30 by yaofenji

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									                                 Capital markets




     The money trail
       Cross-border
                                  G
                                            lobal cross border capital      Capital crossing
                                            flows have soared to their       The growth in global capital flows was
       capital flows and                     highest level ever, with more
                                  institutional and retail investors
                                                                            due to technological advances and
                                                                            the deregulation of financial markets
       foreign holdings           moving millions of dollars around the
                                  globe everyday, according to a recent
                                                                            worldwide, enabling more investors to
                                                                            buy stocks and debts securities outside
       of financial assets         McKinsey Global Institute report.
                                      Cross border capital flows set a new
                                                                            their home countries, the report says.
                                                                            The capital flows included foreign
       are soaring.               record in 2005, topping US$6 trillion,
                                  driven by loans and debt securities.
                                                                            purchases of stocks and debt securities,
                                                                            cross-border lending and foreign direct
       Lee Chipongian             And just three regions – the U.S., the
                                  U.K. and Eurozone – shared 80 percent
                                                                            investment.
                                                                                 “Over the past five to 10 years,
       reports on                 of global capital flows, the economics
                                  think tank wrote in its report released
                                                                            financial innovations and deregulation
                                                                            have dramatically improved the linkage
       where the                  in January.
                                      Global financial assets also jumped
                                                                            between global savers and global
                                                                            investors,” says David O’Rear, chief
       money is going             to US$140 trillion, up 5.3 percent        economist for the Hong Kong General
                                  from US$133 trillion in 2004 and          Chamber of Commerce. “The result is
                                  more than three times the world’s GDP,    that savers earn more and investors pay
                                  the report says.                          less for their capital.”



[ 30 ] A Plus   +   April 2007
    Any increase in capital flows tends     securities. The U.S. had the biggest            While Asia (excluding Australia and
to benefit Hong Kong because of its         share of global financial assets in 2005    New Zealand) accounted for US$9.5
position as a leading financial centre,     worth US$47.6 trillion, compared to        trillion, the region is fragmented, the
along with London and New York,            Eurozone’s US$26.5 trillion, Japan’s       report says. Nearly three-quarters of
O’Rear says.                               US$17.3 trillion and the U.K.’s            China’s US$5 trillion in financial assets
    “[Hong Kong] has no shortage           US$6.7 trillion.                           are in bank deposits, for example, while
of business. Last year, we handled             The Eurozone recorded an               India’s allocation of its US$1.4 trillion
more IPOs than anywhere on earth,          especially robust growth, with an          of assets is more balanced, it says. Japan,
including the largest in history,” he      increase of US$3.3 trillion worth of       the third largest financial market in the
says. “If the liquidity and deregulation   financial assets in 2005. The growth        world, posted the single biggest equity
continue, there is every reason to         – mainly spread across France, Spain,      market gain in 2005 of US$1.5 trillion.
believe that the role of Hong Kong as      Germany, the Netherlands and Italy              For the third year running,
Asia’s only global financial centre will    – boosted the region’s financial depth      equities have outpaced debt securities
continue and expand.”                      to more than three times its combined      to account for the lion’s share of the
    Four markets came up trumps            GDP, representing a growth rate of 6       growth. Increasing equity volumes
out of 100 countries reviewed: The         percent a year over 10 years. There has    in 2005 deepened financial markets
United States, Eurozone, Japan and         been a shift away from bank deposits,      among the world economies by about
the United Kingdom. They accounted         with equities and corporate debt to        70 percent, the report says, giving
for 80 percent of all trades and           thank for nearly three-quarters of the     borrowers better access to capital, better
transactions in global bonds and           region’s 2005 growth in financial assets.   prices, and better risk sharing.



                                                                                                                 April 2007   +   A Plus [ 31 ]
                                                   Capital markets




     Liquidity means more security                  and leader of the research. “[But]           US$700 billion, Latin America gained
     Economists say increased capital flows          money is increasingly flowing to and          US$500 billion and India made US$300
     and greater liquidity in financial markets      from other smaller parts of the global       billion more in 2005. Asia Pacific and
     mean less risk for investors and               landscape as well.”                          Africa shared US$100 billion of financial
     their money.                                       In the last 16 years, capital inflows     stock growth during the same period.
         “When lots of people participate in a      from the United States and Eurozone               Private-debt securities grew
     market, the risks attached to any one of       to Latin America and Eastern Europe          everywhere in the world in 2005, but
     them – or a small group – withdrawing          have doubled, expanding 10.7 percent         the growth story was most significant
     are minimized. More liquidity means            per year.                                    in the U.S. Its private debt expanded by
     more security. When I want my money                The U.S. is still the world’s financial   US$1.3 trillion in 2005 against 2004
     back, it will be there,” says O’Rear.          intermediary with US$1.5 trillion            – compared to a US$400 billion increase
         But he says reduced risk also              of capital flows in 2005. According           in government debt – representing three
     translates into lower reward. “Risk versus     to the report, 85 percent of global          quarters of total growth in U.S. debt and
     reward: When one goes up, so does the          capital flows pass through the U.S.,          more than one-third of the total growth
     other, which means lower interest rates        representing more than US$500 billion        of U.S. financial stock (US$3.1 trillion).
     or [return on investment].”                    a year since 2001. Asia and Europe, in            According to a recent Deutsche
         In tracing the flow of capital around       the meantime, are the world’s largest        Bank report, Asia’s big boost this year
     the world, the report notes that Asian         net suppliers of capital, followed by oil    will come from local bonds. The bank
     countries have the largest links not with      producers Russia and the Middle East.        predicts that bonds will continue to
     Japan or Hong Kong, but with the U.S.,                                                      attract money, especially from offshore
     the U.K. and Eurozone, “underscoring           Emerging markets                             institutional investors.
     the lack of an integrated Asian financial       The geographic distribution of asset              The bank, however, warns that the
     market,” it says. And the fact that Japan’s    growth was remarkably even in                Asian debt market supply will still be
     capital flows are lower than China’s,           2005, the report says. The Eurozone          constrained by investors’ preferences for
     despite being the world’s third largest        contributed the largest share in terms of    equities or loans, especially given banks’
     financial market, illustrates just how          growth – 22 percent of the total – while     excessive liquidity and strong equity
     isolated the country is.                       the U.S. accounted for 20 percent and        market performance.
         “Cross-border capital flows [equity         emerging markets 21 percent. The                  Improved sovereign credit quality
     and debt securities, investments]              emerging market gaining the most was         and the favourable global economic
     remain concentrated [in] the world’s           China, which grew by US$800 billion.         environment will help aid Asia
     financial hubs,” says Diana Farrell,                Growth among emerging markets            Pacific governments to improve capital
     director of McKinsey Global Institute          was widespread. Eastern Europe reaped        flows. A+



[ 32 ] A Plus   +   April 2007
                                              Equity market




Payback time
The 1997 financial crisis may feel                                                         stock markets this year, says Andrew
                                                                                          Freris, chief economist and head of
like a long time ago, but many                                                            credit research at BNP Paribas Asia
                                                                                          Pacific. “Global equity markets remain
Asian markets have only just                                                              interlinked but differentiating regional
                                                                                          factors will become more important.”
returned to pre-crisis levels                                                                  Freris gives as an example the
                                                                                          fact that regional interest rate cycles
By Lee Chipongian                                                                         are generally out of synch with those
                                                                                          of the bigger economies, the U.S.
                                                                                          in particular. He says this is good,


I
     n markets like China and Hong           U.S. rates are expected to start easing.     considering that economists are
     Kong, stock-picking opportunities       The biggest risk to Hong Kong is an          predicting a consumer recession in
     are abundant and are expected           economic slowdown in China, says             the U.S. – and consequent export
to remain positive during 2007,              Hui, who calls the risk remote.              slowdown. Also, differing interest rate
due to strong liquidity and good                 However, the Shanghai and Hong           cycles give investors currency arbitrage
fundamentals. And across the region,         Kong bourses are displaying record           opportunities.
says DBS Group Research, stock               equity prices – and a Hong Kong                   Asia has always been considered
markets will continue to trade higher –      correction could be due, says Hui.           a short-term traders’ market because
led by Hong Kong and Singapore. DBS              “While the current valuation             of its high volatility. But this appears
is forecasting returns of 10 percent in      may not be consistent with a bubble,         to be improving. “Volatility has fallen
the months leading up to June.               a period of consolidation, or even           in the last four years [on] improving
     As expected, China’s story will         correction [for Hong Kong equities],         fundamentals,” DBS market analyst
continue to be a good one. Stephen           should not be ignored given the              Joanne Goh says.
Green, senior economist at Standard          backdrop of the slowing global and                In fact, Asia’s comparative valuation
Chartered Bank, says China’s economy         regional economy,” Hui warns.                in terms of growth premium and price-
will have excess liquidity in 2007, an           A potential positive for the region as   earnings valuation still fares better than
expanding current account and more           a whole will be a weaker link between        most developed markets. The returns
cash chasing assets.                         the fortunes of the U.S. and Asian           on equities are catching up and relative
     “The stock market will suffer a                                                       volatility is below the historic average.
short-term correction when short-                                                              Overall it seems like good times
selling of index futures is allowed in the                                                ahead for Asian stocks, particularly
first half of the year, but will recover                                                   Chinese ones, especially given the new
with robust profitability growth,”                                                         strength of China’s bourses.
Green says.                                                                                     As of January, the Hong Kong
     As for Hong Kong, says                                                                  Stock Exchange ranked sixth in the
Tai Hui, another economist                                                                    world by market capitalization. The
at Standard Chartered Bank,                                                                   Shanghai Composite Index, with a
the territory’s interest rates will                                                           market weighting of almost US$1
decline and liquidity will be                                                                trillion, recently proved that just like
ample, especially in the third and                                                           New York, when it sneezes, the rest
fourth quarter of the year when                                                            of the world catches a cold. A+



                                                                                                                     April 2007   +   A Plus [ 33 ]

								
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