среда, 31 августа 2011 г.

Stock Market Development and Performance in the Emerging Economies - is a new research of SKOLKOVO

In the course of just one decade, equity markets in the emerging world have flourished and have become critical sources of finance for emerging market businesses. It is arguably the most important development in international finance during the past decade.

In the new SIEMS research report you will find an overview of recent stock market development in the emerging markets (Part III), stock market characteristics of the BRICs (Part IV) and also big analytics chapter: evaluation of equity performance in the emerging markets and discussion of risks (Part V).

In this brief review we will give key statements, analytical results and SIEMS experts’ conclusions.

An overview of stock market characteristics of the BRICs

The authors of the research have conducted an examination of the world’s largest companies by equity market capitalization across eight major business sectors (basic materials, energy, industry, consumer staples, financial, utilities, telecommunication and technology) and reviewed how many companies from each country are presented in it.

As a result, you can evaluate not only a power of stock market in each country, but also a nature of that power (i.e. a dominant sector).

CHINA. China has just 27 listed companies ranked in the top 50 in each of the eight major sectors by market capitalization (i.e. – out of a possible universe of 400 companies). A financial sector is most presented (8 out of 50), which is related to an enormous state support (via massive bailouts and state directed lending) and some recent large IPOs.

RUSSIA. Accounting for only 10 listed firms, Russia has the smallest number of public companies among the BRICs in the top 50 across the eight sectors. Not surprisingly, the energy sector accounts for half of these 10 giants. The gas export monopoly Gazprom has the largest equity market capitalization in Russia followed by oil giant Rosneft.

Almost two-third of Russia’s stock market (RTS index) capitalization comes from the energy sector. As a consequence, there is almost perfect correlation between energy prices
and movements in the Russian stock exchange.


BRAZIL. Brazil has a total of 16 listed companies in the top 50 across the eight sectors. It has 4 banks among the world’s 50 largest banks. In basic materials it has two steel and iron makers in the top 50 and mining giant.

INDIA. Of the BRIC countries, India has the most equal division between the eight major sectors. India has 13 companies ranked in the top 50 (within their respective sectors) with basic materials, industry and technology accounting for most of these.

All-in-all, the BRIC countries currently account for 66 listed companies ranked within the top 50 largest across eight business sectors. While this is a doubling in their numbers since 2005, 36 of these companies are state owned and comprise two-thirds of total market capitalization.

The world’s top 100 companies, ranked by market capitalization, are listed in the appendix of the Paper.

Evaluation of equity returns and discussion of risks

In orthodox financial theory, corporate earnings are expected to account for a roughly constant share of national income over the long-run (i.e., — a full business cycle), implying that dividends should grow at a similar pace to the overall economy. As a consequence, fast-growing economies are expected to experience faster growth in real dividends, and in turn, higher
stock returns. Is it right?

Figure 8 ranks the real equity returns of 19 countries over the period (1900-2009), from lowest to highest, while comparing them with real dividend and real per capita GDP growth. As you can see, real dividend growth (adjusted for inflation) has lagged behind real per capita GDP. And the supposed strong positive correlation between long-run real growth in per capita GDP and real equity returns is completely nonexistent.

 
As Table 1 shows, even among the largest emerging market countries last decade, when they were all experiencing historically unprecedented growth spurts, there was actually negative correlation between per capita GDP growth and average annualized returns


Reasons why economic growth may not translate into better equity performance are detailed further in this research (Part V, p.22).

However, if this correlation is ambiguous, is there another one? On analyzing data on stock market and stock returns for the last decades – with recessions and economically unstable periods taken into account – the authors of the research have come to the following conclusion.

Over the last 25 years, emerging market equities have always outperformed developed market equities when emerging economies were growing faster than the developed economies and they underperformed when the reverse was true.

Evaluating equity returns is meaningless unless it is accompanied with a discussion of risk, or the underlying volatility of stock prices. And from this point of view, it is necessary to admit that emerging markets as an asset class remain significantly riskier than developed markets

Read the full text of SIEMS research report here.

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