Stock Market Trends in the Big Four Nations Underlying BRIC - Thesis Proposal Example

?Investigation of the factors that cause a co-movement among BRIC, the biggest 4 emerging market in the world Table of Contents 3 Introduction 4 Overview of the emerging markets and BRIC 5 Overview of the stock market linkages and co-movements 9 Data and Methodology 10 Time Table 11 References 12 Bibliography 13 Abstract The present paper deals with the degree to which the stock market trends in the Big Four nations underlying BRIC had been behaving over the years. BRIC encompasses some of the highest developing nations in the world which are commonly termed as emerging nations or transition economies. An evaluation of the factors which affect stock market fluctuations have been discussed in the present paper. The actual emphasis had been over the factors which relate the stock market indices between these four nations. Given their urgency in development and economic growth, all of them tend to possess similar demands owing to which their stock market indices correlate strongly. One of the most important factors which tend to affect all of them is fluctuations in oil prices since oil is the most important fossil fuel necessary for technological improvements. Other important factors which account for their stock market linkages are similarities in the political and cultural aspects of all four nations. The soaring popularity of these nations is reflected through betterment in their respective market sizes as well as economic growth rates. This trend is noted particularly due to improvements in the investment inflows within these nations over the past few years. One of the strongest points which have been elaborated in the present paper is the limited liberalisation that these nations have allowed to their peers. Unlike the advanced economies which had opted for complete liberalisation since a long time, these developing nations are yet to free their boundaries and this partial freedom is an essential reason why external economic crises could not touch the emerging nations as could be evinced from the recent subprime crisis. Introduction BRIC is a phrase that jointly represents the four emerging economies of Brazil, India, Russia and China respectively. The term was formulated in 2001 owing to a positive correlation in the macroeconomic trends of these four nations. In fact, when the Chief Economist of Goldman Sachs, Jim O’Neill proposed the name, he had cited the qualitative outcome of a prolonged research which established that these four nations will eventually emerge as global ‘powerhouses’ by 2050 (Kowitt, 2009, ‘For Mr. BRIC, nations meeting a milestone’). The connotations about the potentials of these nations had been recognised by 2008 when the bloc attained 15 percent of net global output in contrast to the expectations posed by Goldman Sachs. However, the nations did not attain a homogenous growth over time as predicted by the researchers; while Brazil and Russia went forth in a fast paced growth path, the road to development had not been as smooth for China and India. The stock market trends depicted 35% and 21% deterioration in terms of US Dollars for China and India respectively between 2007 and 2008. However, stock market index for Brazil had been up by 7% while that for Russia had been 6% which could be counted as fair compared to the two Asian nations (The Economist, 2008, ‘Another BRIC in the wall’). This trend had been continuing since 2008 as shows the diagram alongside even though they portray similar stock market trends. The stock market indices being considered are Ibovespa for Brazil, RTS for Russia, S&P CNX 500 for India, and the SSE Composite for China recorded between October, 1990 and October, 2009 (An & Brown, 2010, p. 17). A direct implication of the above diagram could be the presence of a robust association between the four emerging economies, which actually forms the background of the present paper. Purpose of the present paper will be to guide the investors willing to invest in BRIC nations. An examination of the linkages between stock market movements of these nations could prove beneficial for speculations by investors especially the venture capitalists. Relevance of the issue could be recognised especially post the subprime crisis when most of the nations withdrew capital from a large number of major investments. One of the primary reasons which could be cited behind a co-movement in stock price indices of the BRIC nations is that given all of them are posited over a common plane, a possible factor affecting any one of them is likely to affect them all. For instance, a hike in the price of oil could hamper their technological frontiers substantially thus blocking their economic growth process. A similar issue which could affect the stock price indices of emerging nations could be exchange rate fluctuations. Given that most of these nations are dependent on export revenues and investment inflows, changes in their currency values could prove beneficial for the economies (Gay, 2008, p. 3). The point is that all of these nations are characterised by similar features core to those of emerging nations which might be the reason why investors across the world try to evaluate the trends in all of them through investigating the same in any one. Overview of the emerging markets and BRIC Emerging markets are those which are undergoing a process of increased industrialisation owing to rapid globalisation activities. These economies are new to the process of informationalisation and are fresh in the foreign community. Their fundamentally unexplored nature is one of the reasons why most of the nations are easily lured towards investing in them. In general, emerging nations are those which decided to open up to the world, post globalisation of 1990s hence inviting the developed nations to set forth their foot within their premises. Their unexplored frontiers and rich resource endowments have drawn foreign investors in these economies because of to which they are witnessing immense economic growth rates these days. However, these nations have not yet opened up completely which is why they are not as much vulnerable to exogenous shocks as is the case with the developed nations who had opted for liberalisation long before 1990s. Two of the fastest such emerging nations are China and India which have managed to sustain the major subprime crisis of 2008 due to their relatively protected financial structure. However, the impact of the crisis was profound upon the developed nations of the world who had long since opened up channels to all their assets and resources. Actually, emerging economies too are treading along a similar path; the only difference between these economies and the developed ones is the time when these two groups of nations decided to lay open their barriers. Since economic liberalisation, which is yet another name for globalisation, is a prolonged process, the emerging nations of today are susceptible to such shocks sometime in the future. These economies are still undergoing the process of relaxing their respective trade barriers so as to improve their connectivity with the world. On an average, the BRIC nations had been the advocates of trade liberalisation amongst the developing nations of the world between late 1980s and early 1990s. Among the Big Four BRIC nations, Brazil and Russia had been the advocates in relaxing their respective trade barriers. India had been characterised by high tariff rates till early 1990s but removed the same post 1990s to rates lower than those prevailing in OECD nations. China, historically known as one of the most conservative of all nations throughout the world, too relaxed high tariff rates in certain regions of the economy which later came to be known as Special Economic Zones (SEZs). Post liberalisation, the BRIC nations accounted for some of the highest economic growth rates around the world (OECD, 2009, p. 2). Hence, a fundamental characteristic of an ideal emerging nation is promotion of trade liberalisation which not only invites the foreign investors within domestic premises but also catalyzes the amount of commodities and services circulated across the globe which assists in accelerating the rate of economic growth of the concerned nation. Another essential feature of emerging nations are that the respective administrative bodies target to frame foreign policies and strategies which suit the needs of foreign investors as much as possible in order to compensate for opportunity costs incurred previously. One of the commonest of policies which emerging nations tend to implement is that of providing tax incentives. This is the very factor which has resulted to a flood of foreign direct investment inflows within these transition nations which have considerably influenced the stock market trends in these nations (Easson, 2004, p. 10-11). The BRIC nations, which account for the four major emerging nations in the world today, had been forecasted to be liable for 10 percent of the world’s total assets by the end of 2010 though the region already possesses 15 percent of global possessions. These nations which are still looming in their transition phases, however account for some of the fastest rates of development in the world which is evident from the fast pace at which their respective market are expanding. BRIC nations accounted for more than 15 percent of FDI inflows back in 2005 (Sarkar, 2009, p. 123). A growth in the size of the market could be evinced from the change in Global Competition Indices of these nations. As the underlying table shows, there had been a significant improvement in Brazil in terms of GCI when it moved up 8 positions between 2008-09 and 2009-10. India and China too witnessed marginal improvements in the field. The only exception had been Russia which deteriorated remarkably as evident from a fallback in its rank by 12 positions in the respective aspect (Schwab, 2009, p. 27). Source: Schwab, 2009, p. 27 The expanding size of the market of BRIC nations is evident from the stock market trends that these nations had been displaying over the years. Speaking in obvious terms, a rising trend is indicative of high investment demands in the concerned nation and thus, higher inflow of capital. This is in contrast to periods of recession which are characterised by shortfalls in capitalisation and hence, stock market slumps. The BRIC nations enjoyed a remarkable uplift in their respective stock indices in 2003 with a 150 percent hike in the overall stock index (Sarkar, 2009, p. 123). This fact is obvious given that BRIC nations accounted for raising capital worth more than US $ 106 billion in 2007 through Initial Public Offerings (IPOs). Precisely, out of the top 20 IPOs issued in 2007 across the globe, 14 had been in the emerging economies of the world thus demonstrating the extent of popularity that these nations had been gaining over the years (Kvint, 2009, p. 130). A high degree of stock market activity implies privatisation moves by a large extent which is beneficial for stock market trends given that a high degree of privatisation opens the door for greater foreign capital inflows. Source: The Market Financial, 2011, ‘Some BRICs are crumbling’ Their expanding size of market is reflected in the accelerated rate of economic growth that the region had been witnessing over the past few years. Recent statistics put down the contribution BRIC nations to global economic growth have expanded by 28 percent between 2000 and 2005 in terms of US Dollars and 55 percent in terms of PPP. They have also improved in the frontier of international trade which has jumped up to 15 percent by the end of 2005 in contrast to almost marginal rates in 2001; trade within them has also enhanced remarkably as the 8 percent figure shows. Demand for oil had also been spurring high in these BRIC nations given that in 2005 it rose up by 18 percent than what it had been in 2004. These nations could be rated highly in terms of potentials given that almost 30 percent of the world’s monetary reserves are concentrated in BRIC nations. Yet these nations maintain a low rate of exchange of their respective domestic currencies which is primarily in accordance with their target to maintain current account surpluses (Sarkar, 2009, p. 123). Overview of the stock market linkages and co-movements Stock market indices of nations are often found to move in conjunction with each other owing to the innate properties that these nations have in common. Such is the case for BRIC nations which are referred together owing to the common stage of transition that all four of them belong to. Stock market fluctuations generally take place due to differentiated amounts of investments flowing in and out of a nation. During periods of economic crisis, foreign as well as domestic investors are indulged in bearish activities which lead to a massive capital flight from the recipient nations. Their activities are contrasted during periods of boom when capital flows in thus shooting up stock index prices. Given the nature of investors who tend to speculate the price movements in one emerging market to be mirrored in another one, trends in stock prices are reflected for all emerging nations. Furthermore, the unexplored nature of these economies push investors belonging to developed economies attempt to survey their potentials and eventually identify their strongholds. With instruments of globalisation seeping into these nations, the endeavours of entrepreneurs are eventually realised simultaneously for all nations which assist in their stock market movements. In addition, emerging economies are always in a rush to develop and grow faster than their counterparts which keep on pushing them towards implementing better technologies requiring an intense use of fossil fuels such as oil. Hence, stock market indices in emerging economies are highly susceptible to oil price fluctuations and thus, eventually seem to develop a correlation between each other. As these economies are highly dependent upon international trade and foreign investment inflows, fluctuations in rates of exchange throw immense impact over the stock market values of these nations. The association has been found to be quite significant for Brazil, India and China although it is not so for Russia (Gay, 2008, p. 4). Another reason been quoted by Goldman Sachs Chief Economist Jim O’Neill was the immense potentials of these nations owing to their demographics. The factor resources which these nations are enriched with are likely to be reflected in terms of increased productivity and thus better prospects for liberalisation (Kowitt, 2009, ‘For Mr. BRIC, nations meeting a milestone’). Political and cultural aspects are found to be quite similar for the BRIC nations, which are cited as one of the reasons why there is a strong association between their respective stock indices. Emerging nations know the exact areas where they need to maintain their strongholds in order to improve economically. This is the reason why they tend to maintain low rates of inflation, sturdy rates of exchange and interest rates as well as other macroeconomic policies which assist in inviting foreign investors in these nations. Furthermore, the emerging nations have also eventually realised the importance of enhancing the quality of their resources which is why they are highly emphasising over the degree of education in their respective nations. In order to develop the qualitative factors, the nations are inviting foreign direct investments to complement domestic resources (Wilson & Purushothaman, 2003, p. 14). This is factor has also helped in enhancing the market capitalisation of these nations. In general, the BRIC nations too had historically been found to portray stock market trends similar to each other. Records since the past two years for instance show unparalleled growth in respective economic stock indices of all four nations even though there had been changes in the innate features which contribute to the economic growth and development of the respective economies. While India and China had been pinning up highly on their low cost of labour owing to a large population base, the stock market trends for Russia and Brazil are found to be functions of high commodity prices and energy endowments. Given the ultimate target of excelling for all four nations, India and China receive high foreign demand for labour from Brazil and Russia which could produce their commodities for cheap. Due to the high demand they receive, GDP values of China and India automatically soar up and so does those for Russia and Brazil (The Economist, 2008, ‘Another BRIC in the wall’). Given a communion in their political, economic, cultural and military aspects, the BRIC nations have gained significant influence through the globe eventually (Hirst, 2008, p. 93). Data and Methodology The present paper deals with the association in stock market fluctuations in the Big Four emerging nations of the world, which are essentially phrased as BRIC considering the initials of the four component nations – Brazil, Russia, India and China. Given the purpose of the paper to enlist the factors which actually lead to stock market fluctuations in these nations, collection of data and the methodology to be employed have been elaborated as follows. One of the most important factors considered to be affecting stock price fluctuations is the price of oil, followed by demographic, political and cultural similarities. However, as the latter three factors cannot be quantified effectively through any single proxy variable and that too for all nations taken together, the only variable to be included will be oil price fluctuations. The second objective will be to study the associations between the stock markets of the four nations. Hence, the stock price records for Ibovespa in Brazil, RTS in Russia, BSE Sensex in India, and the Shanghai Stock Exchange Composite in China will have to be counted upon. The data to be collected will be between the period since 1995 and 2011 on a daily basis. Daily data has been preferred over weekly or monthly records given that stock markets are quick to react to shocks arising in any corner of the world and also recover speedily. Hence, records collected with long intervals are likely to overlook such subtle changes. In order to assess the degree of association between the stock market prices in the four nations underlying BRIC, a bivariate Pearson’s correlation analysis will be made between each of the pairs being formed. With four variables, there will be 6 correlation coefficients in the present case. In line with the above research, a strongly positive association is expected between all four variables. The software to be used in this regard will be MS-Excel. Time Table Task-1 24 March, 2011 Collecting Data Task-2 25 March, 2011 Performing Correlation Task-3 26 March, 2011 Analyzing the results References An, L. & Brown, D. (2010). ‘Equity Market Integration between the US and BRIC Countries: Evidence from Unit Root and Cointegration Test’ [PDF]. Research Journal of International Studies, Issue 16. Available at: http://www.eurojournals.com/rjis_16_02.pdf (Accessed: March 22, 2011). Easson, A. (2004). Tax incentives for foreign direct investment. The Netherlands: Kluwer Law International. Gay, R. D. (2008). ‘Effect Of Macroeconomic Variables on Stock Market Returns for Four Emerging Economies: Brazil, Russia, India, And China’ [PDF]. International Business & Economics Research Journal, Vol. 7 (3). Available at http://www.cluteinstitute-onlinejournals.com/PDFs/911.pdf (Accessed: March 22, 2011). 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