Irfan mumbaPerformance of Global Stock Market Intgration: Empirical Evidencce from BRICS Stock

PERFORMANCE OF GLOBAL STOCK

MARKET INTEGRATION: EMPIRICAL

EVIDENCE FROM BRICS STOCK

MARKET

MOHAMMAD IRFAN

RESEARCH SCHOLAR

DEPARTMENT OF MANAGEMENT

CENTRAL UNIVERSITY HARYANA, MAHENDERGARH, HARYANA

OBJECTIVES

INDICESBRAZIL

RUSSIA

INDIA

CHINA

SOUTH AFRICA

The present paper is focused on examining the risk and

return behavior and Multiple Correlation has been

computed for the selected stock market The

IBOVESPA(Brazil), MICEX(Russia), BSE-Sensex

(India), SSE Composite index (China), The

FTSE/JSE(South Africa) from (1st Jan 2007 to 30th Sept

2013).

OBJECTIVES

To analysis the performance of Brazil, Russia,

India, China, South Africa Stock Market.

To analysis the co-integration of Indian stock

market with other selected indices and vice versa.

To find out the integration of Indian stock market

by volatility of selected indices and vice versa.

To do comparative analysis between Brazil, Russia,

India, China, South Africa stock markets.

INTRODUCTION

BRICS is the acronym for an association of five major

emerging national economies: Brazil, Russia, India,

China and South Africa. Economists have determined

that these countries could rank among the world’s

dominant economies by mid century, based on gross

domestic product. BRICS will a accelerate world’s

economic growth. The present study is being

contemplated with the objective of studying the degree

of stock market integration.

INTRODUCTION

BRICS are growing countries in the world. It is typically

rendered as “the BRIC economies" or the "Big Four". It has

been replaced by BRICS since the 2010 inclusion of South

Africa in the bloc. More modestly, Goldman Sachs has argued

that, although the four BRIC countries are developing rapidly,

it was only by 2050 that their combined economies could of the

current richest countries of the world. In 2010, however, while

the four BRIC countries accounted for over a quarter of the

world's land area and more than 40% of the world's population,

they accounted for only one quarter of the world gross national

income.

INTRODUCTION

BRICS HELPS TO WORLD ECONOMIC GROWTH

The BRICS countries acted as a loyal partner during the drafting of

decisions, starting with the Framework for Strong, Sustainable and

Balanced Growth and Financing for Investment, Vadim Lukov said that

The Ambassador also drew attention to the fact that, in 2011-2013, the

BRICS economies posted an average growth rate of 4.11%, as compared

to the 1.37% average growth rate of developed countries. "This means

that the BRICS countries remain an important driving force of global

economic growth, and that their role in the global economy, including all

the G20 economies, continues to increase," he said. The BRICS

countries have accumulated tremendous foreign currency reserves and

practice in implementing reforms, and they continue to improve their

mutual coordination in the financial and economic sphere.

INTRODUCTION

BRICS countries to remain engines for global economic

growth

BRICS countries are growing in the world wide in terms of

manufacturing, marketing, Legislation Management,

consumer durable product, technical product, construction,

politics, employment and financial activities.

INTRODUCTION

THE TEN LARGEST ECONOMIES IN THE WORLD

IN 2050

There is ten largest economies in world in 2050

continuously ranks from first to ten countries. There are

China, UnitedState, India, Brazil, Mexico, Russia,

Indonesia, Japan, United Kingdom, Germany.

The ten largest economies in the world in 2050, measured in

GDP according to Goldman Sachs

Output Growth Forecast – 2013

Source: WEO March 2013, IMF

8.2

6.0

4.0 3.8 3.53.0 2.8

2.1 2.01.5 1.2 1.1 0.9

0.4 0.2

0

1

2

3

4

5

6

7

8

9

Output growth 2013 - WEO IMF (March 2013)

INTRODUCTION

BRAZIL STOCK MARKET (BOVESPA)

The IBOVESPA is a major stock market index which

tracks the performance of around 50 most liquid stocks

traded on the Sao Paulo Stock Exchange in Brazil. It is a

gross total return weighted index. The index has a base

value of BRL 100 as of January 2, 1968. Since 1968, The

Bovespa Index has been adjusted 11 times by a factor of

100 in 1983 and by factor of 10 in 1985, 1988, 1989,

1990, 1991, 1992, 1993, 1994, and 1997.

7.4

2.0

4.0

5.8

4.5

3.13.7 3.5

1966-80 1981-2003 2004-2009 2010-2015 (*)

Brazil World

Brazil has resumed growth after a long hibernation, and is bound to grow

above the global average over the coming years

Economic performance of Brazil

Brazil: Economic indicators 2013

3.9 4.7 4.6

8.5

21.5 20.9

0

5

10

15

20

25

Outputgrowth

Finaldomesticdemand

Privateconsumption

Fixedinvestment

Exports Imports

Source: Citi Research (August 2012)

Risks

China/Asia slowdown

Stagnation in the US and Europe

Protectionism, uncertainties and market

distortions created by unconventional policies

Tightening of international credit

13

The Way Forward – Challenges

Accelerate labor productivity

Increase savings and investments

Improve competitiveness in manufacturing

Tackle infrastructure bottlenecks

Accelerate the transition towards a knowledge-based

economy

14

INTRODUCTION

RUSSIA STOCK MARKET (MICEX)

Stocks in Russia had a positive performance during the last month.

Russia Stock Market (MICEX), rallied 69 points or 4.82 percent

during the last 30 days. From 1997 until 2013, Russia Stock Market

(MICEX) averaged 855 Index points reaching an all time high of

1970 Index points in December of 2007 and a record low of 19 Index

points in October of 1998. The MICEX is a major stock market

index which tracks the performance of 30 largest and most liquid

Russian companies from 10 main economy sectors, listed on The

Moscow Stock Exchange. It is a capitalization-weighted composite

index. The MICEX has a base value of 100 as of September 22,

1997.

Economic Challenges

There is widespread pollution in Russia. A few

examples are:

A. Oil spills from poorly maintained pipelines.

B. Radioactive waste from nuclear power plants

and nuclear submarines.

C. Air pollution from factories with poor air

quality standards.

World performance of GDP

2000 2010 2020 2030 2040 2050

U.S. U.S. U.S. U.S. U.S. China

Japan Japan China China China U.S.

Germany Germany Japan Japan India India

U.K. China Germany India Japan Japan

France U.K. U.K. Russia Russia Brazil

Italy France India U.K. Brazil Russia

China Italy France Germany U.K. U.K.

Brazil India Russia France Germany Germany

India Russia Italy Brazil France France

Russia Brazil Brazil Italy Italy Italy

17

(Country GDP Rank in Billions of Real (2003) U.S. Dollars)

Source: Global Insight World Service and Goldman Sachs, 2006

INTRODUCTION

INDIA STOCK MARKET (SENSEX)

Stocks in India had a positive performance during the last month.

India Stock Market (SENSEX), rallied 875 points or 4.43 percent

during the last 30 days. From 1979 until 2013, India Stock Market

(SENSEX) averaged 5852 Index points reaching an all time high of

21005 Index points in November of 2010 and a record low of 113

Index points in December of 1979. The SENSEX (BSE30) is a major

stock market index which tracks the performance of 30 major

companies listed on the Bombay Stock Exchange. The companies are

chosen based on the liquidity, trading volume and industry

representation. The SENSEX, is a free-float market capitalization-

weighted index. The Index has a base value of 100 as of 1978-79.

Indian Market performance

World’s largest producer of milk, and second-largest

producer of wheat and rice

6,600 companies on the Bombay Stock Exchange

World’s second-largest pharmaceutical industry after China

World’s second-largest small car market

World’s second-largest group of software developers

100 Fortune 500 R & D facilities

Super computer manufacturer

Satellite launches

Information Communication

Technologies – Market Snapshot

World’s second-largest and fastest-growing telecom market

About 700 million subscribers and 13 mobile operators

Half of the world’s back office services

BPO and software sub-sectors employ over 2.3 million

directly and 8.2 million indirectly, with revenues of US $73

billion in FY2010

Animation and gaming industries growing rapidly

(estimated revenues of $1.8 billion by 2012)

INTRODUCTION

CHINA STOCK MARKET (SSE Composite)

Stocks in China had a positive performance during the last month.

China Stock Market (SSE Composite), rallied 2 points or 0.07

percent during the last 30 days. From 1990 until 2013, China

Stock Market (SSE Composite) averaged 1671 Index points

reaching an all time high of 6092 Index points in October of 2007

and a record low of 100 Index points in December of 1990. The

Shanghai SE Composite is a major stock market index which

tracks the performance of all A-shares and B-shares listed on the

Shanghai Stock Exchange, in China. It is a capitalization-weighted

index. The SSE Composite Index has a base value of CNY100 as

of December 19, 1990.

The Chinese Market development

Since 20 years the Chinese economy has a very important

role in the international scene, and also continues to be

subject of contrasting reviews.

The surface of China is 9,671,018 km, making it the largest

state in East Asia and the population is approximately 20% of

the world: China is the most populous country in the

world.

The importance of China in the XXI century is reflected in

its role as second largest economy to GDP after United

States.

China Trade patterns

China: Rapid export growth involving aggressiveincreases on world market shares, based onrelocative capital attracted by cheap labour andheavily subsidized infrastructure.

India: Lower rate of export growth, with cheaplabour due to low absolute wages rather than publicprovision and poor infrastructure development. Soexports have not yet become engine of growth,except in services.

INTRODUCTION

SOUTH AFRICA STOCK MARKET (FTSE/JSE)

Stocks in South Africa had a positive performance during the last

month. South Africa Stock Market (FTSE/JSE), rallied 121 points

or 0.28 percent during the last 30 days. From 1995 until 2013,

South Africa Stock Market (FTSE/JSE) averaged 16444 Index

points reaching an all time high of 44454 Index points in

September of 2013 and a record low of 4308 Index points in

September of 1998. The FTSE/JSE All Share Index is a major

stock market index which tracks the performance of all companies

listed on the Johannesburg Stock Exchange in South Africa. It is a

free-float, market capitalization weighted index. The FTSE/JSE

All Share Index has a base value of 10815.08 as of June 21, 2002.

Economic Overview of South Africa

South Africa—middle-income, emerging marketwith abundance of natural resources.

◦ World's largest producer of platinum, gold,chromium

◦ Possess well-developed legal, communications,energy, transport, and financial sectors; with astock exchange that ranks among the 10 largestin the world.

◦ Employment by sector:

agriculture 30%, industry 25%, services 45%

FDI’s Presence in South Africa

TodayWhat makes South Africa an attractive climate for foreign

investors?

Substantial market with significant growth potential

Economy moving towards market orientation

Access to other markets in Africa

Well developed financial institutions and capital markets

Excellent communication and transport links

Lower labor costs compared to industrialized countries

Inexpensive electrical power and raw materials

Strong macroeconomic policies

BUSINESS OPPORTUNITIES

IN THE GREEN ECONOMY

Natural Resource Management

Low Carbon Foods

Green Tourism Accreditation

Rural-based / niche Tourism

Renewable Energy Production - Wind & Biomass

Green Building Design and Construction

Efficient Transport Systems + Increased Public Transport

Efficient Planning of Towns and Cities

Developing Niche Markets in Retail / Manufacturing Sector

Sustainable Waste Management i.e. Reduce, Reuse & Recycle

Expansion of Environmental Consulting, Policy and Research

Green Procurement

Green Social Responsibility Opportunities

HYPOTHESIS

Null Hypothesis

H0 = There is no significant relationship between Brazil and other

select indices.

H0 = There is no significant relationship between Russia and other

select indices.

H0 = There is no significant relationship between India and other

select indices.

H0 = There is no significant relationship between China and other

select indices.

H0 = There is no significant relationship between South Africa and

other select indices

DATA ANALYSIS &

INTERPRETATION

Methodology

Study the Performance of Risk and Return behavior of indices

Beta (CAPM) Capital Assets Price Model .

CAGR (Compound Annual Growth Rate).

Correlation.

T-test, etc.

DATA ANALYSIS &

INTERPRETATIONIn this study, daily returns, without any adjustment for

dividends, has computed by using this formula:

Rt = ln(Pt / Pt – 1)* 100

Where:

Rt = is the daily return at time t of the and Islamic

Benchmark Indices {The IBOVESPA(Brazil), MICEX(Russia),

BSE-Sensex (India), SSE Composite index (China), The

FTSE/JSE(South Africa) }

Pt = is the daily price in time period t.

Pt-1 = is the daily price one period t-1.

DATA ANALYSIS &

INTERPRETATION

Compound Annual Growth Rate

= Start Value,

= Finish Value,

= Number of years.

EMPIRICAL RESULTS

Risk and Return behaviour of The IBOVESPA (Brazil),

MICEX (Russia), BSE-Sensex (India), SSE Composite

index (China), The FTSE/JSE (South Africa) from 1st Jan.

2010 to 30th Sept. 2013

This part of study narrated the risk and return behavior all

Emerging Islamic Indices. The daily return of Ismlamic

Benchmark Indices{The IBOVESPA (Brazil), MICEX

(Russia), BSE-Sensex (India), SSE Composite index

(China), The FTSE/JSE (South Africa) } were calculated as

natural logarithm of today price divide by tomorrow price.

EMPIRICAL RESULTS

Table 1: Performance of BRICS Stock Market from

1st Jan. 2007 to 31st Aug. 2013

The table 1 explain the respectively of Brazil indices is lower as compare

to the volatility of other remain benchmark indices, However, CAGR of

Sensex (India) is greater then the CAGR remain all benchmark indices.

Hence, South Africa indices is less risky than other remain benchmark

indices. But growth of Sensex (India) is increase because of India have

third rank in world economies growth after China and United States.

Indices Returns Volatility CAGR

Brazil 0.0131 27.4846 0.1340

Russia 0.0464 32.1400 0.4693

India 0.0252 30.6868 0.2525

China 0.0254 44.1961 0.2692

South Africa 0.0218 31.3303 0.2248

EMPIRICAL RESULTS

Table 2: Performance of Beta between Brazil and

Other Selected Indices

The table 2, described the results of the beta with respective to Brazil

Indices. The beta value of Brazil Indices over the Other Selected Indices

are 0.54, 0.21 and 0.09 that means that 54% , 21% and 9% movement in

india, China, South Africa are dependent on market movements and rest

of 46%, 29% and 81% depends on the other factors. But Brazil & Russia

beta performance shows the negative impact.

Indices Beta

Brazil & India 0.5475

Brazil & Russia -0.2530

Brazil & China 0.2127

Brazil & South Africa 0.0953

EMPIRICAL RESULTS

Table 3: Performance of Beta between Russia and


The table 3, described the results of the beta with respective to Russia

Indices. The beta value of Russia Indices over the Other Selected Indices

are 0.18,and 0.23 that means that 18% and 23% movement in india and

China are dependent on market movements and rest of 82% and 77%

depends on the other factors. But Brazil & South Africa beta performance

shows the negative impact.

Indices Beta

Russia & Brazil -0.5366

Russia & India 0.1853

Russia & China 0.2375

Russia & South Africa -0.4815

EMPIRICAL RESULTS

Table 4: Performance of Beta between India and


The table 4, described the results of the beta with respective to Indian

Indices. The beta value of Indian Indices over the Other Selected Indices

are 0.42, 0.67 and 0.15 that means that 42%, 67% and 15% movement in

Brazil, Russia and China are dependent on market movements and rest of

58%, 33% and 85% depends on the other factors. But India & South

Africa beta performance shows the negative impact of market movement.

Indices Beta

India & Brazil 0.4251

India & Russia 0.6786

India & China 0.1517

India & South Africa -0.1168

EMPIRICAL RESULTS

Table 5: Performance of Beta between China and


The table 5, described the results of the beta with respective to China

Indices. The beta value of China Indices over the Other Selected Indices

are 0.18, 0.09, 0.17 and 0.42 that means that 18%, 9%, 17% and 42%

movement in Brazil, Russia, India and South Africa are dependent on

market movements of rest of 88%, 91%, 83% and 58% depends on the

other factors.

Indices Beta

China & Brazil 0.1893

China & Russia 0.0997

China & India 0.1739

China & South Africa 0.4205

EMPIRICAL RESULTS

Table 6: Performance of Beta between South Africa

and Other Selected Indices

The table 6, described the results of the beta with respective to South

Africa Indices. The beta value of South Africa Indices over the Other

Selected Indices are 0.06 and 0.36 that means that 6% and 36% movement

in Brazil and China are dependent on market movements of rest of 94%

and 64% depends on the other factors. But Russia and India beta

performance shows the negative impact of market movement.

Indices Beta

South Africa & Brazil 0.0613

South Africa & Russia -0.1464

South Africa & India -0.1315

South Africa & China 0.3616

EMPIRICAL RESULTS

Table 7: Correlation between Brazil and Other

Selected Indices

The table 7, described The study of relationship between Brazil and other select

indices indicates that, null hypothesis is rejected and alternate hypothesis is

accepted in all the cases. Hence, there is a significant relationship between Brazil

and other world major indices. In all the cases, correlation is significant at 1% level

of significance, indicating strong integration of Brazil market with major world

stock markets. Though, the correlation of Brazil stock market is Moderate with

India and the correlation of Brazil stock market is weak with Russia, and China

market also, But Brazil & South Africa is showing the strong relationship. The

statistically significant as it is revealed in t-test.

Indices CorrelationLevel of

Correlation

T-test result

t-value p' value Hypothesis Accepted

Brazil & India 0.4825 Moderate 0.0400 0.9600 H1: Accepted

Brazil & Russia -0.3685 Weak -0.1010 0.9120 H1: Accepted

Brazil & China 0.2006 Weak 0.5630 0.5720 H1: Accepted

Brazil & South

Africa 0.7640 Strong 0.7650 0.4430 H1: Accepted

EMPIRICAL RESULTS

Table 8: Correlation between Russia and Other

Selected Indices

The table 8, described The study of relationship between Russia and other

select indices indicates that, null hypothesis is rejected and alternate

hypothesis is accepted in all the cases. Hence, there is a significant

relationship between Brazil and other world major indices. Though, the

correlation of Russia stock market is Weak with all the selected Indices.

The statistically significant as it is revealed in t-test.


Correlation

T-test result


Russia & Brazil -0.3685Weak

-0.1017 0.9190 H1: Accepted

Russia & India 0.1121Weak

0.1387 0.8897 H1: Accepted

Russia & China 0.1539Weak

0.5503 0.5822 H1: Accepted

Russia & South Africa -0.2656Weak

0.1221 0.9028 H1: Accepted

EMPIRICAL RESULTS

Table 9: Correlation between India and Other

Selected Indices

The table 9, described The study of relationship between India and other



relationship between India and other world major indices. Though, the

correlation of India stock market is Moderate with Brazil and rest of all

three stock market Russia, China, South Africa relationship with India’s is

Weak. The statistically significant as it is revealed in t-test.


Correlation

T-test result


India & Brazil 0.4825 Moderate -0.0423 0.9662 H1: Accepted

India & Russia 0.1121 Weak -0.1387 0.8897 H1: Accepted

India & China 0.1624 Weak 0.5567 0.5778 H1: Accepted

India & South Africa -0.1240 Weak 0.5750 0.5654 H1: Accepted

EMPIRICAL RESULTS

Table 10: Correlation between China and Other

Selected Indices

The table 10, described The study of relationship between China and other



relationship between China and other world major indices. Though, the

correlation of China stock market is Weak with all the selected Indices.

The statistically significant as it is revealed in t-test.

Indices Correlation Level of CorrelationT-test result


China & Brazil 0.2006 weak -0.5638 0.5730 H1: Accepted

China & Russia 0.1539 weak -0.5503 0.5822 H1: Accepted

China & India 0.1624 weak -0.5567 0.5778 H1: Accepted

China & South Africa 0.3899 weak 1.3850 0.1663 H1: Accepted

EMPIRICAL RESULTS

Table 11: Correlation between South Africa and


The table 11, described The study of relationship between India and other



relationship between South Africa and other world major indices. Though,

the correlation of South Africa stock market is Strong with Brazil and rest

of all three stock market Russia, India, China relationship with India’s is

Weak. The statistically significant as it is revealed in t-test.

Indices Correlation Level of Correlation

T-test result


South Africa & Brazil 0.7640 Strong 0.7659 0.4439 H1: Accepted

South Africa & Russia -0.2656 weak 0.1221 0.9028 H1: Accepted

South Africa & India -0.1240 weak 0.5750 0.5654 H1: Accepted

South Africa & China 0.3899 weak 1.3850 0.1663 H1: Accepted

EMPIRICAL RESULTS

Table 12: Correlation Matrix of BRICS Stock

Market

The tables 12, In comparing the returns of the All BRICS indices that

mean the relationship between of all benchmark indices show the level of

relationship like strong, moderate, weak. This relationship is very similar

to the result of Ahama and Ibrahim (2002) in Malaysia and P. Natarajan

and M. Dharani (2011).

Indices Brazil Russia India China South Africa

Brazil 1

Russia -0.0368497 1

India 0.0482478 0.01121 1

China 0.0200617 0.01539 0.01624 1

South Africa 0.7640113 -0.2656 -0.124 0.3899394 1

EMPIRICAL RESULTS

Table 13: Descriptive Statistics for BRICS selected

Indices

The table 13, Russian Stock Market has witnessed greater fluctuations

which have been indicated by very high variation followed by Brazil,

China and India market index. In the case South Africa has shown very

low fluctuations. Skewness of the distribution of all the indices prices is

negative except Indian Stock market.

Indices Minimum Maximum Mean

Std.

Deviation Variance Kurtosis Skewness

Brazil -12.096 13.677 0.0200 1.9937 3.9747 6.1323 -0.0254

Russia -31.237 15.460 0.0293 2.9033 8.4289 12.7849 -0.8639

India -11.604 15.990 0.0171 1.7568 3.0862 7.7811 0.2496

China -9.256 9.034 -0.0202 1.8808 3.5373 2.9694 -0.3566

South Africa -4.252 4.094 0.0429 1.1532 1.3298 1.0575 -0.1575

CONCLUSIONS:The results of this study strongly support the view that,

there is a substantial integration between Indian and

International financial markets. Russian Stock Market has

witnessed a greater fluctuation which has been indicated

by a very high Co-efficient of variation compared to other

select indices. Sensex, the Indian bench mark index, has

shown Moderate association with all selected indices. In

the case of CAGR Indian Stock market has growing in

Comparison of All Selected Indices. In the case of

volatility Russian stock market is more volatile in

comparison of all selected Indices. In the case China,

according to volatility and CAGR is growing average

position out of the other selected indices. But according to

Goldman Sachs, The ten largest economies in the world in

2050, China will be the first position.

RECOMMENDATION AND

SUGGESTIONSThe BRICS growing importance for the world economy is reflected by

various economic and demographic indicators. These include

Their increasing share in world GDP share in world trade openness and

increasing forex reserves.

Their foreign direct investment (FDI) inflows and outflows.

These projected long-term growth trends pose many opportunities and

challenges for businesses in China, India, Brazil and the other emerging

markets highlighted in our study will become not just low cost production

locations but also increasingly large consumer markets.

BRICS have 45% of global population, near about 30% of global

economy.

BRICS has every possibility to have a robust foot print in coming day’s

multi-polar world order.

The BRICS share in world trade has also improved significantly over the

last two decades, from 3.6% to over 15%.

RECOMMENDATION AND

SUGGESTIONSTheir shares have also increased, with Brazil’s share rising from 0.8% to 1.2%,

Russia’s from 1.5% to 2.3%, and India’s from 0.5% to 1.8%. South Africa is the

only country in the group whose share in world trade has remained constant over

the last two decades and also future prospective trade will increase.

Within the BRICS countries, China accounts for the highest share in both

population and economically active population.

India, though having second-highest population, shows a relatively lower

percentage of economically active compared with Brazil and Russia in the group.

BRICS economies will be in a more favorable position in 2020.

BRICS countries have a great opportunity to meet the future demands of the

world.

They will, in fact, become the worldwide sourcing hub for a skilled workforce.

They account for almost three billion people, or just under half of the world’s

total population.

The Goldman Sachs clearly indicates that by 2050 the BRICS countries will

become the world’s most important economies, replacing the US as the biggest

economy.

Questions Answers

Economy & Finance

Irfan mumbaPerformance of Global Stock Market Intgration: Empirical Evidencce from BRICS Stock