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Global Market Commentary Portfolio Strategy 08 September 2008 AES ® Analysis Global Equity Market Handbook

Global

Market Commentary

Portfolio Strategy

08 September 2008

AES ® Analysis

Global Equity Market Handbook

2008 AES ® Analysis Global Equity Market Handbook Everything You Ever Wanted to Know about Global

Everything You Ever Wanted to Know about Global Equity Markets

(but were too overwhelmed to look up)

AES ®

The Standard in Algorithmic Trading

Ana Avramovic

+1 212 325 2438

Murat Atamer

+ 852 2101 7133

Marwan Abboud +44 20 7888 0082

Portfolio Strategy

Portfolio Strategy

A Rapidly Changing Global Marketplace

Markets More Integrated Globally, Fragmented Locally

Over the past few years we’ve seen an explosion in alternative trading venues, creating a more fragmented marketplace. While this trend began in the US with the SEC’s passage of Regulation NMS which paved the way for Electronic Communication Networks, it is rapidly sweeping across the globe triggering a rise in algorithmic trading and Smart Order Routing technology. We explore some of the effects of fragmentation on pg. 5 for the US and pg. 6 for Europe.

We discuss the benefits of

Asian exchanges, to stay competitive, are reducing their minimum tick sizes.

reduced tick sizes and extrapolate from previous cases to predict the impact on Japanese spreads in 2008 (pg. 8).

Global Wealth Growing

Along with the growth in the number of trading venues, we have seen strong increases in trading volumes worldwide as well (up until the pat few months). Also, despite the recent bear market, worldwide wealth has expanded substantially over the years. Emerging Markets have grown the most, now comprising more than 10% of global benchmarks (p. 11).

Beware the Fundamentals

Building global quant portfolios is still a challenge, even using fundamental data such as P/E ratios and dividend yields. The trouble is caused by differing accounting standards and corporate structures, but it is only compounded by recent heavy writedowns. We examine this further on pgs. 12 & 13.

Emerging Markets: More Risk & Return

Developed Markets still tend to have tighter spreads and higher turnover, which makes it easier to trade in and out of these markets (pgs. 14 & 15). However, liquidity in many Emerging Markets is improving just as emerging markets have offered relatively attractive returns (p. 18).

Frontier Markets Offer New Investment Opportunities

The latest focus seems to be ‘Frontier’ markets. Many index providers have recently started benchmarks in these new regions, which should ultimately help liquidity there as well. We introduce frontier markets in our final section (see The Whole Enchilada below).

The easiest way to reduce risk remains diversification. To help investors identify markets which may offer the best diversification, we calculate country by country correlations over the past year on page 16.

The Whole Enchilada: Country-by Country Market Guides and Volume Curves

With so many markets open for trading and rules and market conditions changing so quickly, it’s hard for global traders to keep up. We include 3 sections devoted to comparing rules and features across markets.

The first part (starting on pg. 19) provides an overview of international markets including the primary exchange, benchmark index, settlement currency, sovereign debt ratings and market hours for all 48 countries in the MSCI All-Country World Index.

The second part comprises a side-by-side comparison of average daily volume curves for 32 leading markets (p 23).

Finally, beginning on pg 28, we detail the rules & regulations for trading in each market such as round lot sizes, price limits, special restrictions for foreigners, fees, and more. Here we cover the 48 developed and emerging markets from the first part, as well as 19 additional frontier markets.

2

Portfolio Strategy

Portfolio Strategy

TABLE OF CONTENTS

Part I: KEY MARKET THEMES

US Leads The March of the Algos………………….….5 Europe’s Changing Marketplace…………………….…6

… 7

Spread Reductions Sweep Across Asia…….……… 8 India Focus: A Tale of Two Markets……………… ….9

Crossing the Border: Canada’s Dual Listings.…

Part II: MARKET CHARACTERISTICS

Global Weightings……………………………………

Fundamentals: Price/Earnings Ratio………

Dividend Yields……………………………………

Trading Activity (Velocity)…………………………… 14

Spreads and USD Turnover………………….……

……………………… 16

Price Performance……… …………… …………….18

1 year Global Correlations…

………12

11

13

15

Part III: STRUCTURE OF GLOBAL MARKETS

Primary Exchange, Index, Futures………….……… 20 Sovereign Debt Ratings & Settlement Ccy………….21 Global Trading Hours………………………………….22

Part IV: DAILY VOLUME CURVES

Avg Daily Volume Curves by Country……………… 23

Part V: INTERNATIONAL RULES & REGULATIONS

Country by Country Guide to Rules & Regs…………28

3

Portfolio Strategy

Portfolio Strategy
Portfolio Strategy Part I K EY M ARKET T HEMES … Europe’s Changing Marketplace………………… Crossing

Part I KEY MARKET THEMES

Europe’s Changing Marketplace………………… Crossing the Border: Canada’s Dual Listings… Spread Reductions Sweep Across Asia…….…… India Focus: A Tale of Two Markets……………… 9

US Leads The March of the Algos…………

5

6

7

8

4

Portfolio Strategy

Portfolio Strategy

Total Daily Value Traded ($ Bn)

$350 $300 $250 $200 $150 $100 $50 $- Daily Value Traded ($ Bn)
$350
$300
$250
$200
$150
$100
$50
$-
Daily Value Traded ($ Bn)

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Source: Credit Suisse: AES ® Analysis

US Volume Breakdown by Exchange

10 NASDAQ 9 NYSE 8 PCX 7 FINRA TRF 6 NSX 5 ISE 4 CHX
10
NASDAQ
9
NYSE
8
PCX
7
FINRA TRF
6
NSX
5
ISE
4
CHX
3
BSE
AMEX
2
PHLX
1
CBOE
-
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
May-08
Source: Credit Suisse: AES ® Analysis
Volume (Billion Shares)

Average Number of Shares per Trade Over Time

2000 1800 Small Cap 1600 Large Cap 1400 1200 1000 800 600 400 200 0
2000
1800
Small Cap
1600
Large Cap
1400
1200
1000
800
600
400
200
0
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Number of Shares per Trade

Source: Credit Suisse: AES ® Analysis

5

US Leads The March of the Algos

Daily Value Traded

Total volume traded in shares has grown sharply over the years with 10bn share days (listed+OTC) now regular occurrences. Thanks to the steep market sell-off following the tech bubble crash, however, the total value traded stumbled in 2000. Prices have since clawed back to reach new highs, and, coupled with the ever-increasing volumes, US daily value traded is now hovering around $200 Billion USD / day!

Volume Breakdown by Exchange

While overall volumes have increased, the once-dominant

NYSE’s market share has dropped by almost 50 points

from 75% in July 2006 to 27% in July 2008!

In fact, the FINRA TRF (which reports trades executed

away from exchange, like dark pools and crossing

networks) began printing more NYSE-listed volume than

the NYSE itself on 4/3/08 and the NASDAQ did so on

6/3/08!

Average Trade Size

With the rise in algorithmic trading and an increasingly fragmented marketplace making it difficult to execute large block trades, the US has seen the average trade size fall dramatically over the years, to a current level now around 200 shares per trade. In fact, the average retail print is now larger than the average institutional trade size!

Large cap stocks have seen the most dramatic decline, likely due to the fact that they are more liquid, thus easier to trade algorithmically. It has always been relatively more difficult to print large blocks in small caps. Still, they too have been susceptible to the slicing of algorithms.

Portfolio Strategy

Portfolio Strategy
20 15 10 5 0 0 5 10 15 20 25 30 Price Improvement (bps)
20
15
10
5
0
0
5
10
15
20
25
30
Price Improvement (bps)

Average Spread (bps)

Source: Credit Suisse: AES ® Analysis

Europe’s Changing Marketplace

MiFID Spurs Growth in Alt Trading Venues

Coinciding with the implementation of MiFID in November 2007, the European marketplace has seen accelerated growth in the number of Multilateral Trading Facilities (MTFs). These alternative venues have taken a substantial market share away from the primary exchange as well as created new pools of liquidity for trading European equities.

Indeed, as we see below, the percentage executed on alternative venues via Credit Suisse AES ® was around 12% in November 2007. Only 8 months later, that amount crossed 30% and is still climbing.

35% 30% 25% 20% 15% 10% 5% 0% % Executed on Alternative Venue
35%
30%
25%
20%
15%
10%
5%
0%
% Executed on Alternative Venue

Nov-07

Feb-08

May-08

Aug-08

Source: Credit Suisse: AES ® Analysis

And Often Significant Price Improvement

Trading on alternative venues offers substantial benefits, including price improvement, anonymity, and increased liquidity, which allow one to improve performance, reduce slippage, and minimize market impact.

In Q1 2008, price improvement ranged from 2 bps to 15 bps, with every stock realizing at least some improvement over the period. The average cost savings was 5.2 bps. In general, the wider the bid-ask spread, the greater the price improvement. This is caused by the fact that trades on alternative venues are often executed at the mid, and this saves you half the spread. Thus, the larger the spread, the more you save.

The figure to the left demonstrates the relationship between spread and price improvement for all Chi-X listed stocks executed through Credit Suisse AES ® from January-March 2008.

6

Portfolio Strategy

Portfolio Strategy

Crossing the Border: Canada’s Dual-Listings

As regulations have made it easier for Canadian companies to list shares in the US, the number of Canadian companies with dual listings has increased greatly. However, as the volumes have increased, more and more of the trading is taking place on US exchanges rather than the native Canadian exchanges.

In fact, of the 10 largest cross-listings by market cap, on average, around 70% trades in US markets. The average volume traded in the US for all cross-listings is around 50%. More telling: The average value traded in the US for all dual-listed Canadian companies is close to 60% and has been growing over the years.

Value Traded in Dual-Listed Stocks - Broken Down by Exchange

100% Growth in Value Traded over Time 80% 3,000 2,500 60% 2,000 1,500 40% 1,000
100%
Growth in Value Traded over Time
80%
3,000
2,500
60%
2,000
1,500
40%
1,000
20%
500
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
0%
Annualized
Canada
US NYSE
US NASDAQ
US AMEX
US Other
Value Traded ($ Millions
.43 .47 .47 .46 .49 .52 .55 .62 .60 .03 .00 .16 .13 .03 .18
.43
.47
.47
.46
.49
.52
.55
.62
.60
.03
.00
.16
.13
.03
.18
.13
.10
.16
.00
.01
.00
.02
.05
.01
.01
.14
.00
.01
.01
.10
.15
.14
.19
.11
.25
.15
US Exchanges
.34
.29
.26
.23
.23
.24
.21
.19
.15

2000

2001

2002

2003

2004

2005

2006

2007

2008

Annualized

Growth in Volume

80 70 60 50 40 30 20 10 0 Shares (Billions)
80
70
60
50
40
30
20
10
0
Shares (Billions)
Volume 80 70 60 50 40 30 20 10 0 Shares (Billions) 2000 Canada 2001 2002

2000

Canada

70 60 50 40 30 20 10 0 Shares (Billions) 2000 Canada 2001 2002 US NYSE

2001

2002

US NYSE

2003

2004

0 Shares (Billions) 2000 Canada 2001 2002 US NYSE 2003 2004 US NASDAQ 2005 2006 US

US NASDAQ

2005

2000 Canada 2001 2002 US NYSE 2003 2004 US NASDAQ 2005 2006 US AMEX 2007 2008

2006

US AMEX

2007

2008

Annualized

US Other2003 2004 US NASDAQ 2005 2006 US AMEX 2007 2008 Annualized US NYSE US NASDAQ US

US NASDAQ 2005 2006 US AMEX 2007 2008 Annualized US Other US NYSE US NASDAQ US

US NYSE

2005 2006 US AMEX 2007 2008 Annualized US Other US NYSE US NASDAQ US AMEX US

US NASDAQ

2006 US AMEX 2007 2008 Annualized US Other US NYSE US NASDAQ US AMEX US Other

US AMEX

AMEX 2007 2008 Annualized US Other US NYSE US NASDAQ US AMEX US Other Canada Source:

US Other

2008 Annualized US Other US NYSE US NASDAQ US AMEX US Other Canada Source: Credit Suisse:

Canada

Source: Credit Suisse: AES ® Analysis

New Markets Offer Benefits for All

Even with the relative increase in the US’s market share, exchanges in both US & Canada are benefiting as overall trading activity is increasing.

Traders are the biggest beneficiaries of the expanding US market. Not only have spreads narrowed from increased competition among alternative venues (see US microstructure in focus on pg 5), but new products such as Credit Suisse AES’s BorderCross will agnostically find

the best market for trades, thereby saving traders costly FX fees.

Source: Credit Suisse: AES ® Analysis

7

Portfolio Strategy

Portfolio Strategy
Portfolio Strategy Source: Credit Suisse: AES ® Analysis Source: Credit Suisse: AES ® Analysis Source: Credit

Source: Credit Suisse: AES ® Analysis

Portfolio Strategy Source: Credit Suisse: AES ® Analysis Source: Credit Suisse: AES ® Analysis Source: Credit

Source: Credit Suisse: AES ® Analysis

® Analysis Source: Credit Suisse: AES ® Analysis Source: Credit Suisse: AES ® Analysis Spread Reductions

Source: Credit Suisse: AES ® Analysis

Spread Reductions Sweep Across Asia

Counterpart to Decimalization in US

Electronic trading has swept the globe, making it easier for both retail and institutional customers to trade. The internet has afforded retail clients the ability to trade seamlessly 24hrs a day, while algorithms have proliferated, helping institutions execute trades with less price impact and less signaling risk.

While algorithms are in use in Asia, their penetration has been slower than the rest of the world owing to unique characteristics of Asian markets. Spreads tend to be wider (see p. 6) and liquidity lower, forcing many trades to queue up on the order books rather than crossing the large spread.

To help address this issue, various Asian exchanges are implementing reduced tick sizes. Hong Kong was the first to do so, in July 2005, followed by Singapore in Dec 2007. Japan is next in line as the reductions begin this summer with the balance occurring in 2009.

Our Prediction for Japan’s Spread Reductions

In a December 21, 2007 report, using Hong Kong as an example, Credit Suisse accurately predicted that a tick size reduction in Singapore would cause spreads to decline by 64% to 22bps (see top left).

Observing that stocks generally trade a few bps above the theoretical spread levels suggested by the minimum tick sizes, we expect that the average bid-ask spread for TOPIX500 constituents will decline from 21bps to 19bps (a 7% reduction), and then to 15bps (a further 26% reduction) by 2H09 (see middle left).

For Nikkei 225 constituents, we expect spreads to decline by 13% and 26% in summer 2008 and 2009, respectively, from the current level of 21bps (see below left).

Note that predictions are based on current prices as of Feb 08, and thus may change considerably. We would also note that soon after tick size changes, spreads in Singapore continued to be much higher than the daily average in the early morning hours (area in box), which is also a possibility in Japan.

Benefits of Tick Size Reduction

Using the examples of Hong Kong and Singapore, reduced tick sizes lead to lower spreads; shorter queues with faster order book turnover; and increased volumes with activity more evenly distributed throughout the day and less “catch up” volume concentrated at the close.

We expect a similar phenomenon to occur in Japan, but note that historical premiums over theoretical spreads are more volatile in Japan than in Hong Kong or Singapore, making predictions potentially less accurate.

Credit Suisse AES ® performance is also likely to see large improvements due to spread cost saving. In addition, since crossing the spread will become much cheaper, intraday trading strategies are expected to be more profitable.

8

Portfolio Strategy

Portfolio Strategy

India Focus: A Tale of Two Markets

Portfolio Strategy India Focus: A Tale of Two Markets Source: Credit Suisse: AES ® Analysis Market

Source: Credit Suisse: AES ® Analysis

Market Microstructure Matters

India has two major stock markets, each with their own flagship index, and many stocks are included in both indexes (all but one as of this writing). However, the same name trades at a 40% lower bid-ask spread on National Stock Exchange (NSE) than the Bombay Stock Exchange (BSE), on average. The NSE discount can be as large as 60-70% for certain names!

The NSE was created to offer a fully electronic, national trading system. Today it is India’s leading stock exchange with much higher daily turnover and tighter spreads compared to the older BSE. The same name trades, on average, four times more on the NSE than its BSE listed counterpart. This is all despite the fact that the market capitalizations of both markets are roughly inline, demonstrating that a market’s microstructure matters a lot.

Indian Markets’ Idiosyncrasies

The daily volume curve for the NSE50 is similar to what we are used to seeing. However, the volume curve for the BSE30 is rather unusual. Trading Starts out relatively lightly and gradually increases over the day. In this environment, TWAP may be a more useful strategy than VWAP, especially given the relatively less liquid nature of the market.

On both markets, spreads are wider at the open and gradually decline. With larger volumes at the close, the markets may experience substantial jumps in spreads during the final minutes of trading.

A further quirk of the India market to recognize is the closing mechanism. The opening price is the first print, but the close is the volume weighted average price of the last 30 minutes. This makes trading market-on-close orders much more difficult in India

trading market-on-close orders much more difficult in India Source: Credit Suisse: AES ® Analysis Source: Credit

Source: Credit Suisse: AES

® Analysis

orders much more difficult in India Source: Credit Suisse: AES ® Analysis Source: Credit Suisse: AES

Source: Credit Suisse: AES

®

Analysis

9

Portfolio Strategy

Portfolio Strategy
Portfolio Strategy Part II M ARKET C HARACTERISTICS Global Weightings……………………… ……….11

Part II MARKET CHARACTERISTICS

Global Weightings……………………… ……….11 Fundamentals: Price/Earnings Ratio… …… …12 Dividend Yields………………………………… 13 Trading Activity (Velocity)…… ………………….14 Spreads and USD Turnover ………………….…15 1 year Global Correlations……………………… 16 Price Performance.…………… …………… …18

10

Portfolio Strategy

Portfolio Strategy

August 2008 .

Afria

LatAm

1% 3% Asia Pac 19% N America (Canada) 4%
1%
3%
Asia Pac
19%
N America
(Canada)
4%

Europe

29%

MidEast

1%

US

44%

Source: Credit Suisse: AES ® Analysis

Global Weightings

USA - the Elephant in the Portfolio

So does the world catch a cold when the USA sneezes? That depends on how you invest. If using the MSCI All-Country World Index, the answer is a resounding yes. With the US representing an overwhelming 40% of the MSCI ACWI, portfolios benchmarked to this index will no doubt feel the pain when the US falters. However, an alternative approach that puts a more equal weight on the 23 Developed and 25 Emerging countries currently in the index might not be affected as much.

As The Pie Grows, EM Take Larger Share

Worldwide equity market capitalization has exploded over the years, more than doubling to a current value of almost $30 Trillion over the past 5 years!

Not surprisingly, assets into to Emerging Markets have grown the fastest. They are also commanding a larger share of the global pie, increasing their worldwide weight from 5% in 2006 to 11% today.

Total Market Cap in USD by Region

2003 2004 2005 2006 2007 Jan Aug
2003
2004 2005
2006
2007 Jan
Aug

$16 Tn

$14 Tn

$12 Tn

$10 Tn

$8 Tn

$6 Tn

$4 Tn

$2 Tn

$ Tn

N America

Europe

Asia Pac

Emerging

2008

2008 N America
2008
N America
Emerging Asia Pac Europe

Emerging

Emerging Asia Pac Europe

Asia Pac

Emerging Asia Pac Europe

Europe

Source: Credit Suisse: AES ® Analysis

Regional Weightings Over Time

100% Emerging 90% Asia Pac 80% 70% Europe 60% 50% North America 40% 30% US
100%
Emerging
90%
Asia Pac
80%
70%
Europe
60%
50%
North America
40%
30%
US
20%
10%
0%
2003
2004
2005
2006
2007
Jan 2008
Aug 2008
US
N America
Europe
Asia Pac
Emerging
(Canada)

Source: Credit Suisse: AES ® Analysis

11

Portfolio Strategy

Portfolio Strategy

Fundamentals: Price-Earnings (P/E) Ratio

 

Forward P/E

Trailing P/E

August

January

August

January

2008

2007

2008

2007

MSCI All-World

10.9

14.1

14.0

16.8

Developed

10.5

14.7

12.0

16.9

Emerging

11.2

13.4

15.9

16.7

Thanks to the global credit crisis, Forward P/E ratios have come down almost

universally.

Index have higher Forward P/E ratios than they did at the start of 2007! (Not surprisingly, they are both Emerging countries: Peru (up 37%), and Brazil.

However, using P/E ratios to asses the attractiveness of investment opportunities is tricky in the current environment of continued earnings revisions. Using the Historical P/E, ratios currently appear to be fairly high as writedowns and a weak economy dragged down earnings. (A smaller value for earnings in the denominators makes the P/E ratio larger.) Some may argue that the worst has passed so the recent poor historical numbers are not an accurate measure of investment fundamentals.

Unfortunately, the Forward P/E ratio has another set of problems. The forward ratio is based on analysts’ expectations for future earnings. But traditionally analysts have been very slow to update their forecasts in light of changing market conditions. As a result, even as actual EPS growth has gone down, analysts have tended not to revise their forecasts much until very close to the actual earnings announcement date. This leads to overly- optimistic estimates and, consequently, excessively low Forward P/E ratios.

In fact, only 2 out of the 48 countries in the MSCI All-World

Forward Price/Earnings Ratios

Emerging Markets

21 Jan-07 18 Aug-08 15 12 9 6 3 0 Price / Forecast Earnings Argentina
21
Jan-07
18
Aug-08
15
12
9
6
3
0
Price / Forecast Earnings
Argentina
Brazil
Chile
China
Colombia
Czech Rep
Egypt
Hungary
India
Indonesia
Israel
Jordan
Korea
Malaysia
Mexico
Morocco
Pakistan
Peru
Philippines
Poland
Russia
S Africa
Taiwan
Thailand
Turkey

Developed Markets

20 Jan-07 Aug-08 16 12 8 4 0 Price / Forecast Earning Australia Austria Belgium
20
Jan-07
Aug-08
16
12
8
4
0
Price / Forecast Earning
Australia
Austria
Belgium
Canada
Denmark
Finland
France
Germany
Greece
Hong Kong
Ireland
Italy
Japan
Netherlands
N Zealand
Norway
Portugal
Singapore
Spain
Sweden
Switzerland
UK
USA

12

Source: Credit Suisse: AES ® Analysis

Portfolio Strategy

Portfolio Strategy

Dividend Yields

(Dividend / Price)

The Dividend Yield similarly suffers from reliability issues and discrepancies between historical and forecasted yields. In this case, yields based on historical dividends are most likely too high as many companies will be forced to cut dividends in an effort to preserve capital. However, accurately predicting future dividends is not an easy task. People often try to infer them from the options market but this is complicated by the mismatch in timing between an option’s expiration and a potential dividend date.

Not surprisingly, all but 8 countries - all Emerging - have higher Dividend Yields in August 2008 compared to January 2007 (using actual dividends). This is most likely caused by falling market prices.

Belgium offers the highest dividend yield at 7.6; it’s market has dropped -22% over the past year. Pakistan is highest among the Emerging Markets at 5.5

Ireland’s yield is up the most from Jan 07, increasing from 2.2 to 5.8.

European Dividends in Focus:

Can a higher Dividend Payout compensate the fall in earnings?

Recall that Dividends = Earnings x Payout Ratio

Given the recent hit to earnings following the global credit crisis, companies would need to increase their payout ratio to maintain a constant dividend stream on lower earnings. As an example, if earnings fall by 20%, companies would have to raise the payout by 25% to compensate.

For the companies in the Dow Jones Euro Stoxx 50, an index of 50 blue chip companies in the EMU, the current payout is ~42%. Maintaining the current level of dividends would require an increase to about 52% - a level not seen since the 1970s.

Eurozone Avg Dividend Payout Over Time
Eurozone Avg Dividend Payout Over Time

13

Source: Credit Suisse: AES ® Analysis

Portfolio Strategy

Portfolio Strategy

Trading Activity (Velocity of Shares)

We use Velocity to measure market activity, where velocity is defined as:

Annual Shares Traded ---------------------------------- Shares Outstanding (Free Float)

Note that while a higher turnover generally means the market is more active and more liquid, this is not always the case. Pakistan appears to be especially attractive, but this is because the free float available for trading is very low. Consequently, the market is actually very illiquid as most shares (around 80%) are held by insiders and not available to regular investors. This also makes the market very volatile.

Nevertheless, as we would expect, developed markets are indeed more active than emerging markets, turning shares over an average of 2 times per year, compared to 1.71x for emerging markets.

When we take out Pakistan, the average turnover ratio for EM is even lower, at 1.43x.

Velocity =

9 8 Developed 7 Emerging 6 5 4 3 2 1 - Source: Credit Suisse:
9
8
Developed
7
Emerging
6
5
4
3
2
1
-
Source: Credit Suisse: AES ® Analysis
Velocity (shares traded / shares outstanding)
Pakistan
Spain
Turkey
Norway
Korea
Taiwan
Italy
Germany
Netherlands
China
United Kingdom
Finland
Japan
Sweden
Portugal
France
Switzerland
Czech Republic
Israel
Brazil
Indonesia
Singapore
Denmark
USA
Belgium
Thailand
Hong Kong
Australia
Egypt
Jordan
Hungary
Austria
Ireland
Canada
India
South Africa
Greece
Morocco
Malaysia
Poland
Philippines
Mexico
Chile
New Zealand
Russia
Colombia
Argentina
Peru

14

Portfolio Strategy

Portfolio Strategy

USD Turnover

USD Turnover

Spreads and USD Turnover

10,000,000,000 Developed Emerging 1,000,000,000 100,000,000 10,000,000 1,000,000 100,000 10,000 1 10 100 1,000
10,000,000,000
Developed
Emerging
1,000,000,000
100,000,000
10,000,000
1,000,000
100,000
10,000
1
10
100
1,000
Spread (bps)
USD Turnover

10,000,000,000

1,000,000,000

100,000,000

10,000,000

1,000,000

100,000

1,000,000,000

100,000,000

10,000,000

1,000,000

100,000

10,000

North America Developed Asia Developed Europe 1 10 100
North America
Developed Asia
Developed Europe
1
10
100
Spread (bps) Emerging Asia Emerging EMEA Latin America 1 10 100 1,000
Spread (bps)
Emerging Asia
Emerging EMEA
Latin America
1
10
100
1,000

Spread (bps)

Source: Credit Suisse: AES ® Analysis

15

Developed vs. Emerging Markets

Tighter spreads are usually reflective of a more open and competitive market.

As noted previously, the same is often true of higher turnover as well – though we highlighted the notable exception of Pakistan.

As a result, it is not surprising that we generally find much tighter spreads and higher turnover

in the developed countries as compared to

emerging ones.

Regions within Developed Markets

When we consider different regions within the Developed markets, we see that North America tends to have the tightest spreads and Asia the widest. This is due to the fact that Asian markets were slower to adopt the electronic trading that began with the US marketplace and swept across the pond.

Again we see that tighter spread often go hand

in hand with higher turnover as both stem from

freer, more competitive markets.

Regions within Emerging Markets

Amongst Emerging market regions, we have a mixed bag. No region is a strong leader in either spreads or turnover.

As the defining characteristic of Emerging markets is a restricted trading environment with each country potentially imposing their own

special restrictions, we are not surprised to see

a range of liquidity from very high spreads/low turnover (ex. Peru) to tighter spreads/higher turnover (ex. Brazil) within the same region.

This is also partly caused by a smaller sample size in many countries.

Portfolio Strategy

Portfolio Strategy

1 Year Global Correlations

 

USA

 

Argentina

Australia

Austria

Belgium

Brazil

Canada

Chile

China

Colombia

Czech Republic

Denmark

Egypt

Finland

France

Germany

Greece

Hong Kong

Hungary

India

Indonesia

Ireland

Israel

Italy

USA

100%

54%

3%

32%

49%

69%

77%

50%

-8%

32%

23%

43%

4%

40%

51%

45%

27%

5%

29%

7%

10%

47%

46%

50%

Argentina

 

100%

26%

50%

56%

74%

63%

62%

4%

40%

53%

59%

13%

58%

60%

55%

44%

23%

43%

20%

35%

50%

44%

59%

Australia

   

100%

38%

34%

21%

10%

18%

27%

27%

45%

36%

32%

42%

36%

39%

32%

74%

31%

56%

62%

29%

24%

26%

Austria

     

100%

79%

50%

40%

50%

13%

43%

78%

78%

21%

84%

84%

81%

73%

41%

65%

40%

46%

71%

54%

78%

Belgium

       

100%

57%

51%

60%

6%

47%

70%

75%

23%

83%

91%

86%

70%

31%

57%

33%

38%

72%

55%

84%

Brazil

         

100%

76%

60%

8%

38%

49%

61%

6%

55%

62%

57%

48%

23%

51%

17%

28%

49%

48%

57%

Canada

           

100%

53%

-2%

36%

38%

52%

9%

50%

52%

48%

35%

11%

34%

13%

20%

43%

43%

53%

Chile

             

100%

2%

45%

52%

51%

13%

54%

57%

50%

40%

14%

43%

7%

21%

48%

36%

52%

China

               

100%

16%

18%

14%

7%

10%

6%

9%

9%

45%

12%

31%

28%

0%

1%

5%

Colombia

                 

100%

47%

41%

21%

45%

48%

44%

40%

28%

33%

28%

33%

37%

29%

45%

Czech Republic

                   

100%

65%

23%

71%

71%

72%

71%

36%

61%

38%

43%

56%

46%

65%

Denmark

                     

100%

15%

80%

78%

71%

69%

40%

59%

41%

50%

67%

55%

74%

Egypt

                       

100%

18%

16%

19%

15%

34%

10%

37%

35%

18%

25%

17%

Finland

                         

100%

88%

84%

70%

38%

62%

37%

44%

73%

54%

82%

France

                           

100%

93%

72%

30%

62%

33%

35%

73%

62%

90%

Germany

                             

100%

67%

28%

62%

30%

33%

67%

58%

85%

Greece

                               

100%

35%

54%

34%

36%

55%

50%

69%

Hong Kong

                                     

100%

33%

71%

72%

26%

24%

25%

Hungary

     

How To

     

Read Correlations

                       

100%

28%

34%

49%

42%

61%

India

                                         

100%

62%

32%

31%

33%

Indonesia

       

Correlation tells us

   

how

         

closely returns move together, taking a

               

100%

35%

25%

28%

Ireland

             

value between -100% and 100%.

                             

100%

50%

69%

Israel

     

Markets

     

that move up and down together at the

           

same time will

                 

100%

58%

Italy

             

have perfect correlation

 

(100%).

                             

100%

Japan

                                                   

Jordan

                         

Conversely, markets that move the same amount but

 

in exactly

                   

Korea

       

opposite

   

direction each

         

day will have perfect negative

                       

Malaysia

       

correlation (-100%).

                                         

Mexico

                                                   

Morocco

             

A value of 0 means the

     

returns are unrelated.

                           

Netherlands

             

Low correlations are useful for diversifying a portfolio

           

as the

                     

New Zealand

             

returns from one country will

   

not be related

   

to the other.

                       

Norway

                                                   

Pakistan

             

Negative correlations are useful for hedging.

                                   

Peru

             

Correlations are symmetrical

         

so the correlation between Brazil

                       

Philippines

     

and

     

Sweden is the same as

         

between Sweden and Brazil.

 

For

                   

Poland

     

this

     

reason, the bottom

 

half of the matrix is

     

blank as it is the

                       

Portugal

       

same as

 

the top half.

                                     

Russia

                                                   

Singapore

             

In order to find market correlations, look up

         

the first country by

                       

South Africa

       

alphabet

   

on the left and the

         

second country along the top.

                       

Spain

                                                   

Sweden

                                                     
   

Switzerland

                                                     
   
                           

75% < correlation 50% < correl < 75%

                           

Taiwan

 

Thailand

                         

25% < correl < 50%

                           
 

Turkey

                                                   

United Kingdom

                                               

Data from June 2007 - June 2008

16

Source: Credit Suisse: AES ® Analysis

Portfolio Strategy

Portfolio Strategy

1 Year Global Correlations (p.2)

 

Japan

Jordan

 

Korea

Malaysia

Mexico

Morocco

Netherlands

New Zealand

Norway

Pakistan

Peru

Philippines

Poland

Portugal

Russia

Singapore

South Africa

Spain

Sweden

Switzerland

Taiwan

Thailand

Turkey

United Kingdom

USA

9%

-10%

8%

4%

78%

-5%

48%

2%

28%

9%

35%

0%

37%

29%

21%

11%

19%

45%

46%

47%

1%

13%

34%

50%

Argentina

17%

-3%

25%

25%

58%

-1%

59%

17%

54%

8%

56%

28%

47%

50%

48%

29%

45%

52%

57%

50%

27%

31%

51%

59%

Australia

69%

11%

69%

58%

15%

17%

36%

55%

42%

9%

29%

58%

24%

41%

39%

68%

44%

22%

30%

36%

62%

49%

37%

35%

Austria

47%

7%

46%

40%

35%

-2%

83%

30%

74%

12%

57%

28%

68%

74%

66%

53%

64%

77%

81%

81%

38%

43%

71%

85%

Belgium

35%

9%

37%

37%

48%

1%

91%

28%

68%

16%

61%

29%

64%

70%

61%

41%

62%

79%

80%

83%

35%

35%

69%

86%

Brazil

24%

-6%

27%

23%

72%

-8%

59%

19%

54%

3%

56%

18%

48%

45%

44%

32%

42%

53%

55%

53%

24%

30%

51%

59%

Canada

16%

-1%

17%

16%

69%

-2%

52%

15%

47%

7%

43%

13%

40%

36%

37%

22%

35%

47%

49%

46%

14%

22%

37%

54%

Chile

20%

-3%

20%

22%

64%

3%

58%

20%

40%

8%

55%

28%

47%

45%

38%

25%

40%

52%

49%

51%

20%

21%

47%

55%

China

27%

6%

33%

29%

1%

14%

8%

24%

13%

2%

13%

22%

8%

10%

10%

25%

12%

-1%

0%

6%

28%

15%

11%

8%

Colombia

26%

10%

29%

21%

30%

10%

49%

26%

39%

9%

45%

21%

40%

47%

38%

32%

29%

45%

37%

43%

22%

21%

40%

47%

Czech Republic

44%

16%

43%

43%

27%

11%

73%

33%

68%

6%

56%

38%

60%

62%

68%

47%

56%

62%

63%

65%

42%

45%

69%

69%

Denmark

41%

-2%

44%

40%

45%

-6%

78%

30%

75%

12%

67%

29%

64%

69%

66%

52%

68%

69%

78%

75%

40%

49%

66%

79%

Egypt

28%

18%

28%

29%

9%

16%

17%

32%

19%

4%

13%

32%

16%

21%

20%

30%

20%

7%

10%

16%

23%

32%

24%

16%

Finland

43%

3%

44%

41%

41%

1%

88%

29%

77%

12%

59%

29%

68%

73%

69%

51%

69%

82%

87%

81%

40%

42%

70%

87%

France

36%

7%

35%

35%

48%

-2%

94%

25%

72%