Common Stock Market In South Asia

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

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

Wealth Maximization&

Efficient Market Hypothesis

Wealth Maximization & Market Efficiency

• Wealth Maximization Hypothesis

• Efficient Market

- Flow of Information

- Use of Information

• Abnormal Profits

• Efficient Market Hypothesis

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

Required Returns and Sectoral Development

Investors’ Required Return on Stocks

Flow of Capital Cost of Capital

Patterns of Investment and

Sectoral Development

Effects of the Monetary and Fiscal Polices

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

Foreign Investments and KSE-100 Index

Weekly Net Foreign Investment since Jul-2007

(4 weeks moving average)

Credit and Equity Prices

Overview of the South Asian Economies-I:

Monetary and Fiscal Policies

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

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

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

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

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

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

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

Overview of the South Asian Economies-II:

Financial Markets Strength and Efficiency

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

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

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

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

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

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

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

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

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

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

From Cross Boarder Investment to Common Stock

Exchange

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.

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

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

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…

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.


Cont…


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…

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.)


Cont…

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

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

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

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

Documents

Common Stock Market In South Asia