5-year Pre and Pasca Global Economic Crisis Effects on the Capital Market of World’s Representative Countries among South Korean, Russia, China, and Indonesia (Part 1)

Introduction and Brief Overview of Stock Markets

Introduction

By the time passes, it is so common among all around the world to have its economy developed by the most effective and efficient ways. The same principles has occured in the financial system too. One of the most interesting business models in finance is about the business in ownership of corporations, in other words, the global investors have proven the attractiveness of capital market to get an economic growth. In fincance, we obviously call the best profit of the capital market has been in the long run profits and in the short run abnormal return. It has been proven too that corporations’ growth has been affected by the companies’ responsibility to the shareholders. Therefore, basically we may perceive that continuous relations between companies and the owners (investors) will always be maintained even as the long run financial system.

However, many experiences showed that stock market as the representative of the financial ownership business have been always even unpredictable, volatile, and sometimes moved in undesirable growth. Many years before, by the global financial reducing barriers, global investors and companies really expected long run mutual profits in the more massive diversified portfolio of investments. As the principle of continuous learning, the 2007—2008 global crisis was one of the most important experiences for global financial managers. The concept of “risk-return analysis” is believed to be paid more attention rather than before. The huge expectation of global diversification was proven to be reluctant with the global recession issues for each country members’ economic issues in the diversification. In one side, the global return might be high, but conversely the negative side-effect may also be very severe even to the nation’s economy. Therefore, further study, proofs, and academic solutions are rationally deemed to be very necessary for global financial education.

At the moment, for our broader and deeper study, I have prepared four national capital markets to discuss: The South Korea, Russia, China, and Indonesia. After understanding exactly the need of studying the global capital market, Ross (2003) suggested us to both explicitly and implicity know and comprend how the international flow of money has been conducted. By keeping the understanding of how the money flows among the world, we have already had a really good base of drilling into the depth of each financial flows among the countries. However, study revealed that international financial flow has been mainly going around the developed market and until this time the developing country has only been a second-layered priority. More over, in the global capital market the less developed countries are poorly expected by the investors. Therefore, in this simple paper, we exclude the less developed countries.

Brief Overview of Stock Markets

On top of our discussion, I still believe in my personal opinion that international investors are still in use of the developed country’s stock market as the dependent variable of how to measure the global risk-return analysis. Hence, we still have to understand briefly about the USA’s Dow Jones in correlation with the four countries’ stock market movement, especially before and after the occurance of the 2007—2008’s global crisis that were happening firstly in the USA. Here are brief overview of our today’s stock markets (wikipedia.org):

1.            Moscow Interbank Currency Exchange (Redirected from MICEX)

The Moscow Interbank Currency Exchange (Russian: Московская межбанковская валютная биржа) or MICEX was one of the largest universal stock exchanges in the Russian Federation and East Europe. MICEX opened in 1992 and was the leading Russian stock exchange. About 239 Russian companies were listed, with a market capitalization of US$950 billion as of December 2010. MICEX consisted of about 550 participating organizations and members, which trade for their clients. In 2006 the volume of transactions on the MICEX reached 20.38 trillion rubles (US$754.9 billion), representing more than 90% of the total turnover of the leading stock exchanges in the Russian stock market. In 2011 MICEX merged with Russian Trading System creating Moscow Exchange.

MICEX started with currency auctions in November 1989 as an initiative by the Foreign trade and investment bank of the USSR. Thus, for the first time the market ruble exchange rate to dollar was established. In January 1992 it became the main platform for carrying out currency transactions for banks and enterprises. Until July 1992 the rate in the Moscow Interbank Stock Exchange was used by the Central Bank for the official quotation of ruble to foreign currencies. In the mid 1990s preparation for trading corporate securities and futures began. On 19 December 2011, MICEX merged with Russian Trading System. The merger created a single entity that is expected to become a leading stock exchange globally for trading across asset classes and to advance Russia's plans to turn Moscow into an international financial centre. Hence forth to be known as MICEX-RTS, the full merger of the organisational structure is not yet completed. Problems in merging the infrastructure resulted in computer error in trades, something that had not happened on the merged exchanges for a decade: on the first day of trades, there was a short period of computer glitches when the clearing system malfunctioned, which resulted in registering multiple unsanctioned deals, with some traders suffering losses.

The goals of the merger include the optimization of the Russian stock market, the reduction of the number of organizations with overlapping functions, the creation of a single platform for issuers, traders and investors, the reduction of transaction costs, and easier trading. The united exchange is undergoing a rebranding, with the new brand identity to be unveiled in the first half of 2012.

2.            JSX Composite (Redirected from IHSG)

The IDX Composite (formerly: JSX Composite, Indonesian: Indeks Harga Saham Gabungan, IHSG) is an index of all stocks that trade on the Indonesia Stock Exchange, IDX (formerly known as Jakarta Stock Exchange, JSX).

3.            SSE Composite Index

The SSE Composite Index (Chinese: 上海证券交易所综合股价指, 简称上证综指) is an index of all stocks (A shares and B shares) that are traded at the Chinese’s Shanghai Stock Exchange.SSE Indices are all calculated using a Paasche weighted composite price index formula. This means that the index is based on a base period on a specific base day for its calculation. The base day for SSE Composite Index is December 19, 1990, and the base period is the total market capitalization of all stocks of that day. The Base Value is 100. The index was launched on July 15, 1991.

The B share stocks are generally denominated in US dollars for calculation purposes. For calculation of other indices, B share stock prices are converted to RMB at the applicable exchange rate (the middle price of US dollar on the last trading day of each week) at China Foreign Exchange Trading Center and then published by the exchange. The full list of all constituent stocks can be found at SSE or at Yahoo! Finance.

4.            KOSPI

The Korea Composite Stock Price Index or KOSPI (코스피지수) is the index of all common stocks traded on the Stock Market Division—previously, Korea Stock Exchange—of the Korea Exchange. It's the representative stock market index of South Korea, like the Dow Jones Industrial Average or S&P 500 in the U.S. KOSPI was introduced in 1983 with the base value of 100 as of January 4, 1980. It's calculated based on market capitalization. As of 2007, KOSPI's daily volume is hundreds of millions of shares or (trillions of won). KOSPI (한국종합주가지수 Hanguk jonghap juga jisu) was introduced in 1983, replacing Dow-style KCSPI (Korea Composite Stock Price Index).

For years, KOSPI moved below 1,000, peaking above 1,000 in April 1989, November 1994, and January 2000. On June 17, 1998, KOSPI recorded its largest one-day percentage gain of 8.50% (23.81 points), recovering from the bottom of the Asian financial crisis. On September 12, 2001, KOSPI had its largest one-day percentage drop of 12.02% (64.97 points) just after 9/11.

On February 28, 2005, KOSPI closed at 1,011.36. It then plunged to 902.88 until April. But unlike previous bull traps, it kept moving upward breaking the long-standing 1,000 point resistance level. In November 2005, the index's Korean name was officially changed to Koseupi jisu (코스피지수). On July 24, 2007, KOSPI broke 2,000 level for the first time. On July 25 it closed at 2,004.22. On August 20, 2007, the index recovered 93.20 (5.69%), its largest one-day point gain, after the U.S. Federal Reserve lowered the discount rate. Then on October 16, 2008, the index dropped 126.50 (9.44%), after the Dow Jones index dropped 7.87%.

5.             Dow Jones

Dow Jones & Company is an American publishing and financial information firm. The company was founded in 1882 by three reporters: Charles Dow, Edward Jones, and Charles Bergstresser. Like The New York Times and the Washington Post, the company was in recent years publicly traded but privately controlled. The company was led by the Bancroft family, which effectively controlled 64% of all voting stock, before being acquired by News Corporation.

The company became a subsidiary of News Corporation after an extended takeover bid during 2007. It was reported on August 1, 2007 that the bid had been successful after an extended period of uncertainty about shareholder agreement. The transaction was completed on December 13, 2007. It was worth US$5 billion or $60 a share, giving NewsCorp control of The Wall Street Journal and ending the Bancroft family's 105 years of ownership.In 2010, the company sold 90% of Dow Jones Indexes to the CME Group, including the Dow Jones Industrial Average.

Comparative Analysis of South Korea, Russia, China, and Indonesia Stock Markets

Theoretical Foundation

In evaluating national stock market, I prepared a very brief but powerful analysis and evaluation of the four-nation main stock markets. Therefore, we would like to classify indicators that we are going to use today in several relevant points. We are going to use the three classifications because, it is believed that from having the three perceptions of evaluation, our view will be concise and clearer about a certain stock market. If we only stree our analysis in technical (calculations and charts) aspects, we might be trapped in many mathematical calculations that are sometimes not able to value a certain foundation of the stock market because by using fundamental analysis, we are hoped to be able to understand clearly about the national economic foundation. Therefore, we have to be balance among the three kinds of analysis.

Fundamental Analysis: The fundamental analysis answers a question of “Can a very well-fashioned building survive from natural disasters?” Therefore, depends on the building fundamental. It consists of:

a.             Economic aspects: national income (GDP & GNP), interest rate, inflation rate.

b.             Industrial aspects: economic structure, competition, privatization, foreign direct investments, domestic direct investments, and so on.

c.              Company aspects: individual competition (substitutes), market share, unique conclusion about several companies and industries (challenging, saturating, and so on).

Technical Analysis: the experts in financial technical analysis are usually called chartists. Therefore, technical analysis is about operational and procedural analysis of a certain stock markets. The analysis consists of: trading atmosphere (short term or long term), global risk-return analysis, correlation analysis, trend analysis, and other statistical forecasting and evaluations.

Behavioral Analysis: answers the importance of analyzing the investors who always have different perceptions in different circumstances. They are human who are unpredictable in every different nations, even more they are sometimes proven to be irrational. Hence, the behavioral analysis is based on thoughts of evaluating the humans’ rationality in investing.

Comparative Analysis of South Korea, Russia, China, and Indonesia Stock Markets

Fundamental Approach

From the Figure 1 (in Appendix), we have identified several approach in chart in order to see the that the global crisis really did bring impacts to the nations. However, the figure also proved that there is a huge correlation among GDP and GNI of the countries to the volume of the traded stocks over the year (2002—2011). More over, in the country like USA and South Korea, in the period it has been shown that even their traded stock volume is more than the countries’ GDP. Recall that these countries are categorized as developed income countries. It really showed us that these developed countries fundamentally have had bigger influence in the world’s finance. On the other side, China is the one that showed progressive influence. From the previous similar condition to the Russia Federation and Indonesia, China rose its overall GDP and GNI with the more amount in traded stocks. Therefore, briefly we may take conclusion that for USA, South Korea, and China, global risks are deemed to be more holded rather than the Russia and the Indonesia.

In the perspective of evaluating the global crisis effects to the countries, Indonesia seemed to be the least in bearing the previous global effect. The figure’s shape directly showed us that even though there might be several stacked movements, Indonesia’s stock marker (even more the GDP and GNI) were still stable compared to Russia, China, South Korean, even the USA where it happened there. Therefore, in this pint of view, Indonesian stocks showed its own interesting side.

Technical Approach

In the technical approach to see deeper about the countries’ stock performance, we would like to make separation of analysis of before June 2007, when the global crisis strated (Wikipedia) and after the 2007 to see the phenomena of how these countries suffered and might recover or faced the global crisis to face the future challenges.

 

In the return information (Figure 3 & 4), it is very useful to verify that actually Indonesia is still the most favorable one among the other stock markets (for MICEX the information is really closed to outsiders / non-subscribers and the ExAnte return data was only from 2010). For both before and after the global crisis, Indonesia has still had the lowest Covariance.

 

In the charts above (Figure 4 & 5), just generally if we judge that more than 50% of correlation as relatively significant correlation, we might learn a lot of things, especially in the perspective of Indonesia. Indonesia survived the global crisis (even though volatility was still inevitable at that time) actually because Indonesia was proven above to have insignificant correlation with the developed stock market (KOSPI & DJA), but rather to be correlated to the SSE of China. The challenge comes after the global crisis (Figure 6) when Indonesia shifted the majority of investors to be more in the developed stock market. Previously, it had significant correlation with the Chinese SSE but after the global crisis, Indonesia was proven to be moved away from the previous correlation with the SSSE. The question is: “Is the Indonesian stock market will be still steadily competitive if the strategy is like that in the future?”

Conslusion

Even though we still leave the behavioral analysis, general learning and analysis of the 4-country stock market can be gotten already. Among the financial phenomenas (especially because of the global financial risk), investors got paid attention more time by time to the concept of risk-return analysis in creating portfolio of investment. However, maintaining the uniqueness of the stock market has been a great challenge, especially for Indonesia. Indonesia was able to survive the crisis because of insignificant correlation with the developed countries like the USA and South Korea. Howeverm after seeing the atteactiveness of Indonesian capital market (we believe), the developed coutries’ investors gained more Indonesian stocks. Therefore, the risk transferred to Indonesia and it is going to be a significant risk if something happen to the developed countries’ emerging economies. It is a compulsory for both Indonesian government and businessmen to maintain the capital market situation and lastly will contribute to the overall economy for all people in Indonesia.

References

Beim, D.O. & Calomiris C.W. (2001). Emerging Financial Markets. NY: McGraw-Hill Irwin International.

http://data.worldbank.org

http://finance.yahoo.com

http://www.wikipedia.org

Mishkin, Frederic S. 2001. The Economics of Money, Banking, and Financial Markets. Sixth edition. USA: Addison Wesley Longman

Robin. (2011). International Corporate Finance. NY: McGraw-Hill Irwin International.

Ross, Westerfield, & Jordan. (2006). Corporate Finance Fundamentals. NY: McGraw-Hill Irwin International.