Emerging Markets Heading for Banner Year - Essay Example

Emerging Markets Heading for Banner Year Literature Review: It was estimated by international Finance Corporation that the emerging markets must face the challenges about the macroeconomic stability, corporate governance, environmental issues and social matters. The analysis linking the above mentioned issues to emerging stock markets was done by IFC, the private sector arm of the World Bank Group.1 International analysts feel that the emerging markets are capable of attaining growth at high standard if they act a group. The dynamism can be reflected even in acting as a group. This is due to the similarity in their needs and activities. The significant problem that was found and expected by all analysts in different studies was the uneven growth in the emerging markets. The reason for this was predicted due to unplanned agenda. Different studies and analysts wrote that the unfinished or unplanned agenda was due to the lack of planning for the future and due to the following of the already emerged markets. According to executive vice president of IFC Thunnel the flow of private capital was estimated as $350 billion, which is 4 times more than the flow of international aid into those countries. This change can be termed as critical in making the economies grow and to emerge as new markets. The emerging stock markets in developing economies can cause the development of financial and aid organisations like multilateral banks, foundations, non profit organisations. The emergence of stock market due to the economic growth will create an entrepreneurial approach for every development. The emerging stock markets are capable of bringing out small and women entrepreneurs from the trap of internal economy according to Thunnel in a study by International financial corporation. The growth rate of developing economies was double than the developed countries. This resulted in flow of the capital into those countries. Even equity funds are flowing into the stock markets of the developing countries. The inflows into the stock markets of the developing markets were capable of lifting the stock markets above the level of $5 trillion. The emergence of stock markets at a new level is creating and was created in some regions, the market for mutual funds. This can be termed as growth indicator of the economy. The study by international financial organisations revealed that there is a need to bolster the stability by strengthening the domestic financial institutions. They suggest that, this can be done by deepening the local currency markets. For this it was felt that the improvement of corporate governance is necessary. It was written by IFC that the role of it in the emerging markets has pioneered foreign direct investments. This according to IFC created the first equity funds for developing countries and the share market boomed. When we consider a particular region of emerging markets several African countries implemented the structural adjustment programmes. The structural adjustment and liberalisation policies were termed as fundamental prerequisites for the emerging markets that result in emergence of stock markets. The economies boomed, and the stock markets emerged as a result of the liberalisation policies. 1 Analysis: The real development of developing countries started from the portfolio flows into the developing economies. This enabled the stocks to pick up in 1996. The preliminary estimates provided by the World Bank’s Global Development Finance reveal that $45.7 billion flowed into the emerging stock markets till 1996 after 1993. The increase in 1996 is significant. This resulted in increase of share and stock prices and developing of banking sector and financial organisations in the developing countries.2 The developing economies attracted the foreign portfolio capital due to emerging markets. This inflow of the direct investments resulted in stock booms. In some minor cases in Asia like India some crashes of stock exchange indexes occurred but after that even in that country and all the other countries the stock markets continued to grow. According to latest news, Indian stock market (BSE: Bombay Stock Exchange) crossed 14000 point level. Before 1996 the index used to oscillate between 3000 to 5000. The remarkable development is due to the development of economy, the earning of profits by the companies, the distribution of the profits to the share holders, the flow of foreign direct investments in to the stock markets of the developing countries. Coming to India, where in 90s stocks crashed due to the illegal manipulation of share prices, reached a high of 14,000 points to the week lasted on 9th December 2006. At the starting of the year the index was at 9000 points. Though the index stands high there were no celebrations. The reason is that the analysts in India and other developing countries felt that the market is over valued. This made them to act cautiously. But the common investor who got good returns from the market continued to invest in the market. This resulted in unusual and a healthy growth. The fear is due to the fact that the last year the market crashed below 9000 after reaching point near by 11000.1 The crashes before 2000 and after 2000 affected the small investors resulting in huge losses. Another fear for this is that the market boom is in a few big stocks. The reason is that the companies performed well resulted in increase of share. Previously in the emerging economies the emerging stock markets manipulated the inflow of investments and raised the share prices of the shares of the companies who did not fare well in the business. This time that type of manipulation was minimised in majority developing economies. This is due to the implementation of strict measures regarding the manipulation of trading activities. These measures almost controlled the manipulation of the capital inflows and directed the growth of the stock markets towards a healthier trend. The boom in countries like India, china and Thailand and other emerging economies in the recent past and the current situation can be termed healthier because the boom is after the declaration of foreign direct investors that the real value of the index was much lesser than the actual value exhibited. Even this statement by the representatives of FDIs did not stop the boom of the stock markets in the emerging stock markets. Conclusion This above fact reveals that the role of FDIs is limited in surge of the share prices and it was due to the investments of the small investors. The investment of small investor is not due to the statements of the international institutions or analysts but due to the returns they get from the market. This increase in the investment from a large and unorganised group of small investors in the emerging stock market countries resulted in a booming stock market. This can be continued and made possible due to the sustained growth in the business of the companies involved in the trading. This indicates the growth in the economy. According to the latest trend the majority of the economies recorded the growth in the stock market similar to the growth in the economy. As a result this can be termed as true and healthier growth. The healthier competition in the prices of the shares between the companies happens due to the sustained growth in their business activities and their profit per share. References 1. Corrie Shanahan, 2006, Emerging Markets Heading for Banner Year in 2006: IFC Notes Progress, Development Challenges Ahead, International Finance Corporation, ,electronic, 11-12-06, http://www.ifc.org/ifcext/50thanniversary.nsf/Content/News_Release_English 2. Temitope W. Oshikoya and Osita Ogbu, 2006, Financial Liberalization, Emerging Stock Markets and Economic Developments in Africa, IDRC CRDI, ,electronic, 11-12-06, http://www.idrc.ca/en/ev-56355-201-1-DO_TOPIC.html 3. IFC, 1997, key trends in emerging stock markets, IFC fact book, ,electronic, 11-12-06, http://www.itcilo.it/english/actrav/telearn/global/ilo/equity/ifckey.htm#Flows 4. Swaminathan S Anklesaria Aiyar, 2006, Sensex at 30000 in six years, The Times of India, ,electronic, 11-12-06, http://timesofindia.indiatimes.com/OPINION/Columnists/Swaminathan_A_Aiyar/Sensex_at_30000_in_six_years/articleshow/756137.cms Read More