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CONTENTS

INTRODUCTION 4

Chapter 1. Features of Financial markets: definition, essence, main features 7

1.1. Financial markets 7

1.1.1. Definitions of Financial markets 7

1.1.2. Functions of financial markets 10

1.1.3. Types of financial markets .12

1.1.4. The regulation of financial markets: causes and goals 12

1.2. The concept stock market: 14

1.2.1. Securities market 14

1.2.2. The Functions of securities market 15

1.2.3. Stock market as a component of the securities market 16

1.3. Future prospects of financial markets 20

Chapter 2. Financial markets of BRICS. Features of stock market of BRICS 23

2.1. Financial Markets of BRICS. 23

2.2. Stock market of BRICS 32

2.3. Situation on stock market 47

Chapter 3. Financial market of RF. Features of stock market of RF 56

3.1. Financial market of RF 56

3.2. Stock market of RF 67

3.3. Future prospects of stock market in RF. 71

CONCLUSION 75

LIST OF LITERATURE 78

APPENDICES 80

INTRODUCTION

The global financial market has been widely developing and currently plays a leading role in the functioning of the international economic system. The financial markets have a number of important functions in the economy. These include the accumulation of capital, savings income, controlling function, retribution and many others. More of them will be revealed in this work. In addition, there are several types of financial markets which will be discussed deeply in this paper. Properly regulated financial markets provides effective economic development. At the state level it is a very important part of the regulation. In particular, investors can make the right decisions about the attachment-targeted investments.

The role of the BRICS in the modern financial world can not be overlooked. The BRICS members are all developing or newly industrialized countries, but they are distinguished by their large, fast-growing economies and significant influence on regional and global affairs. As of 2013, the five BRICS countries represent almost 3 billion people, with a combined nominal GDP of US$16.039 trillion, and an estimated US$4 trillion in combined foreign reserves. Therefore, the BRICS play a huge role in the financial markets. When came a recession of the 2008 financial crisis, China, India and many other developing economies continued to post strong growth, helping to prevent the world economy from tumbling into an even deeper and more painful downturn. As the U.S. and Europe struggled to recover, talk that the giants of the developing world were destined to take their place at the top of global economic and political affairs accelerated.

Today there is a growth of the subjects of the global financial market. Increased competition for the last twenty years among global companies and financial institutions has led, on the one hand, to the increase of efficiency of functioning of the global financial market, and, on the other hand, to the increasing requirement for financial institutions from the point of view of economic efficiency of their activity. Therefore, the importance of research on this topic leaves no doubt.

It is important to note that the5 practice of operation of modern financial markets in foreign countries may not be fully adapted to Russian conditions and possibilities. In Russia's financial markets are still in early development. For this, Russia needs to do a lot of preparatory and organizational work at the level of the state structures, experts, financiers, and entrepreneurs and consultants. However, the government bond market is so far the only developed segment of the financial market in Russia. I think this is a normal stage in the development of the economy, and these will depend on the readiness of Russia and their appearance.

Therefore, in this paper will be reviewed financial markets of other participants of the BRICS. In addition, there will be given a comparative characteristic of the stock markets and their analysis.

The aim of this work is to study the main features of the financial market in BRICS countries on the example of stock market.

To achieve this goal it is necessary to solve the following tasks:

  • define the role of financial markets in the socio-economic development and its main features in BRICS countries
  • define financial markets and consideration of their classification
  • consider of financial markets on the example of the market of securities
  • review the impact of the global financial crisis and2other factors on the functioning of BRICs stock markets
  • define current challenges and problems for BRICS stock market.
  • identify problems related to the stocks market of Russia

The work has the following structure: introduction, three chapters, conclusion, list of literature and appendix. In the first Chapter, I discuss the financial markets in General, their functions, essence, types and role in the economy. As well I reviewed the securities market closer and traced the current trends and the future of financial markets. In the second3 Chapter. In the second3 Chapter I will discuss the financial markets of the BRICS countries and will consider them the example of stock markets. In the third Chapter, I will examine the situation of the Russian financial markets closer. Also monitor certain tendencies and prospects of stock markets and their importance.

The work is based on the following sources of information: books and scientific works, articles and research papers of Russian and foreign economists devoted to the studies of S.V. Nozdryov, Thomas Murray, Steffen Kern and others. Also web-sites and online resources, statistical data and reports of WFE , RBC economics research, the Department of research and information of the Bank of Russia, Center for capital market development Ernst and Young and others.

  1. Features of Financial markets

1.1. Financial markets

1.1.1. Definitions of Financial markets

The economy is complex system that requires quite careful and detailed study. This primarily connected with the fact that the economy is part of everyday life and primary function is the maintenance of human activity, creation of conditions for the renewal of the human family and the welfare of society. However, successful functioning of the economy is impossible without the coherent interaction of its economic structures, one of which is the financial market.

Before talking about the concept of the financial market, it is necessary to consider the components of these terms "Finance" and "market". The term "Finance" originally meant any monetary payment and its use in the future connected with the system of monetary relations between the population and the state for the creation of state monetary funds. Finance is the aggregate of monetary relations, which arise in the process of creating funds for entities of the public, private, community, and other entities of the state and using them for the purpose reproduction, incentives and social needs of society.

"The market" is the organization of the economy arising from natural development of economic relations; it is a universal form of interaction of the subjects of economic activity through which implemented the movements of goods, labor and capital in accordance with the changes of their yield.

Thus, the financial market is the market in which the interaction of economic entities and its demand, implement the supply of capital. A distinctive feature of the financial market from other markets is a subject of trade, as it is the buying and selling of money capital in one or another specific form: in the form of financial instruments or in the form of financial services. The main role in this market plays financial institutions, which guides cash flows from owners to borrowers.

The concept of the financial market is general. In fact, the financial market consists of several separate segments, which are significantly different from each other. These differences allow us to speak about the financial market as the complex of individual markets.

There are different segments of the financial market, classified by types of tradable financial assets, tools and services, in the forms of organization of procedures for the purchase and sale under the terms of transactions and other grounds. With all the differences of individual segments of the financial market, the object of transaction - is available cash.

The processes of formation and allocation of financial resources by means of special institutions determine the formation and functioning of financial markets. The basis of financial markets is a financial system, which in turn arises through the allocation of Finance as separate spheres of social reproduction process. As the social division of labor, with the development of trade and functions of money from various economic entities there are needs and incentives in a particular financial system that includes a variety of financial assets (or the tools of financial activity) and institutions.

The economic essence of financial assets is collective relations of economic agents regarding the formation, distribution, the rights to income and other benefits that are created in the real economy.

Financial assets include specific goods (tools) which are traded on financial markets. The main types of financial assets are: 1) money in national or foreign currency, 2) securities, 3) deposits, 4) credits, 5) insurance products, 6) precious metal

Structure of financial assets changes as market develops, the needs of the state, corporations and organizational possibilities for creation of financial instruments. In particular, the corporation as they develop, in addition to money bills, they use shares, bonds, warrants, mortgages and other instruments. The fundamental basis of the dynamics of the structure of financial assets include changes in the structure and cost of the manufactured real assets (goods and services).

By creating financial assets and selling economic entities is forming their financial obligations. Volume and structure of liabilities is determined by the specific properties of financial assets (tools).

The purpose of the financial system is the transformation of savings into investment, taking into account the interests and needs of different groups of economic entities. In the case of effective transformation of savings into investment occurs the totality of financial assets, adequate to the interests of the state, companies and population.

Finance performs the following functions: 1) distribution, 2) reproduction, 2) control, 4) stimulating, 5) information.

Based on the definition and functions of the financial market, it is possible to allocate following advantages: - The financial markets, including domestic market, allow economic agents on the one hand to receive higher rates of return, and on the other quickly obtain the necessary capital.

The financial markets allocate resources between users of resources effectively, identifying the most effective directions of their use. The financial markets have experienced a qualified intermediary between the seller and the buyer of financial instruments (by professional market participants). The financial markets varied in type and terms of the instruments, so they will able to cover all layers of the economic agents. The financial markets accelerate the turnover of funds, which helps boost economic processes, i.e. the development of the economy as a whole.

The Russian financial market is developing rapidly and has a high potential, which opens up great possibilities for investment. With the development of the financial system based on the actual movement of capital and as the institutionalization of financial relations are formed financial markets. Financial markets are an element of the financial system, including, in addition, public finance, financial companies, and a complex of financial institutions (commercial banks, insurance companies, private pension funds, investment funds, unit investment funds and others).

Financial market is a combination of the forms of special economic (fiscal) relations between different subjects over the formation and exchange of financial assets with certain institutional infrastructure, including specialized financial institutions. The essence of financial markets lies in the efficient allocation of savings between consumers of financial resources through the mechanism of exchange of financial assets with the help of special institutions.

1.1.2. Functions of financial markets

The functions of financial markets include:

- raise capital;

- savings;

- distribution of risks;

- insurance of financial risks;

- redistribution;

- regulating;

- control;

- information;

- pricing.

The function of mobilizing capital is realized through accumulation of capital and its accumulation with financial institutions in the interests of market participants and the national economy as a whole. The2 market's ability to perform mobilization function makes them particularly attractive for countries with developing economies, in which the amount of the proposed capital insufficient.

The savings function is implemented by purchase of financial assets (tools) with the purpose of receipt of income. Using savings institutions gives the opportunity for the world to receive additional income, and consumers to save a certain amount of investment.

The function of risk allocation is that - using a variety of financial institutions, financial infrastructure, risks of participants (investment, interest rate, credit etc) are redistributed, creating the possibility of a more sustainable and safe development. The function of insurance of financial risks (or hedging) is performed by entering into futures (futures, options, forward contracts).The redistributive function of financial markets is evident in the distribution of investments between their final customers. This function includes the mechanism of redistribution of funds between sectors and spheres of economy with the help of securities received on the primary market. Thus, financial markets complement the system of budgetary transfers and mechanism of direct funding.

The aim of regulatory function is to create the standard rules and regulations for the participants of the financial market, in the determination of the procedure for transactions with financial assets on the trading floors, in the definition of control and supervisory functions of the regulatory authorities. The control function is to control compliance with legislation, regulations for transactions with financial market participants.

Information function is realized by creation of information systems to bring the information to issuers, investors, regulators and other participants of financial markets. The amount of information about financial instruments, the market participants, the state of the markets (securities, loans, insurance), differentiated taking into account their specificity. Information essential role, as it is the basis for making investment decisions and issue of securities.

In the process of functioning of financial markets is implemented function of the pricing of financial assets based on the establishment and maintenance of movement of market prices for financial instruments, which is based on supply and demand.

The main suppliers of capital on the financial markets in modern conditions are the population and institutional investors. Among the last stand of collective investors (various funds: investment, pension), the aim of which are to accumulation of funds of small investors with subsequent transformation into investments.

1.1.3. Types of financial markets

Financial markets can be classified according to various criteria:

By types of financial assets (securities market, capital market, insurance market, the financial derivatives market, currency market). In turn, in each of the markets in financial assets it is possible to allocate separate segments. For example, the securities market can be represented in the form of shares, bonds, promissory notes or options.

On a territorial basis (international, national, regional financial markets).

According to the degree of organization (organized market functioning according to certain rules based on special financial Institute institutions (stock exchanges, banks), unorganized market, represented by a sphere of circulation of financial assets without observance of common rules for financial markets participants).

The type of organization (stock exchange and OTC). The exchange market, in turn, presents stock, currency, commodity exchanges. The OTC market is organized market based on OTC trading systems financial assets with the participation of brokers, dealers and appropriate technologies.

By way of placement of financial assets (primary and secondary markets in financial instruments).

Types of transactions (spot market - the market with immediate execution of transactions for a period of not more than two working days, and the derivatives market with the conclusion of transactions, the execution of which more than two business days).

Historically, financial markets have developed as a mechanism of interaction of investors (savers) and consumer’s capital of the banking system. Over time, the institutional structure of financial markets has changed, including new financial institutions and instruments. The efficiency of interaction of investors and issuers depends, first of all, on state of the financial institutions and instruments, organizational and technological conditions, level of development of legislation in the financial sector and the role of regulatory bodies. The way of financial markets to attract private capital, is primarily determined by their institutional device.

Depending on the combination of these factors in a country and the current configuration, there are two main models of financial markets. The first model of the organization of the financial markets requires participation of the population and special institutions as investors to the capital markets. This approach –“broad participation”– is a characteristic for the US and the UK.

The second approach to organization of financial markets focuses on the banking system. This type of financial market based on universal commercial banks that holds the major part of savings in the form of deposits, and their participation as buyers of shares and bonds of companies. This model of the financial market widespread in continental Europe (particularly in Germany), as well as in Japan. The Anglo - American model of functioning of the financial market (capital market with "participatory") is characterized by the following features:- issuing activity of corporations;

- a wide range of investors;

- high level of organization of the stock market;

- division of banks on commercial and investment.

European (or German) model of organization of the financial markets is characterized by the following features:

- active participation of banks in the securities markets;

- the use of bonds emissions as the primary means of raising capital on the securities market;

- in the active control of banks, industrial companies through ownership of shares.

1.1.4. The regulation of financial markets:

causes and goals

Importance of regulation of financial markets is evident. As a rule, unregulated markets may not be successful, economically optimal beneficial for participants of the market, and for the state. In this case, investors will not take the right decisions about the attachment optimal targeted investments, and risk of different levels will not be distributed throughout the economy properly. The danger is that in this case, increasing the rate of decline of one of the sectors of the market, which will entail a violation in the work of the whole financial system.

If the regulation of financial markets is maintained at the proper level, then investors will gain stability and economic benefits (resulting) from their investment. In such case, even the crisis and the risks obtained in economy will be more optimal and safe. For this reason, financial markets need a good competent regulation. Taking into account the complexity of providing services of such financial markets, their regulation of financial markets is much higher degree of regulation of financial services. The form and degree of regulation of any market different and sometimes even contradict each other, but there are some global model regulation. In all developed countries markets, including financial, inevitably subject to regulation. The main objectives of this regulation are:

1) identify weaknesses in a particular area of the financial market;

2) support the effective and orderly market segments;

3) protection of consumers of financial markets and services;

4) to stabilize the financial system and maintaining trust and confidence in its stability.

1.2. The concept stock market in the securities market.

1.2.1. securities market

In General, the securities market can be defined as a set of economic relations regarding the issue and circulation of securities between participants.

Classification of securities markets have many similarities with the classifications of securities themselves. So they are distinguished:

International and national markets of securities; regional markets of securities; the market for specific types of securities (shares, bonds, etc.,);the markets of governmental and corporate securities; the markets of primary and derivative securities. The meaning of one or another classification of the securities market is determined by its practical importance.

In that part, in which market securities based on money as capital, it is called the stock market. The stock market makes up a large portion of the securities market. The remaining part of the securities market due to their small size has not received a special name, and therefore often the concept of the securities market and the stock market are considered synonymous.

The securities market is part of the financial market. The other part of it is the market of Bank loans. Commercial Bank rarely makes the loan more than a year. Manufacturing securities, you can get a loan for several decades (bonds) or in perpetuity (shares).The securities market complements the system of Bank credit and interacts with it. Commercial banks provide intermediaries RZB loan for a subscription to securities of new issues, and those banks sell large blocks of securities for resale.

An important part of the securities market is the money market, at which turn short-term debt, mainly Treasury bills (tickets). Money market provides a flexible flow of cash in the Treasury of the state and allows corporations and individuals to earn income on their temporarily free funds.

Like any other market, RZB is the sum of the supply, demand, and balancing their prices. The demand is created by companies and the state, that lack of own revenues for financing investments. Businesses and governments are on RZB net borrowers (take more than lend), and net creditor is the population whose income for different reasons exceeds the expenditures for current consumption and investment in physical assets (e.g. real estate).

1.2.2. The Functions of securities market

The securities market has a number of functions, which can be divided into two group: the General market functions inherent in each market, and specific features that distinguish it from other markets.

The General market functions include:

1) commercial function, that is, the profit from operations in this market;

2) pricing function, i.e. the process of folding market prices, their constant movement and so on, informational function, i.e., the market produces and brings to its market participants information about the objects of trade and its participants;

3) Regulating function, i.e. the creation of trade rules and the participation in it, the procedure for resolution of disputes between participants, sets priorities, control authorities or even control etc.

The specific functions of the securities market are the following:

1) the redistributive function;

2) the insurance function of price and financial risks.

3) The redistributive function is conditionally can be divided into three sub functions:

4) the redistribution of funds between sectors and spheres of market activity;

5) the transfer of savings, first of all population of unproductive to productive form;

6) financing of the deficit of the state budget for non-inflationary basis, i.e. without issuance of additional funds.

As were said the insurance function of price and financial risks, or hedging, is possible by the emergence of a class of derivatives: futures and options contracts.

1.2.3. Stock market as a component

of the securities market

Part of the securities market, are based not one or the other type of securities, and the way to trade on this market in the broad sense of the word. From these positions are the following markets: 1) primary and secondary, 2) the organized and unorganized, 3) exchange and OTC, 4) traditional and computerized, 5) cash and term.

The primary market is the securities purchased by first owners, the first stage of the implementation process of the securities - the first appearance of the securities market, with specific rules and requirements. The secondary market is the conversion of the previously issued securities - the combination of all acts of sale or other forms of transfer of securities from one owner to another during the whole period of existence of securities.

The organized market of securities is their appeal on the basis of sustainable policies between licensed professional intermediaries - market participants - on behalf of other market participants. Unorganized market is the securities without observance of all the participants of the market rules.

The stock market is trading in securities on stock exchanges. The OTC market is the trading of securities, bypassing the stock exchange. The stock market is always an organized market of securities, as Forex trading is strictly by the rules of the exchange and only between exchange intermediaries, selected among all other market participants. OTC market can be organized and unorganized. The organized OTC market is based on computer communications, trade, and services for securities.

The trading of securities can be carried out on the traditional and computerized markets. Trading through a computer network, which bring together relevant stock intermediaries in the unified computerized market, could be characterized by:

The lack of a physical place where sellers and buyers, and, consequently, the absence of direct contact between them.

Full automation of the process of trade and services; the role of market participants is reduced only to enter bids for purchase-sale of securities in the trading system.

Cash securities market (or spot-market) is a market with immediate execution of transactions within 1-2 business days. Term securities market is the market on which consist of different types of transactions with maturity date in excess of 2 working days. Most often, the term of execution of orders is 3 months.

Size of market

In 2010, global stock market capitalization stood at $54 trillion, according to the McKinsey Global Institute’s report “Mapping Global Capital Markets 2011.” The outstanding global debt including public debt securities, financial institution bonds and nonfinancial reached $93 trillion - almost twice the capitalization of the equity market.

The size of the U.S. bond market is just under $37 trillion, finance professor Torben Anderson at the Kellogg School of Management says in “Volatile Assets” in July 2012. In comparison, the market capitalization of the U.S. stock market is about $21 trillion. (see pic. 1)

Picture 1 (source: the McKinsey Global Institute’s report “Mapping Global Capital Markets 2011.”)

The process of growth of financial assets was suspended global the financial crisis of 2007-2008. Fall of financial assets affected almost all groups of countries, except for Western Europe, where held by the governments the program of recapitalization of banks, which caused expansion of production of private debt. In particular, the level of support rose after the decision of the European Central Bank and Bank of England of using securitized assets as collateral for credits REPO. The renewed post-crisis growth of the world financial market restored the indicators of financial depth on the basic segments of the market in addition resecuritization loans.

Deepening of financial markets was defined as General trends

development and modernization of financial mechanisms and peculiarities of development regional markets. The catalyst of the growth of individual groups of financial products were: first, capital markets in Western and Eastern Europe, some Asian countries has undergone a major transformation, in particu

lar in the use of schemes full or partial privatization public and semi-public enterprises through public funding or sale to private companies. In addition, revaluation of the shares upwards after growth of their dividend yield. Secondly, the expansion of the stock market by issuing corporate bonds, securities backed by assets. Third, increasing deposits as a result of growth of incomes of the population, the new savings outlet products (certificates of Deposit and money market instruments)

Over the past thirty years, the volume of export of capital increased many times, when this main peak growth began from the second half of 90-ies and continued until the global financial crisis. Depending on the methodologies in assessing the most important components of this magnitude since the beginning of 90th years has increased from 28 to 30 times and was about 13-15% of global GDP. Despite the high inertia cross-border capital flows, the emergence of many new drivers, caused by network interaction in the markets, the degree and forms participation of major groups of investors have had a noticeable effect on the overall picture of formation and distribution of the movement of capital resources on key market segments and groups of creditors and debtors.

1.3. Prospects of financial markets

Financial markets are experiencing significant transition as a base for further growth in countries with high income. They are notifications of final extraordinary stimulus measures in the wake of the global financial crisis.

During the spring and summer of 2013, long-term interest rates on sovereign debt of the USA almost twice, as financial markets have reacted to the prospect of a tapering-off Federal reserve's quantitative easing policy. The sharp increase in U.S. yields caused a sudden adjustment of the portfolio of international investors from developing countries funds, which led to a significant reduction in capital flows. Most adjustments have played it to the end of August 2013. Stocks, bonds and currency markets, will recover22 or stabilize in the last22 months of the year. Gross capital inflows, which were recovered in the fourth quarter of 2013, the amount of foreign capital raised through new bonds, shares and syndicated lending of banks to 13.6% higher than a year earlier.

Unlike in the summer, when financial markets did not react, when the Federal reserve system of the USA2 has actually announced on December 18, and began to reduce the scale of quantitative easing policy (in early January 2014). Long-term U.S. Treasury Yields remained stable and volatility in the currency markets was low, suggesting that a large part of the reduction in dosage are already priced in in. However, this period of relative market calm was broken at the end of January, when the Argentine peso depreciated by 16%amid concerns about slowing growth in China has led to a sudden change in market sentiment. However, not so suddenly, global equity market has sharply weakened. Sell-off was concentrated among developing countries, including some that were already damaged in the summer of 2013. However, stock market losses in countries with higher income is almost has the same severe, indicating broad-based correction of the stock market, not the address recoil from the assets of developing countries. As at 14 February, the market seems to have stabilized, and recouped some of its early losses, with the stock market indexes in developing countries and countries with high income fell by about 3%starting from January 22.Although shock coincided with a further unwinding of the Federal Reserve’s quantitative easing program, apparently, were not called. The actual decision to continue narrowing of asset purchases was adopted on 29 January, after falling in the steel market and in line with market expectations. Unlike the mid 2013 episode, when the U.S. long-term interest rates increased by 130 basis points, but they have actually decreased by 20 basis points since the start of 2014. These developments suggest modest “flight to Quality” general rotation on the securities market with high-ranking government bonds.

Although developing countries ' spreads increased by about 35 basis points, the decrease in U.S. rates means that the profitability of expenses on loans and credits increased only marginally. Several larger number of developing countries devalued currencies in January of this year when compared to last summer, with new pockets of vulnerabilities is observed, in particular, in Eastern Europe and Central Asia.

Answering the currency and domestic inflationary pressures, monetary policy was tightened in several developing countries, since January 22. In particular, the aggressive increase of interest rates in Turkey have helped to stabilize its currency, and soon after a period of relative calm in the foreign exchange market. Interest rates apparently, not too tight, given the home.

Looking forward, the prospects are mixed. Financing conditions are likely to tighten further in the coming months, as monetary policy continued to normalize. This combined with the decrease of the growth differential between developing countries and those with high income level should translate into weaker capital inflows to developing countries this year. In General, the net inflow of private capital is projected to slow from $1.078 billion rubles (4.6% of GDP in developing countries) in 2013 to $1.065 billion rubles (4.2% of GDP) in 2014.

It is hard to predict if the global interest rate will rise more sharply than expected, or market volatility becomes the new norm. The growth in the US may adversely affect the yield of capital inflows to developing countries rose by about 50% in a few months, while persistent 10 point rise in the VIX index, a total market share of risk aversion, could reduce by about 30 percent compared to the same horizon (see Fig. 1 below).

Figure 1 (source: World Bank capital flow outlook)

  1. Financial markets of BRICS

2.1. Financial Markets of BRICS

Brazil

Brazil financial market is one of the most promising global markets right now. From 2003, the financial scenario of Brazil has been going through several positive changes. The worldwide markets of coffee, soybeans, iron ore and crude oil have developed considerably in the recent times. 

This has stimulated the growth of the financial markets of Brazil because these are the basic products and minerals, which are exported from the country. The prices of these commodities are on the higher side and this price-hike is becoming a boon for the Brazilian economy as the Brazilian traders are making good profits from the market and this profit is adding an additional edge to the investment sector. 

In Brazil, the huge surplus have replaced the trade shortages. The value of the Brazilian real is almost half the value of US dollar. On the other hand, the performance of the stock market of Brazil has been quite satisfactory. 

The Bovespa index touched the 52,750 points in May 2007 and the rise in the market is estimated at a rate of 18.2%. The financial market and the economic condition of any country are inter-related. In the previous years, the Brazilian economy is gaining momentum and in 2006 the total output was of $1.6 trillion. The next expected thing is the rise in the stock market. The Bovespa index of the Sao Paolo Stock Exchange has been doing very well. There are several shares from different sectors, which are providing steady growth to the Bovespa index. 

The Brazilian sugar industries are doing extremely well and the IPOs offered by these industries are the hot favorite of the market. These are attracting huge investment in the Brazil financial market from both the national and international investors. Apart from these, there are many other financial service-providing companies, which are also becoming popular among the investors operating in the Brazilian financial market. The foreign currency reserve of the country is also experiencing an upward trend.

India

Indian financial market is one of the oldest in the world and is considered to be the fastest growing and best among all the markets of the emerging economies. The history of Indian capital markets dates back 200 years toward the end of the 18th century when India was under the rule of the East India Company. The development of the capital market in India concentrated around Mumbai where no less than 200 to 250 securities brokers were active during the second23 half of the 19th century.23 The financial market in India today is more developed than many other sectors because it was organized long before with the securities exchanges of Mumbai, Ahmedabad and Kolkata were established as early as the 19th century. 

By the early 1960s the total number of securities exchanges in India rose to eight, including Mumbai, Ahmedabad and Kolkata apart from Madras, Kanpur, Delhi, Bangalore and Pune. 

Today there are 21 regional securities exchanges in India in addition to the centralized NSE (National Stock Exchange) and OTCEI (Over the Counter Exchange of India). However the stock markets in India remained stagnant due to stringent controls on the market economy that allowed only a handful of monopolies to dominate their respective sectors. The corporate sector was not allowed into many industry segments, which were dominated by the state controlled public sector resulting in stagnation of the economy right up to the early 1990s. 

Thereafter when the Indian economy began liberalizing and the controls began to be dismantled or eased out, the securities markets witnessed a flurry of IPOs that were launched. This resulted in many new companies across different industry segments to come up with newer products and services. 

A remarkable feature of the growth of the Indian economy in recent years has been the role played by its securities markets in assisting and fuelling that growth with money rose within the economy. This was in marked contrast to the initial phase of growth in many of the fast growing economies of East Asia that witnessed huge doses of FDI (Foreign Direct Investment) spurring growth in their initial days of market decontrol. During this phase in India, much of the organized sector has been affected by high growth as the financial markets played an all-inclusive role in sustaining financial resource mobilization. Many PSUs (Public Sector Undertakings) that decided to offload part of their equity were also controlled by the well-organized securities market in India. 

The launch of the NSE (National Stock Exchange) and the OTCEI (Over the Counter Exchange of India) during the mid-1990s by the government of India was meant to usher in an easier and more transparent form of trading in securities. The NSE was conceived as the market for trading in the securities of companies from the large-scale sector and the OTCEI for those from the small-scale sector. While the NSE has not just done well to grow and evolve into the virtual backbone of capital markets in India the OTCEI struggled and is yet to show any sign of growth and development. The integration of IT into the capital market infrastructure has been particularly smooth in India due to the country’s world class IT industry. This has pushed up the operational efficiency of the Indian stock market to global standards and as a result, the country has been able to capitalize on its high growth and attract foreign capital like never before. 

The regulating authority for capital markets in India is the SEBI (Securities and Exchange Board of India). SEBI came into prominence in the 1990s after the capital markets experienced some turbulence. It had to take drastic measures to plug many loopholes that were exploited by certain market forces to advance their vested interests. After this initial phase of struggle, SEBI has grown in strength as the regulator of India’s capital markets and as one of the country’s most important institutions. 

China

For the past 25 years, China has demonstrated phenomenal growth rate financial depth of the economy. The ratio of M2 to GDP increased from 24% in 1978 to 151% in 2007. In 1990, the ratio of M2 to GDP in China and Russia were approximately at the same level of 70%, but by 1995, in Russia it was reduced to 21%, while in China rose to 103%. In 2007 in Russia it was 32%. Such a level of financial depth puts China in a number of countries with the most developed financial systems. Such a high rate is related to a number of factors:

This is a very high savings rate (up to 50% of GDP).

Hard currency legislation and the system of regulation, which hindered care savings abroad or the emergence of savings in cash foreign currency (as in Russia).

The reliability of the banking system in the eyes of the population and credibility (and, again, was almost entirely state).

Relatively moderate inflation rates (average for the 1980s and the first half of the 1990s no more than 10% per year.

A surge in 17% took place in 1995, but in 1998 and 1999 saw deflation).

The relative scarcity of financial products (choice the population is small: either Bank deposits or shares).

The last circumstance contributed to the arrival of the Chinese population on the stock market. Population's deposits account for about half of the money supply. The share of domestic credit (banks ' credits to enterprises and households) in GDP reached 178% in 2003 (138% in 2007), which almost twice exceeded the indicator for US.

The majority of the financial assets of China is concentrated in the banking system. Bank credit remains the main source (80%) of financing of Chinese enterprises. The market of corporate bonds (non-financial companies) is virtually absent. The price of outstanding non-Bank corporate bonds is less than 1% of GDP. The issuance of shares as a means of raising capital enterprises until 2006 did not play any significant role. Dominant position in the banking sector is 5 state banks. In the late 1990s, their share in assets reached 60-70%. By 2007 it decreased, but nevertheless, over half of all assets of credit institutions. The top five are Industrial and commercial Bank of China (ICBC), the largest Bank in the country, initially, was responsible for the lending industry. Bank of China (BOC) is the second largest and most profitable Bank (traditionally, he was responsible for foreign exchange and foreign trade financing). Has a wide network of branches and subsidiaries .Construction Bank of China (CERs), traditionally the main sphere of activity is crediting of construction of infrastructural objects.

Agricultural Bank of China (ABC), as the name implies, was engaged primarily loans and development of the agricultural sector. Fourth in size, the weakest of the five largest. Bank of communications (BOCOM), founded in 1985, entered the group of the state banks in 2007, and previously belonged to the category of joint-stock commercial banks. Currently, all banks Big Five are diversified commercial banks operating in various fields. The total value of assets in excess of 3.8 trillion. $ . They have more than 200 thousand offices and approximately 1.5 million of employed people. For execution of target, tasks of the government in 1994 were created three specialized state Bank: the State development Bank, Agricultural development Bank and the Export-import Bank of24 China. They do not accept deposits, and are engaged in financing long-term projects at the expense of issue of bonds and loans of other banks. The second group of banks (about 14% of assets) in Chinese statistics is called "joint-stock commercial banks" (although 4 of the Big five is also a shareholder). Almost all - state (more precisely, with state control).The number of city commercial banks increased during 2003-2007 with 80 up to 124, urban and rural cooperatives, on the contrary, was reduced several times. Foreign banks are represented 440 institutions (including branches, the number has doubled over the 2003-2007), of which 29 - head of the company. At the end of 2006, according to the23 terms of joining the WTO, China has opened access of foreign banks to their markets and their share has increased to 2.4%.Thus, the peculiarity of the banking system of China is the complete dominance of state banks (or banks with state capital). The share of private banks in the assets does not exceed several percent. Conducted in recent years, policy change in the ownership structure (see below) in the near future will not lead to radical changes in its structure. Until 1995 in the basis of the credit policy of the banks were national priorities defined by the state authorities. Accordingly, the loans were not issued on a commercial basis, without assessing market efficiency. Even the commercial banks in the conditions of the credit expansion in the first half of 1990-ies, and later, are often not paid enough attention to the assessment of the borrower. This policy has led to accumulation of bad debts in the amount of 4 trillion.

Yuan at the end of the past decade (about 480 billion, about half of GDP in 1999). According to some estimates, the share of bad loans in the total loan portfolio of Chinese banks reached 50% in 1998. Perhaps, there was nothing similar in any major country in the world in the postwar period. The share of bad credits in the1 GDP of Japan and Korea in the late 1990-ies was 25-30%. Almost all the bad loans were associated with non-payment of state enterprises. Access of private enterprises to Bank loans was very limited. So, in the end of 1999, private enterprises received only 0,62% of all Bank credits and less than 0.5% of the loans of the state banks. And this despite the fact that in 1998, private enterprises gave 35% of industrial output. The government has developed a program for the rehabilitation of the banking system. In 1998, it released a special Treasury bonds for the amount of 270 billion Yuan (then approximately 33 billion), the proceeds of which were to recapitalize state-owned banks. In October 1998, the Chinese government has made the decision on creation of a special state management company, which would take his bad debts SBC. In April 1999 the company (called Cinda) started work. In future similar companies were created and for the three other major banks. The balance of these companies at nominal value were transferred to the loans granted before 1996 in the framework of the development policy (i.e. provided by the authorities ' instruction).

On average asset management companies manage to return 20% of the nominal value of bad loans, which, of course, demanded direct state support. Unlike Japan, where the national banks (including) led to the aggravation of the problem of public debt (156% of GDP in 2004), China has managed to maintain sound public finances. Moreover, commercial banks used their own reserves and capital in order to write off bad loans. Besides the obvious progress in reducing the share of bad loans in the current decade has significantly improved the quality of loans. The share of bad loans by commercial banks after 2000, is 2%, whereas in the 1990-ies some banks it reached 60% (and in General, repeat, - about 50%). The restructuring program-provided benefits, and by 2007 the share of bad loans in the total loan portfolio of the largest banks was reduced to 8%. In General, to date, the banking system of China has significantly improved all indicators of capital adequacy, quality of loans and other

The Financial Markets over the world have suffered from the problems of heavy inflationary over the last two decades the ‘China growth story’ has been nothing short of spectacular. As the fastest growing and one of the largest economies of the world China has witnessed a magical transformation from a stagnant command economy to a dynamic market economy. Private enterprise has brought about tremendous vibrancy in the Chinese economy but this whole process has been conspicuous by the absence of a regulate

d financial market. Apparently, the process of establishing a capital market structure requires a longer gestation than it does to set up an industrial base. The financial market is evolving in China quite rapidly but perhaps not as fast as one would like, given the size of Chinese industry. For an economy the size of China, growth has not been even with certain parts of the economy reaching first world levels of growth while other parts are still way behind. A case in point is the territory of Hong Kong and its financial market. The Hong Kong Stock Exchange is one of the world’s premier securities exchange and its index the Hang Seng, is also one of the most famous indexes of the world. Unlike most other prime financial markets of the world the Hong Kong financial market do not reflect the health of the Chinese economy. Partly due to history and also because the Hong Kong financial market has a distinct global dimension, it is not integrated to the Chinese economy as the other major financial markets are, to theirs. Therefore, despite the market capitalization of the Hong Kong financial market adding up to China’s GDP, it does not reflect the health of the country’s capital markets.

The Hong Kong securities exchange was established at the end of the 19th century and it is the sixth largest securities exchange in the world with a market capitalization of over USD 1.8 trillion. A total of 4,338 stocks are listed on the Hong Kong securities exchange.

Shanghai

The Shanghai securities exchange was established in November 1990 and is mainland China’s premier securities exchange with 837 listed companies and an investor base of 37.87 million in FY 2004. During the same time the total market capitalization of Shanghai securities exchange was RMB 2.6 trillion and the amount of capital raised amounted to RMB 45.7 billion.

Shenzhen

The Shenzhen securities exchange was established in 1990 and is the second most important securities exchange in mainland China after the Shanghai securities exchange. The Shenzhen securities exchange has 540 listed companies and 35 million registered investors with a market capitalization of RMB 1 trillion.

Additionally China has set up commodities markets with the potential to integrate in a single Chinese financial marketplace in the future.

Capitalization data. (Figure 2)

Figure 2 ( source: market capitalization by World Bank) graph made by author.

South Africa

Growth and improve of macroeconomic stability, lead to a significant inflow of private capital in South Africa. Strong growth prospects, improved macroeconomic management and improved political stability, as well as strong global demand for raw materials led to significant capital inflows in South Africa (of the Sahara shares).The capital market loos its size and liquidity, but still attract the interest of investors. Portfolio investments in equity and debt markets in Africa South of the Sahara is small, due to the low depth and liquidity of markets. Recently, however, higher productivity and improved access to the capital market began to attract foreign investors in search of higher profitability, given the record-low interest rates in developed markets and poor returns in more established emerging markets. Raging Eurobond issue. The increase in financial resources has enabled Africa to the South from Sahara countries to diversify its investor base and access to international bond markets on favorable terms. There is a growing activity in SSA the Eurobond market, with a few debut issues planned. EM sell-off increases borrowing costs", but demand remains. Expectations of reduced liquidity of the Central Bank in the USA has led to growth of yield on SSA bonds recently. SSA countries will likely have to cope with tighter credit conditions and attention from investors in the medium term, but the demand for SSA assets remained stable so far.

Sub-Saharan Africa’s strong growth performance , improvements in the business environment, ongoing economic reforms as well as robust commodity demand have drawn global investor attention to the continent. Combined with easy conditions in the global financial markets – record low interest rates in developed markets and ample liquidity – this has led to increasing private capital inflows to Sub-Saharan Africa over the last ten years. Private capital inflows, i.e. foreign direct investment and portfolio investment, to SSA increased sharply and nearly quadrupled from USD 13.2 bln in 2003 to USD 48.3 bln in 2012 (see chart 1). Foreign direct investment (FDI) continues to be the main conduit for private investment. In 2012 FDI inflows accounted for two-thirds of total private capital inflows. The nature of these FDI inflows, however, is changing. FDI is no longer directed exclusively towards extractive industries, but increasingly targets the rising African consumer market. Some of the most active sectors over the last few years have been consumer-oriented manufacturing, infrastructure and services.

2.2 Stock market of BRICs

Brazil

Figure 3 (source: tradeineconomic.com Index data)

Brazil (along with all of Latin America and most of the emerging markets) has been a horrendous stock market over the last three years.

After doubling in 2009, the IBOVESPA index began to sag the following year. Brazilian stocks are down 25% over the last three years and 20% just since the start of 2013 – a slow-motion crash that almost no one is talking about. The main reasons for this is the huge drop in commodity demand and the economic slowdown of its big trading partner, China. Much of Brazil’s growth output comes from selling commodities to the Far East and a lot of the economy is still dependent on that, although this will change.(Figure 3)

Another contributing factor to Brazilian stocks’ massive underperformance is the country’s current leadership. In 2011, Brazil elected its first female president, Dilma Rousseff, who also happens to have been a Marxist guerilla back in the day. The government has become highly involved with the massive commodity and banking concerns that dominate the Brazilian stock indices, sometimes to the point where it is actually issuing strategic or operational directives. These giant corporations, like Vale, Petrobras, Banco Do Brasil, Itau Unibanco and Banco Bradesco, make up a great deal of the market capitalization of the country’s stock market.

Petrobras, for example, is one of the worst-run, most mismanaged oil companies on the planet, including both private and other state-run concerns. There’ve been instances where its been forced by politicians to procure supplies and equipment from Brazilian suppliers rather than from the most competitive vendors. In terms of the banks, government officials are leaning on the ones they control and banks in the private sector all the time to achieve political aims. In the latest twist, foreign banks like Credit Suisse are being muscled out of the capital markets and issuance business thanks to a misguided attempt to steer more market share to local companies.

Brazil’s primary challenges at the moment are poverty and inflation. While millions have joined the middle class over the last 15 years, 13 million Brazilian households are still living in the subhuman conditions of the favela slums. This while the government builds world-class soccer stadiums to prepare for both the World Cup in 2014 and the Summer Olympics in 2016.  In the meantime, because the currency (the real) held up better than others from 2009 to 2011, it has gotten too strong and inflation has become an issue again. The Brazilian central bank has been hiking rates, attempting to bring inflation down below its 4.5% target. Most Latin American countries are deathly afraid of inflation given their epic battles with prices and default in the 20th century – this has meant extreme conservatism in monetary policy and, in recent years, subpar GDP growth.

In my opinion, these very real negatives are the signs of adolescence and economic immaturity that we can always expect to see as a developing country awkwardly finds its legs to stand up on. Trade protectionism and jittery financial bourses are eventually seen to be a passing phase as politicians are inevitably forced to understand the greater benefit of open markets, global influence and foreign investment. In addition, these negatives are very well known at this point.

The below chart of country market performance for the first six months of 2013 makes this abundantly clear. (see chart 2)

Chart 2 ( source: Halftime report “performance of major stock markets”)

The opportunity in Brazilian stocks from here forward looks excellent, although it could be years before investors – foreign or domestic – care to begin bidding them up. It is always difficult to say when sentiment will turn and “cheap” markets can remain cheap (or get cheaper still). 195 million people call Brazil home, making it the world’s fifth most populous nation (almost 3% of the global total).

Of this 195 million, the median age is a vigorously young 29 years old. The median age in the United States, by way of contrast, is more than a decade older at 39.5 and the median age in Japan is 44.6.

52% of Brazilians or almost 100 million people, are now considered to be in the middle class. This is a massive consumer base with more disposable income than ever.

The middle class wants to higher quality of life and is prepared to fight for it. Million of Brazilians took to the streets in late June and July in a massive awakening of consciousness the likes of which the world has ever seen. They want better health care, better public transportation and they mostly want to close the wealth gap.

Dilma Rouseff’s popularity has absolutely collapsed to 31% favorability down  from 54% between June and July. The people no longer believe in her or in her socialist party’s agenda. Only 33% of the country indicated that they would vote for her in the election next year and there are already three ot

her credible candidates waiting in the wings. Change, in this context, would be a positive.

On valuation, Brazilian stocks are now trading at a cyclically adjusted price to earnings (CAPE) ratio of 9.96.  This is compared to the United States stock market which is now selling for a CAPE of 22. For a closer comparison, Mexico now sells for a 19X cyclically adjusted PE while Peru and Colombia are both above 20. While valuation measures like the Shiller CAPE we’re discussing are not good timing tools, the research does suggest that investing in the countries with the “cheapest” CAPEs gives you a substantial performance advantage over portfolios that are heavily weighted toward the most popular (and hence, expensive) ones. Brazil probably should not trade below a CAPE of 10 times earnings, this is incredibly low relative to both the rest of the world and its own recent historical averages.

The opportunity for Brazil – both the nation and its stocks – is as plain as day: the rapidly developing middle class develops inwardly and begins to consume more and rely on exports less as the years pass by. A young, vibrant nation of people who want more for themselves and are no longer afraid to speak up for it is a tantalizing proposition. In this context, the ramp up to the Summer Olympics could be just the thing to re-introduce Brazil’s domestic potential to global investors once again after years of complete apathy.

It would seem to me that a successful equity strategy for Brazil would be to get long stocks,that play the consumption side of the equation and minimize exposure to the large cap mineral exporters that are so dominant in the mainstream country index. This can be done with both non market cap-weighted index ETFs or individual ADR positions.

Market opportunity of Brazil

In order to better comprehend the Brazilian economy today, it’s important to understand how the market has developed and modernized. As recently as the 1990s, the Brazilian capital market was struggling and losing ground to others due to the lack of protection for shareholders, uncertainties regarding investments, and lack of technological enhancements. With the lack of management transparency and adequate instruments to monitor companies, it gave off an impression of risk, which consequently increased the cost of company capital. In fact, between 1995 and 2003, there were only six initial public offerings in Brazil. Consequently, the Brazilian Stock Exchange was not used by companies to source funds and many Brazilian companies began to go to foreign markets, through American Depositary Receipts (ADRs).

Picture 2 (source: world federation of exchanges; world bank)

Then in 2000, the Brazilian stock exchange system began to unify and consolidate, led by Bovespa and eight other Brazilian stock exchanges. The capital markets recovered as a result of a series of very favorable macroeconomic events for the Brazilian economy. The number of IPOs rose dramatically, with over 100 IPOs between 2003 and 2011. During this timeframe, the merger of BM&FBovespa occurred, liquidity levels improved and stock prices rallied, prompting the market to embrace the self-deceiving belief that this exchange consolidation was allowing Brazilian equities markets to inch closer to major international markets in terms of performance.

In the last few years, however, new investment alternatives have been few and the economy has suffered without any real growth in retail investing. Despite a growing middle class in Brazil that is consuming more goods than ever before, the domestic capital markets are not representative of the economy as a whole. When compared to other exchanges, the monthly trading volume as a percentage of GDP of Brazil’s stock exchange is 2.4 percent, considerably below the 12.4 percent of key US markets such as NYSE and NASDAQ, and roughly three percent for key European markets. When broken down even further, approximately 50 percent of the volume traded is concentrated in only 10 companies in the Bovespa segment,

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