Developing and Emerging Markets Flashcards
What systems are used to classify markets as Developing or Emerging?
1) FTSE Russell
2) MSCI
The book uses FTSE Russell
Give an example of a difference between FTSE Russell and MSCI
Poland is developed undering FTSE and emerging under MSCI
What are the four categories of criteria that FTSE Russell uses?
1) Market and Regulatory Environment
2) Custody and Settlement
3) Dealing Landscape
4) Derivatives
What measures fall under Market and Regulatory environment for developed economies?
1) High Income (measured by GNI per capita)
2) Authorities who monitor the markets reguarly
3) Fair treatment of minority shareholders
4) Developed equity market
5) Developed FX market
6) simple or no registration for foreign investors
What measures fall under custody and settlement for developed economies?
1) Trade failures are rare
2) Competition in custody to ensure good service
3) T+2 or shorte settlement
4) Free settlement available
5) Omnibus custody for international investors
What measures fall under dealing landscape for developed economies?
1) Brokerage competition for good service
2) Liquidity to support sizeable investments
3) Short sales permitted
4) Stock lending permitted
5) off exchange trading permitted
6) Good transparency / visibility of market depth
What measures fall under Derivatives for developed economies?
Developed derivatives market
What two ways can markets be defined as Emerging?
1) Markets classified by the World Bank as low or middle income
2) Markets with stock market capitalization of less than 2% of total world capitalization
What two types of emerging markets exist under FTSE Russell?
Advanced
Secondary
Give examples of Advanced emerging markets
Greece, Mexico, South Africa, Turkey, Brazil
Give examples of Secondary emerging markets
China, Egypt, India, UAE, Saudi, Brazil
What are frontier markets?
Pre-emerging marktes
Under-researched
Under-owned
Why are frontier markets attractive to some investors?
Low correlation to developed markets
Higher long term return potential
An investor must be able to take on more risk as these countries are less liquid
Give examples of frontier markets:
Morocco, Kenya, Nigeria, Malta, Mongolia, Serbia, Vietnam
What are the 3 main world indices?
FTSE World
MSCI World Index
MSCI All country world index
How do FTSE World and MSCI world differ?
FTSE: 4100 names, 50 countries, 90% of market cap
MSCI: 1500 names, 20 countries
How does FTSE world and MSCI ACWI differ?
ACWI includes smaller countries such as luxembourg which FTSE exlculdes
What is the use of world indexes?
Benchmark for global / world stock funds
What are the two major US stock exchanges?
Nasdaq
NYSE
How does the NYSE work
Open outcry market
Brings together buyers and sellers
50% of volume done electronically
Calls to adopt a hybrid structure
How does the Nasdaq work?
Electronic exchange
3300 companies - tech heavy
Market makers undertake trades
Home to high growth, new and volatile names
What two parties are responsible for settlement in the US?
1) Depository trust company (equities, corporate bonds, munis and money marktes)
2) Federal Reserve (Govt Securities & Bonds)
Give points about US settlement
The Depository Trust Company (DTC) hold in book form
85% immobolised
Have the right to ask for physical certificate
First CD issued electronically in 2021
Effors to remove physical certificates
Why do the DTC want to end physical certificates?
1) Security
2) Efficieny
3) Cost Saving
4) Reduce manual operational risk
What is the US settlement cycle
t+1 as of end of may
Govt securities already t+1
What is the main market in Japan?
Give 3 points about it
The Tokyo Stock Exchange
3800 listed companies
3rd largest exchange
Split into 3 categories
What are the 3 segements of the TSE, how are they defined?
Prime - Global companies
Standard - Companies with good enough liquidity to be investable and practice corporate governance
Growth - companies with high growth potential
Give points about how the TSE is ran:
Electronic auction system
No market maker - buyers and sellers matched directly
Price controls to stop swings - trading in a name can be supsended if volatile
What is the settlement period in japan?
T+2
T+1 for JGBs
JASDEC for securites and BOJ clear JGBs
What is the main german exchange?
Deutsche Borse
Combines both floord trading and ecn to maximise liquidity
What is Xetra?
Deutsche Borse ECB - matches buyers and sellers using qualified traders
Traders ensure the market is liquid and optimal pricing
Who provides custody and settlenment in Germany?
What is the settlement cycle
Duetsche Borse own and operate Clearstream
T+2
What is the DAX?
How has it recently changed?
Blue Chip german index
30 -> 40 names
Positive EBITDA for 2 years required
Annual and quarterly accounts must be published (audited)
Give benefits to investing in overseas / emerging markets
1) rapid economic growth (drive to improve financial systems and infrastructure
2) Low correlation of returns (stop portfolio being monopolised)
3) Attractive valuations
4) Wider industry exposure
5) Inefficient pricing
Give drawbacks to EM investing
1) Low Liquidity
2) Governance / Operational risk (bribery) (lax regulation)
3) FX Risk
4) Volatility
5) Settlement and custody problems
6) Controls on foreign ownership (China and Japan)
7) Taxation / repatration
What did Goldman say about BRICs?
By 2050 they will eclipse combined richest economies
Brazil Russia India China
They account for large swathes of population and land
What is brazil’s index and stock exchange?
Bovespa Index - 90 names traded
B3
Bovespa is 80% of last 12 months trading volume
How many brazilian market segments and what regulations??
6 Segments
25% free float untli 7th year
Nivel 2 requires english statements
all segments subject to a corporate governance code
What is Russia’s main exchange?
Moscow Exchange Group
Merger between MICEX and RTS
Who runs settlement and clearing in Russia
National Settlement Depository and National Clearing Centre
What is settlement for russian securities?
Equities T+2
T+1 Ruble denominated t bills
T+0 for all other debt
What has HMRC done to the Moscow Exchange group
HMRC has revoked the status of MEG as a recognised exchange.
What are the two main Indian exchanges?
National Stock Exchange
BSE (formerly bombay stock exchange)
BSE oldest in Asia and has 5300 companies (futures and options are traded)
Listing requirements for BSE:
1) IPO - paid up 10 crore and 3 crore for follow on IPO
2) Minimum issue size 10 crore
3) Market cap minimum 10 crore
1 crore is 10mil rupees
What is Indian NSE?
Screen based automated trading - SMEs, equity, debt and derivatives
Created to improve settlement systems and reduce risk of fraud
What index measures the NSE
How many companies on the NSE?
2100 companies
Nifty 50
What are the 3 chinese exchanges?
Shanghai Stock Exchange
Shenzhen Stock Exchange
Hong Kokg Stock Exchange
In terms of China - what are A shares?
RMB / Yuan denominated - available to PRC residents and QFII
In terms of China - what are B shares?
Quoted in USD or HKD - available to non-residents
In terms of China - what are H shares?
Chinese companies floated on the HK exchange. Denominated in HKD.
A+H Exist which traded on both a chinese onshore exchange and HK
What is a QFII
China’s requirement for foriegn investors to purchase A shares.
What is the criteria for being a QFII?
Limited to 10% ownership in a single company
25% collective limit
Why is QFII being expanded and how?
this was expanded to include institutions from London, HK, Singapore etc. It was expanded even further in 2018 to increase foreign capital investment.
QFII and RQFII schemes aim to enhance foreign investor confidence and participation in Chinese financial markets
RQFII for renmimbi denominated trades
What are the two south african markets?
Johannesburg Stock Exchange
JSE ALTx
Established during the gold rush - trades originally happened in tents on saturdays when mining was paused
How has the JSE changed?
, the JSE transitioned to an electronic trading system
expanded by acquiring the South African Futures Exchange (SAFEX) now providing markets in equities, bonds, and derivatives across financials, commodities, and interest rates.
What is AltX?
an alternative exchange designed to support small and medium-sized high-growth companies and foster entrepreneurship within the country.
