Asset Allocation: Global Asset Management : Financial Assets

There are a number of ‘technical’ features of a national market which will make it more or less attractive to overseas investors. Every currency’s asset markets compete for global investment capital by trying to offer as many of the following features as possible.

Size

The larger an asset’s market in terms of total capitalisation and volumes traded, the greater the market ‘depth’ - which is manifested in the form of liquidity. Another advantage of having a constant stream of buyers and sellers coming to a market is that prices will always reflect up-to-the-minute conditions.

Investment choices

There are three broad classes of financial assets - money market instruments, bonds and equity - but within these categories there can be a phenomenal range, both of product types and issuer characteristics.

A wide product range can enhance trading opportunities and increase the precision of an individual investor’s risk exposure and desired levels of return. This is more important to securitised debt markets (money markets and bonds) as there aren’t many significant variations on the equity contract structure. But the existence of liquid futures and options contracts will make a particular equity market more attractive to experienced investors because they can use derivatives to enhance returns and reduce risk.

	MONEY MARKETS	BOND MARKETS	EQUITY MARKETS
CASH MARKETS	T-bills, CDs, CP, notes	Plain vanilla, zeros, FRNs, convertibles	Ordinary, preference
DERIVATIVES	STIR futures and options	Warrants, Government bond futures & options	Warrants, equity index futures and options, individual equity index futures and options

Again only the major currencies offer a wide range of product choice.

Choice of issuers

Global investors will be attracted by a wide choice of issuers.

In equity markets, the Anglo-Saxon economies of the US and UK have the widest choice of issuer - from ‘blue chip’ companies through a medium sized market to highly speculative smaller companies - and across all industry sectors. The US obviously dominates in terms of size.

In debt markets the range goes from zero credit risk , low returning government debt through to high yield junk bonds . The Anglo-Saxon financing technique of ‘securitising’ debt (issuing bonds) rather than relying on non-negotiable (untradeable) bank loans again gives them an edge in terms of the diversity of issuer. The eurozone is witnessing an ever-increasing use of debt financing and the international bond market (the eurobond market) offers a large choice of highly creditworthy corporate issuers.

So generally, the most mature, efficient markets have a greater range of risk/return investment propositions both for debt and equity.

However, when it comes to new growth, opportunities may be greater in less developed markets where leading companies have yet to reach their full potential. In this context, the search for good value and strong growth can take a global investor into currencies other than the USD, EUR, CHF and GBP.