Characteristics of bonds and equity markets Equities Bonds high - - PowerPoint PPT Presentation

characteristics of bonds and equity markets
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Characteristics of bonds and equity markets Equities Bonds high - - PowerPoint PPT Presentation

Characteristics of bonds and equity markets Equities Bonds high volumes low net purchase pattern Low Volumes, high net purchase patterns, suggesting a strategy based on suggesting a strategy with short-term long holding periods


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SLIDE 1

Characteristics of bonds and equity markets

Low Volumes, high net purchase patterns, suggesting a strategy based on long holding periods

the less volatile component of portfolio flows

Equity investors put emphasis on equity valuation (e.g. knowledge base, the depth and the movement of the equity market.

Equity investors are more attracted by floating exchange rates – fixed or stable exchange rates tend to overtime undermine competitiveness and hence profitability leading to reduced returns on equity investments. The value of the equity tends to be maintained in real terms when exchange rates depreciate. When investments are in the export industries, even the dollar value of the equity investment is robust to depreciation.

Equity investments tend to return to countries hit by crisis when asset prices are low

high volumes – low net purchase pattern suggesting a strategy with short-term

  • horizon. Transactions motivated by

arbitrage opportunities and short-term interest fluctuations

the more volatile component of portfolio flows

Bond investors look at indicators and aggregates related to real yield (e.g. current accounts, currency movements)

International investors in domestic (emerging) markets are more interested in fixed or stable exchange rates – stable exchange rates work to safeguard the value of the principal, for investments in fixed interest securities, enabling investors to benefit fully, in the case of fixed exchange rates from the risk premiums in emerging market interest rates.

Bond investors act more nervously than equity investors

Equities Bonds

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SLIDE 2

F o rm o f ca p ita l flo w C o st C o n d itio n a lity R isk -sh a rin g In tellectu a l Im p a ct o n V u ln e ra b ility p ro p erty in vestm en t to R eversa l O fficia l M D B s L o w to su b -co m m ercial Y es O n ly in tere st risk S o m e N o rm a l C /I b reak d o w n N o B ilateral Z ero to lo w U su ally O n ly in tere st risk S o m e N o rm a l C /I b reak d o w n N o P riv a te F D I H ig h est P o ssib le Y es Y es 1 0 0 % p lu s M in im al P o rtfo lio eq u ity H ig h N o Y es N o S u b sta n tial L im ited S u p p lier cred it S u b -co m m ercial N o N o N o N o rm a l C /I b reak d o w n N o B an k cred it: S y n d icated C o m m ercial N o N o

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N o N o rm a l C /I b reak d o w n Y es, d ep en d in g o n m atu rity T rad e cred it C o m m ercial N o N o N o N o rm a l C /I b reak d o w n M in im al In ter-b an k C o m m ercial N o N o N o N o rm a l C /I b reak d o w n E x tre m e B o n d s C o m m ercial N o N o

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N o N o rm a l C /I b reak d o w n Y es, d ep en d in g o n m atu rity a) E x cep t th at a fix ed in tere st rate p laces in tere st risk o n th e le n d er. S o u rce: W illia m so n (2 0 0 1 )

A summary of the properties of different forms of capital flows

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Is FDI necessarily a good thing?

the volatility of FDI provides little information about the volatility of the capital account

an increase in FDI has not made capital accounts more stable

areas of doubt exist around the sustainability, herding and the risk of servicing the liabilities which FDI creates

Foreign investors can hedge their earnings and protect the value of their assets

  • r

engage in outright speculation by borrowing locally and pledging physical assets as collateral and buying foreign assets and/or foreign loans

equity can be traded, with little distinction between the long term and short term

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Sequencing the Composition of Capital Flows

Very poor countries would be better off with official assistance, FDI directed towards natural resources and trade credit. The next stage involves the previous flows plus bank finance in the form of syndicated credits to the sovereign and FDI for purposes

  • ther than natural extraction. Middle income countries can

include portfolio equity and bonds- new investors: pension funds and mutual funds, access foreign banks and issue foreign bonds and trade shares on developed country markets. In the final stage of development access to the interbank market, certificates of deposit and commercial paper. It is a stage when investment banks and hedge funds become active. The more expensive forms of capital inflow are worth the additional costs as a higher interest rate pales into insignificance in comparison to the cost of capital.