act still governed, financial intermediaries in the U.S. capital market were divided into

distinct categories.

• Today, however, financial groups, such as Citibank and JP Morgan Chase, offer a wide range of financial products and services

under a unified marketing structure.

• These intermediaries are regulated by state and federal agencies, and by self-regulatory bodies.

• The health of the capital market depends upon the ethics, morals, professional skills, and attitudes regarding risk of these

intermediaries. These values are changing, not necessarily for the better.

• In recent years, commercial banks have engaged in trading large portfolios of over-the-counter derivatives, giving rise to

operational and market risks.

• The collapse of Long Term Capital Management in 1998, holding derivatives with notional values of over one trillion dollars,

was a warning as to the safety of today's banking practices.

Fixed Income and Equity Markets

• Based on market value, about 70% of the U.S. securities market in December 2004 was made up of securitized debt, such as treasury

bonds, corporate bonds, and mortgages.

• The remaining 30% consisted of equities.

• Although equities account for 30% of total market value of traded securities, investors in equities get nothing at all back from issuers

on the principal invested and only about 15% (or less) of total payments of dividends and interest.

• This distortion in stock values has been building since the 1960s with the popularization of mutual funds and the spread of the

'Common Stock Legend' — an unquestioning belief that stocks are the safest way to hold long-term assets.

US CAPITAL MARKET STRUCTURE

Sources of New Investment Funds

• The primary sources of new investment money in the U.S. capital market (other than the reinvestment of business profits) is

the personal savings of domestic households and net capital transfers and trade deficits with the rest of the world.

• Price levels in the U.S. market are dependent upon the trade deficit and the prestige of the dollar among foreign investors and

exporters.

• The flows of capital from abroad, mainly related to the U.S. trade deficit, dwarf domestic savings and show how dependent the

U.S. has become upon globalization and the supremacy of the dollar as the international trading currency.

• Foreign investors prefer to hold dollar balances in fixed income securities. As the trade deficit has grown over the last twenty

years, the interest rate on bonds has fallen, due primarily to this massive inflow of foreign capital.

• Any serious impediment to international trade or globalization, or anything that weakened confidence in the dollar or in U.S.

financial intermediaries, would have a profound effect on the U.S. capital market.

US CAPITAL MARKET STRUCTURE

Securitization and Institutional Investors

Flow of funds statistics over the last fifty years show two other significant trends:

• Securitization: In the mid-1970s, starting in the mortgage markets, asset-backed securities have been created,

securitizing everything from home mortgages to credit card debt to accounts receivable. This has increased the size

of the fixed income market.

• Institutional Investors: Over three decades, pension funds have become the largest asset held by households, even

surpassing home equity. Because of this trend and the mass-marketing of open-end mutual funds, corporate control

has shifted from individual investors to intermediaries.

US CAPITAL MARKET STRUCTURE

Direction of Capital Flows

• capital market as a mechanism whereby savings flow from investors to corporations through financial intermediaries.

• Corporations invest these savings producing jobs and dividends for the investing public.

• The national flow of funds accounts show that in the U.S. equity market this 'normal' flow has been inverted for over a

decade.

• Since the mid-1980s, households (individuals) have been net sellers of equities, while corporations have been net buyers.

• Over the last two decades, U.S. corporations have redeemed (bought back) more than one trillion dollars of their own stock,

net of new issues.

• In contrast, in the bond markets, capital has flowed in the normal direction, form investors to issuers.

• By repurchasing more of their own stock than they have been issuing, domestic corporations have inflated equity values over

twenty years, causing values to exceed instrinsic worth.

US CAPITAL MARKET STRUCTURE

Changing Flows, Changing Structures

• Capital Flow Analysis presents a view of financial markets that focuses on long-term shifts in

the flow of funds, as well as on the continuing evolution of market structures.

• Although the U.S. market is large and complex, by following flow of funds accounts over

time, changes in patterns and practices that are reflected in price trends become discernible.

US CAPITAL MARKET STRUCTURE

US EQUITY MARKET INDEXES

THE DOW

• The Dow Jones Industrial Average (DJIA) is one of the oldest, most well-known and most frequently used indexes in the world.

• It includes the stocks of 30 of the largest and most influential companies in United States.

• The DJIA is what's known as a price weighted index. It was originally computed by adding up the per-share price of the stocks of

each company in the index and dividing this sum by the number of companies - that's why it's called an average.

• Over the years, stock splits, spin-offs and other events have resulted in changes in the divisor, making it a very small number (less

than 0.2).

• The DJIA represents about a quarter of the value of the entire U.S. stock market, but a percent change in the Dow should not be

interpreted as a definite indication that the entire market has dropped by the same percent. This is because of the Dow's price-

weighted function.

THE S&P 500

• The Standard & Poor's 500 Stock Index is a larger and more diverse index than the DJIA. Made up of

500 of the most widely traded stocks in the U.S., it represents about 70% of the total value of U.S. stock

markets. In general, the S&P 500 index gives a good indication of movement in the U.S. marketplace as

a whole.

• The S&P 500 index includes companies in a variety of sectors, including energy, industrials, information

technology, healthcare, financials and consumer staples.

THE WILSHIRE 5000

• The Wilshire 5000 is sometimes called the "total stock market index" or "total market index" because almost

all publicly-traded companies with headquarters in the U.S. that have readily available price data are included

in the Wilshire 5000.

• Finalized in 1974, this index is extremely diverse, including stocks from every industry.

• Although it's a near-perfect measure of the entire U.S. market, the Wilshire 5000 is referred to less often than

the less comprehensive S&P 500 when people talk about the entire market.

THE NASDAQ COMPOSITE INDEX

• Most investors know that the Nasdaq is the exchange on which technology stocks are traded.

• The Nasdaq Composite Index is a market-capitalization-weighted index of all stocks traded on the Nasdaq stock exchange.

• This index includes some companies that are not based in the U.S.

• Although this index is known for its large portion of technology stocks, the Nasdaq Composite also includes stocks from

financial, industrial, insurance and transportation industries, among others.

• The Nasdaq Composite includes large and small firms but, unlike the Dow and the S&P 500, it also includes many speculative

companies with small market capitalizations.

• Consequently, its movement generally indicates the performance of the technology industry as well as investors' attitudes

toward more speculative stocks.

THE RUSSELL 2000

• The Russell 2000 is a market-capitalization-weighted index of the 2,000 smallest stocks in the Russell 3000, an

index of the 3,000 largest publicly-traded companies, based on market cap, in the U.S. stock market.

• The Russell 2000 index gained popularity during the 1990s, when small-cap stocks soared and investors moved

more money to the sector.

• The Russell 2000 is the best-known indicator of the daily performance of small companies in the market; it is not

dominated by a single industry.

REGULATIONS OF US STOCK MARKET

The Investor's Advocate: How the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation

Introduction

• The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient

markets, and facilitate capital formation.

• As more and more first-time investors turn to the markets to help secure their futures, pay for homes, and send children to

college, our investor protection mission is more compelling than ever.

• The world of investing is fascinating and complex, and it can be very fruitful.

• But unlike the banking world, where deposits are guaranteed by the federal government, stocks, bonds and other securities

can lose value. There are no guarantees.

• That's why investing is not a spectator sport.

• By far the best way for investors to protect the money they put into the securities markets is to do research and ask

questions.

Creation of the SEC

• The SEC's foundation was laid in an era that was ripe for reform. Before the Great Crash of 1929, there was

little support for federal regulation of the securities markets.

• This was particularly true during the post-World War I surge of securities activity.

• Proposals that the federal government require financial disclosure and prevent the fraudulent sale of stock were

never seriously pursued.

• When the stock market crashed in October 1929, public confidence in the markets plummeted. Investors large

and small, as well as the banks who had loaned to them, lost great sums of money in the ensuing Great

Depression.

Organization of the SEC

• The SEC consists of five presidentially-appointed Commissioners, with staggered five-year terms (see

SEC Organization Chart; text version also available).

• One of them is designated by the President as Chairman of the Commission — the agency's chief

executive.

• By law, no more than three of the Commissioners may belong to the same political party, ensuring non-

partisanship.

• The agency's functional responsibilities are organized into five Divisions and 23 Offices, each of which

is headquartered in Washington, DC.

• The Commission's approximately 3,500 staff are located in Washington and in 11 Regional Offices

throughout the country.

Responsibility of the Commission to:

• interpret and enforce federal securities laws;

• issue new rules and amend existing rules;

• oversee the inspection of securities firms, brokers, investment advisers, and ratings

agencies;

• oversee private regulatory organizations in the securities, accounting, and auditing

fields; and

• coordinate U.S. securities regulation with federal, state, and foreign authorities.

JAPEANESE CAPITAL MARKET STRUCTURE

JAPEANESE CAPITAL MARKET STRUCTURE

• The Japanese market particularly in terms of role played by debt instruments , has been for most of its history

a relatively minor element in financial systems dominated by banks.

• The capital market of Japan is gaining over the past decade.

• The market is becoming more broader and deeper.

• There is a still long way to go before the Japanese market is as flexible as US or British.

• The huge outflow of Japanese savings accelerated the modernizing of Japanese capital market by establishing

a close connection between Japanese and other major markets and necessitating certain related adaptations in

the market.

JAPENESE EQUITY MARKET INDEXES

Nikkei 225• The Nikkei 225 , more commonly called the Nikkei, the Nikkei index, or the Nikkei Stock Average, is a stock market index for the Tokyo

Stock Exchange (TSE).

• It has been calculated daily by the Nihon Keizai Shimbun (Nikkei) newspaper since 1950. It is a price-weighted index (the unit is YEN),

and the components are reviewed once a year. Currently, the Nikkei is the most widely quoted average of Japanese equities, similar to the

Dow Jones Industrial Average. In fact, it was known as the "Nikkei Dow Jones Stock Average" from 1975 to 1985.

• The Nikkei 225 began to be calculated on September 7, 1950, retroactively calculated back to May 16, 1949. Since January 2010 the index

is updated every 15 seconds during trading sessions.

• The Nikkei 225 Futures, introduced at Singapore Exchange (SGX) in 1986, the Osaka Securities Exchange (OSE) in 1988, Chicago

Mercantile Exchange (CME) in 1990, is now an internationally recognized futures index.

• The Nikkei average has deviated sharply from the textbook model of stock averages which grow at a steady exponential rate. The average

hit its all-time high on December 29, 1989, during the peak of the Japanese asset price bubble, when it reached an intra-day high of

38,957.44 before closing at 38,915.87, having grown sixfold during the decade. Subsequently, it lost nearly all these gains, closing at

7,054.98 on March 10, 2009—81.9% below its peak twenty years earlier.

TOPIX• Tokyo Stock Price Index , commonly known as TOPIX, along with the Nikkei 225, is an important stock market index for the

Tokyo Stock Exchange (TSE) in Japan, tracking all domestic companies of the exchange's First Section. It is calculated and

published by the TSE.

• As of 1 February 2011, there are 1,669 companies listed on the First Section of the TSE, and the market value for the index was

¥197.4 trillion.

• The index transitioned from a system where a company's weighting is based on the total number of shares outstanding to a

weighting based on the number of shares available for trading (called the free float).

• This transition took place in three phases starting in October 2005 and was completed in June 2006.

• Although the change is a technicality, it had a significant effect on the weighting of many companies in the index, because

many companies in Japan have significant holdings of shares of their business partners as a part of intricate business alliances,

and such shares are no longer included in calculating the weight of companies in the index.

COMPARISON BETWEEN AMERICAN AND JAPANESE CAPITAL MARKET