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Investment and portfolio analysis

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Introduction of Global financing system:

The global financial system (GFS) is the financial system consisting of institutions and

regulators that act on the international level, as opposed to those that act on a national or

regional level. The main players are the global institutions, such as International Monetary Fund

and Bank for International Settlements, national agencies and government departments, e.g.,

central banks and finance ministries, private institutions acting on the global scale, e.g., banks

and hedge funds, and regional institutions, e.g., the Eurozone. Deficiencies and reform of the

GFS have been hotly discussed in recent years.

The financial system is the collection of markets, institutions, laws, regulations, and techniques

through which bonds, stocks, and other securities are traded, interest rates are determined,

and financial services are produced and delivered around the world. The financial system is one

of the most important creations of modern society. Its primary task is to move scarce loan able

funds from those who save to those who borrow to buy goods and services and to make

investments in new equipment and facilities so that the global economy can grow and increase

the standard of living enjoyed by its citizens. Without the global financial system and the loan

able funds it supplies, each of us would lead a much less enjoyable existence. The financial

system determines both the cost and the quantity of funds available in the economy to pay for

the thousands of goods and services we purchase daily. Equally important, what happens in this

system has a powerful impact upon the health of the global economy. When funds become

more costly and less available, spending for goods and services falls. As a result, unemployment

rises and the economys growth slows as businesses cut back production and lay off workers. In

contrast, when the cost of funds declines and loan able funds become more readily available,

spending in the economy often increases, more jobs are created, and the economys growth

accelerates. In truth, the global financial system is an integral part of the global economic

system. We cannot understand one of these systems without understanding the other.

Stability in an Integrated Global Financial System

The growing interconnectedness of national financial systems is a key dimension of

globalization. Today even small players in the global marketplace, such as individual investors

and small businesses, can direct their wealth around the world almost as easily as moving

pieces on a chessboarda privilege that formerly only biggest firms and richest peopleenjoyed. This increased freedom of financial movement has the potential to benefit all of us by

facilitating trade, enhancing the diversification of assets, and expanding the resources available

for development.

Counterbalancing this greater freedom and opportunity, however, are the dangers inherent in

all financial systems, whether of local, national, or international scale. The natural dynamic of

financial markets is one of boom and bust. Firms, industries, and even whole countries can go in

and out of fashion, as it were, among a scattered and contentious population of investors who


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often behave more like an angry herd than the rational homo economicus of financial theory.

Whole economies can be left trampled and broken in the wake of such stampedes. Some

mechanism of regulatory control is needed to harness these flighty markets and ensure that

their vital energy is directed to productive purposes.

National financial systems, especially in the worlds rich countries, have evolved such

mechanisms to varying degrees of effectiveness. They include central banks, insurance and

securities regulators, bank deposit insurance regimes, and bankruptcy courts, among many

others. But no strong analogue to most of these institutions yet exists at the global level, and as

the international financial system becomes increasingly globalized, their absence is ever more

keenly felt. This chapter explores the ongoing integration of the global financial system and the

ongoing challenge of making it work for the benefit of all.

Financial Integration Yesterday and Today

The global integration of financial systems, with all its opportunities and dangers, is a topic ofenormous current interest, but by no means a new one. National financial systems, especially

those of the major industrial countries, were by some measures almost as closely intertwined in

the first decade of the last century as they are in the first decade of this century. A long period

of financial disintegration occupied much of the early and middle decades of the twentieth

centurylong enough perhaps to create the perception that global financial

interconnectedness is the exception rather than the norm. But that period of low global

integration now appears to have been an interruption in a very long term trend toward an ever

more globalized world financial system. Integration is seen to rise steeply, and even accelerate,

in the last four decades of the nineteenth century. This was the period of the international goldstandard, when each of the worlds major industrial countries fixed the price of gold in its own

currency: for example, the price of gold in the United States was set at $32Aan ounce. By doing

so, they automatically fixed the price of each others currencies in terms of their ownthat is,

their exchange rates. The ability to exchange one currency for another at a predictable rate

engendered confidence among would-be international investors, encouraging them to take the

risk of sending their capital abroad. After 1970, despite the breakup of the Bretton Woods

regime and the shift to floating exchange rates, integration surged: between 1980 and 2000

Obstfelds measure rose more than in any previous twenty-year period in the figure. However,

its level at the end of that period was only marginally higher than its previous peak in 1914.Financial integration seemed to have come full circle from the long hiatus of war and

depression, and in recent years it appears poised to continue its long-term upward trend.

However, if two countries are not closely integrated financiallythat is, if savings in one

country do not flow easily to the otheraverage interest rates in the two countries can

diverge. For example, assuming that the supply of savings is the same in both countries but that

the demand for borrowed money differs, competition for those scarce savings will be greater in


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the country with stronger demand; if savings cannot flow from the country with weaker

investment demand, competition will drive the interest rate up in the country with stronger

demand. From then until about 1980, however, the difference between U.K. and U.S. interest

rates is usually both large and highly variable. After 1980, stability returns: the difference is

even smaller and more stable than it was before 1914. This evidence from interest rates is thus

quite consistent with the pattern observed in figure 1: countries were closely financiallyintegrated before World War I and after 1980, and not in the period in between.

Yet a third way of demonstrating the historical pattern of financial integration is by looking at

gross international asset positions. The first two figures were based on flows of capital, that is,

the amount entering or leaving a country in a given year. When this stock measure of foreign

capital is taken as a ratio to gross domestic product (GDP) for a sample of mostly industrial

countries, the pattern is again one of high integration in the early 1900s, a sharp decline during

the world wars and the interwar years, and a sharp increase once again after World War II. Also

as in the first two figures, financial integration is seen to have only recently risen above its

previous peak. Capital assets held outside their country of origin amounted to just over half of

all assets in the early 1900s, but only about 10 percent by 1945, rising to about two-thirds of all

assets by 1990.

However, when the denominator is world GDP rather than the combined GDPs of the sample

countries, the gross foreign asset position is a much smaller 20 percent or less in the earlier

period, rising to about 60 percent in the later period. This way of looking at the data suggests

that international financial integration today has gone far beyond anything experienced in the

first great era of financial globalization.

International Initiatives to Enhance Global Financial Stability :

The financial crises of the late 1990s made it clear that action needed to be taken to strengthen theinternational financial system, to prevent further crises and possibly a global financial meltdown.

There ensued a lengthy and often-heated debate over what has come to be called the international

financial architecture, or the whole of the system that monitors, coordinates, regulates, and

otherwise influences cross-border capital flows. That architecture has many rooms and corridors,

only a few of which this chapter will explore.

One generally agreed broad principle in the redesign of the international financial architecture has

been to retain its basic market orientation. The free operation of financial markets has, on balance,

served the world economy well. But, as we have seen, financial markets have certain dynamics that

other markets do not, which can lead to instability under some circumstances. And instability in one

market in one country can have spillover effects on markets in other sectors and other countries.

Thus there remains a role for official or semiofficial institutions at the international level.

However, any effort to maintain and improve stability in global financial markets must start from

one basic fact: no international body has the legal authority to exercise direct control over

international transactions under normal circumstances. There is, for example, no global central

bank analogous to, say, the U.S. Federal Reserve, that can set bank reserve requirements globally,

nor is any international agency empowered to issue deposit insurance, mandate uniform

accounting standards, or legislate financial disclosure requirements for firms issuing stock. And


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there is little likelihood of the countries of the world agreeing to establish such global financial

governing bodies in the foreseeable future. The International Monetary Fund is perhaps the closest

thing, but its power derives mostly from its ability to step in and impose rules on countries already

in crisis, as a condition to receive the Funds emergency lending. The Fund can and does monitor

the transactions of countries in global financial markets and issues warnings when appropriate, but

there is little else it can do to actively prevent a financial crisis. Legal authority for regulatingfinancial systems continues to reside mainly at the national, not the international, level.

Given this reality, proposals to reform and reinforce the international financial architecture have

had a twofold focus. The first is to encourage countries to voluntarily improve monitoring and

surveillance by the IMF and other international institutions.

Much progress has already been made in the setting of international financial standards and their

adoption by countries around the world. Indeed, no fewer than sixty such standards have been

promulgated, although only about twelve have been widely adopted and are being supervised by

the IMF and/or the World Bank, and thus can be considered core international standards. Much

of the impetus for standards setting has come from the Basel Committee on Banking Supervision,

which has concluded two successive international accords on standards for banking, dealing mostly

with capital requirements, standards for national supervision, and disclosure of risks. TheOrganization for Economic Cooperation and Development has promulgated standards for corporate

governance. Standards have also been developed for fiscal and monetary policy transparency on

the part of national governments, for insurance regulation, for securities market regulation, for

corporate governance and supervision, and most recently for the combating of money laundering

and terrorist financing. Standards for national bankruptcy procedures have also been issuedan

important development because, as discussed below, efforts to establish an international

bankruptcy court have so far failed to reach fruition. These are just a few of the major international

standards already in existence.

Increased surveillance in the wake of the crises of the late 1990s has been largely within the

purview of the IMF. In addition to its past surveillance efforts, the IMF has embarked on two new

initiatives. The first is the Financial Stability Assessment Program, which the IMF operates jointlywith the World Bank. This program identifies strengths and vulnerabilities in countries financial

systems, determine how key sources of risk are being managed, and ascertains developmental and

technical assistance needs in the countries financial sectors. The second is the Reports on

Observation of Standards and Codes, which, as the name indicates, consists of regular reports on

how well countries are implementing and adhering to the various new standards promulgated by

the Basel Committee and others.

An important historical fact about the international standards approach, and one that has led to

some criticism, is that the standards have been shaped for the most part by the worlds developed

countries. Leadership in this area has come mostly from the Group of Seven and the Group of Ten,

whose membership consists of the largest industrial countries. The developed countries are also

more influential within the World Bank and the IMF than would be the case if voting rights in thoseorganizations were determined by population, or by one country, one vote as in the United

Nations. Developing countries, consequently, have had relatively little input in the standards

discussion: few emerging markets are represented in the Financial Stability Forum, and the newly

created Group of Twenty, which does include developing countries, has had relatively little input

thus far, and its role remains unclear. In the view of some, the current balance of influence amounts

to financial regulation without representation.


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The dominance of the developed countries in the standards setting process was to some

extent inevitable: it was these countries, with their already well developed financial markets, that

were mostly at the forefront of the issues. These countries also had most of the resources and

expertise to undertake a thorough review of the existing system. Moreover, the developed counties

had already been working in concert with each other to develop common standards, through

forums such as the Basel process and the OECD. Thus the global promulgation of standards waslargely just a matter of bringing these already existing or in-process standards to the rest of the

world.

Yet the critique that the standards process has unfairly left the developing countries on the outside

looking in is not without merit. Not only did the standards setting process give greater weight to the

interests of developed-country governments; it also gave representatives of the financial and

corporate sectors of those countries an opportunity to lobby for their own, private interests. As a

consequence, the current set of standards is hardly a neutral one between developed and

developing countries. Rather, it tends to favor the former, which are the global economys

traditional lenders, over the latter, the traditional borrowers. Moreover, the process has tended to

leave out some countries, like China, that were small players in the world economy when the

process began but are certain to become major players in the near future.As a result, the poorer countries of the world have had to adapt or catch up to a set of standards

that they had little voice in creating, even as they are making prodigious efforts to build and expand

their often-primitive financial systems. At best, one can say that they had few outmoded national

standards to scrap and replace. But the developing countries have good reason to wonder if the

new global standards are designed in their interest, and this raises issues about the standards

legitimacy. For example, the standards promote openness to entry by foreign banks and other

financial institutions into national financial markets. Although this may help developing countries

import state-of-the-art technology and worldwide best practice, it clearly works to sustain the

financial dominance of the developed countries, in which nearly all the worlds leading banks are

headquartered. More broadly, whereas the new standards typically constrain national autonomy,

they put no such constraints on private global investors choices. Perhaps most worrisome of all,the standards presume that a one-size-fits-all approach is best, without taking into consideration

the very real differences between countries in terms of size, development, history and culture, and

financial sophistication.

Arguably, one adverse consequence of this perceived lack of legitimacy has already occurred,

namely, the failure to create an international bankruptcy court. Such an institution (also called a

sovereign debt reduction mechanism, or SDRM) has great potential to prevent future financial

crises, or at least mitigate their destructiveness, by bringing to situations of country insolvency the

same structure and discipline that now applies within countries with effective bankruptcy laws.

Often the prospect of a countrys default on its debt precipitates a crisis, as investors crowd the

marketplace to sell off their holdings before others do, because they fear that if they wait there will

be nothing left to sell. Like Chapter 7 or Chapter 11 procedures in the United States, aninternational bankruptcy institution could, in effect, call a timeout in such a situation. This would

give the country a chance to recover its footing, or at least allow for an orderly disposal of any

financial assets of doubtful value. Unfortunately, the SDRM proposal has so far gone nowhere, in

part because of opposition from the U.S. administration, but also because emerging market

economies have likewise failed to support it. Some of these countries fear that this new institution,

too, would be tailored to the developed countries preferences and interests rather than their own.


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Another, more obvious consequence of the lack of universal support for the redesigned

international financial architecture is that financial crises have continued. They have occurred with

less frequency and less of a propensity for spillover than during the 1990s, but the crises that have

occurred have sometimes been severe, as in Argentina and Turkey. There have been some near

misses as well. Other countries have responded to the continued threat of instability by amassing

huge foreign exchange reserves as a buffer against a future crisis. China, India, and Japan have all

expanded their reserves severalfold since 1997. Meanwhile, of course, when crises have occurred,

they continue to be managed in the contentious, ad hoc way that earlier crises were. And the risks

of a major future crisis are considerableand will remain considerable until the longer-run issues of

the legitimacy of the international financial architecture are addressed.

Change and Diversity in the Global Financial System:We know that people have engaged in financial transactions since the dawn of recorded

history.

Sumerian documents reveal the systematic use of credit for agricultural and other purposes inMesopotamia around 3,000 BC. Barley and silver served as a medium of exchange -- i.e.,

money.

Even regulation of financial contracts existed in ancient times. Hammurabi's Code contains

many sections relating to the regulation of credit in Babylon around 1,800 BC. Banking

institutions arose in the city-state of Genoa in the 12th Century AD, and flourished there and in

Florence and Venice for several centuries. These banks took demand deposits and made loans

to merchants, princes, and towns. Security issues similar to their modern form also originated

in the Italian city states in the late Middle Ages. Long-term loans floated by the Republic of

Venice, called the prestiti, were a popular form of investment in the 13th and 14th Centuries,

and their market price was a matter of public record. Even organized exchanges for trading

financial futures contracts and other financial derivatives, which some see as an innovation ofthe 1980s, are not entirely new. Similar contracts were widely traded on the Amsterdam

securities exchange in the 1600s.6

As this little bit of history makes clear, some things have not changed. Financial activities, such

as borrowing, investing in securities, and other forms of financial contracting are very old

indeed. The ways in which these activities are carried out, however, have changed quite a bit

through the ages.

In the past few decades, in particular, the pace of financial innovation has greatly accelerated.7

Think of round-the-clock-trading in Tokyo-London-New York, financial futures, swaps, mortgage

backed securities, exchange-traded options, junk bonds, shelf registration, electronic funds

transfer and security trading, automated teller machines, asset-based financing, LBO, MBO, andall the other acronymic approaches to corporate restructuring. And this is but a small sampling.

While it may be hard to believe that the pace of general financial innovation during the past

few decades can sustain itself into the future, there are reasons to believe it can because it is

rooted in fundamental economic factors.8 Technological advances in telecommunications, data

processing, and computation, which began in the 1960s, have resulted in dramatically reduced

transaction costs for the financial services industry. In addition to lower transactions costs due


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to technological advances, there is also the learning curve: When one has created nine new

markets, the tenth one becomes a lot easier.

The decision to implement an innovation involves a trade-off between its benefit and its cost.

With secularly lower transactions costs, the threshold benefit to warrant implementing

financial innovations declines. If we see the same pace of change in the underlying

fundamentals as in the past, the implementation of financial innovation is likely to remainrapid, as the threshold for change is lower. With much lower costs of change, it becomes

profitable not only to introduce new products and create new markets, but also to change

entire institutional arrangements (including geographical and political locations) in response to

much smaller shifts in customer tastes or operating costs than in the past. Thus, technological

advances, lower costs, and the prospect of greater global competition in financial services all

form the basis for predicting substantial increases in both the frequency and the magnitude of

institutional changes for private sector and government financial intermediaries and for

regulatory bodies alike. To illustrate both the change and the diversity in institutional structures

around the world, consider the financing of retirement income for older people. For much of

the world's population, the extended family is the main institution to perform this function.

Elderly family members live and work with younger members of the agrarian family, and all

draw a common livelihood from it. But in much of the industrialized world, urbanization and

other fundamental economic and social changes have led to new institutional structures for the

care and support of the elderly.

An often-used metaphor for describing a country's retirement income system is the three-

legged stool. The first leg is government-provided pension and welfare programs (such as

Social Security in the United States); the second is employer- or labor union-provided pensions;

and the third is direct individual saving. There is substantial variation across countries in the mix

of the three sources of retirement income.

The Future of the Global Financial System:Consider now a small sampling of the implications of the functional perspective for the future

evolution of the global financial system. In our most likely scenario, aggregate trading volume

expands secularly, and trading is increasingly dominated by institutions such as mutual funds

and pension funds.

As more financial institutions employ dynamic strategies to hedge their product liabilities,

incentives rise for further expansion in round-the-clock trading to allow for more effective

implementation of these strategies. Supported by powerful trading technologies for creating

financial products, financial services firms will increasingly focus on providing individually

tailored solutions to their clients' investment and financing problems. Sophisticated hedging

and risk management will become an integrated part of the corporate capital budgeting andfinancial management process.


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The Role of Investment in the Countrys Economic and Social Development.

The effects of the investment can be classified into 2 main categories and these effects depend

on the dynamics, volume and quality of investments.

1.ECONOMICEFFECTS:

o Stimulates demand for goods and services,o Growths and diversify the demand of economic agents ,o Increase the turnover, revenue and profit,o Promotes the movement of capital,o Increases the participation of the country to international economic circuit,o Accelerates the promotion of technical progress, development, ando Upgrade of existing production capacities,o Increases efficiency and stimulate all areas,o Improves the economic environment, etc.

2. SOCIALEFFECTS:

o Increases the quality of life and standard of living,o Increase the number of jobs and the degree of employment,o Reduces unemploymento Develops the culture and education,o Increase the quality of labor,o

Health, environmental protection, etc.

The Role of Markets in the Global Economic System:

In most economies around the world, markets carry out the complex task of allocating

resources and producing goods and services. The marketplace determines what goods and

services will be produced and in what quantities through their prices. markets also distribute

income by rewarding superior producers with increased profits, higher wages, and other

economic benefits.

o Markets also distribute income. In a pure market system, the income of an individual ora business firm is determined solely by the contribution each makes to producing goods

and services demanded by the marketplace. Markets reward superior productivity and

sensitivity to consumer demands with increased profits, higher wages, and other

economic benefits. Of course, in all economies, government policies also affect the

distribution of income and the allocation of other economic benefits.


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Institute of global financing system

International institutions:The International Monetary Fund keeps account of international

balance of payments accounts of member states. The IMF acts as a lender of last resort for

members in financial distress, e.g., currency crisis, problems meeting balance of payment when

in deficit and debt default. Membership is based on quotas, or the amount of money a country

provides to the fund relative to the size of its role in the international trading system. The

World Bank aims to provide funding, take up credit risk or offer favorable terms to

development projects mostly in developing countries that couldn't be obtained by the private

sector. The other multilateral development banks and other international financial institutions

also play specific regional or functional roles. The World Trade Organization settles tradedisputes and negotiates international trade agreements in its rounds of talks (currently the

Doha Round).Also important is the Bank for International Settlements, the intergovernmental

organization for central banks worldwide. It has two subsidiary bodies that are important actors

in the global financial system in their own right - the Basel Committee on Banking Supervision,

and the Financial Stability Board. In the private sector, an important organization is the Institute

of International Finance, which includes most of the world's largest commercial banks and

investment banks.

World Bank:The World Bank is an international financial institution that provides loans to developing

countries for capital programmes. The WorldBank's official goal is the reduction of poverty. By

law, all of its decisions must be guided by a commitment to promote foreign investment,

international trade andfacilitate capital investment.

The WorldBankdiffers from the WorldBank Group, in that the WorldBank comprises only two

institutions: the International Bank for Reconstruction and Development (IBRD) and the

International Development Association (IDA), whereas the latter incorporates these two in

addition to three more:[4] International Finance Corporation (IFC), Multilateral Investment

Guarantee Agency (MIGA), and International Centre for Settlement of Investment Disputes

(ICSID).

Function:Financial institutions provide service as intermediaries of financial markets. They are

responsible for transferring funds from investors to companies in need of those funds. Financial

institutions facilitate the flow of money through the economy. To do so, savings a risk brought

to provide funds for loans. Such is the primary means for depository institutions to develop


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revenue. Should the yield curve become inverse, firms in this arena will offer additional fee-

generating services including securities underwriting.

Corporate valuation:

To consider how valuing a Financial Institution's balance sheet is different from a non-Financialfirm, consider how an industrial firm wields capital machinery (asset) and the loans (liabilities) it

used to finance that asset. The line is blurred in Financial Institutions, which must hold deposit

accounts (liabilities) to fuel the issuance of loans (assets). The same accounts are considered

loans as they are held in ownership not of the bank, but of the individual client.

Regulation:Financial institutions in most countries operate in a heavily regulated environment as they are

critical parts of countries' economies. Regulation structures differ in each country, but typically

involve prudential regulation as well as consumer protection and market stability. Some

countries have one consolidated agency that regulates all financial institutions while othershave separate agencies for different types of institutions such as banks, insurance companies

and brokers.

Countries that have separate agencies include the United States, where the key governing

bodies are the Federal Financial Institutions Examination Council (FDIC), Office of the

Comptroller of the Currency - National Banks, Federal Deposit Insurance Corporation (FDIC)

State "non-member" banks, National Credit Union Administration (NCUA) - Credit Unions,

Federal Reserve (Fed) - "member" Banks, Office of Thrift Supervision - National Savings & Loan

Association, State governments each often regulate and charter financial institutions.

Countries that have one consolidated financial regulator include United Kingdom with the

Financial Services Authority, Norway with the Financial Supervisory Authority of Norway, and

Hong Kong with Hong Kong Monetary Authority and Russia with Central Bank of Russia.

Government institutions of global finance system:

Governments act in various ways as actors in the GFS , primarily through their finance

ministries: they pass the laws and regulations for financial markets, and set the tax burden for

private players, e.g., banks, funds and exchanges. They also participate actively through

discretionary spending. They are closely tied (though in most countries independent of) to

central banks that issue government debt, set interest rates and deposit requirements, and

intervene in the foreign exchange market.

Private participants;

Players active in the stock-, bond-, foreign exchange-, derivatives-

and commodities-markets, and investment banking, including:


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Commercial banks Hedge funds and Private Equity Pension funds Insurance companies

Mutual funds Sovereign wealth fundsRegional institutions

Commonwealth of Independent States (CIS) Euro zone Marcos North American Free Trade Agreement (NAFTA)

Perspectives:

There are three primary approaches to viewing and understanding the

global financial system.

The liberal view holds that the exchange of currencies should be determined not by state

institutions but instead individual players at a market level. This view has been labeled as the

Washington Consensus. This view is challenged by a social democratic front which advocates

the tempering of market mechanisms, and instituting economic safeguards in an attempt toensure financial stability and redistribution. Examples include slowing down the rate of financial

transactions, or enforcing regulations on the behavior of private firms. Outside of this

contention of authority and the individual, neo Marxists are highly critical of the modern

financial system in that it promotes inequality between state players, particularly holding the

view that the political North abuse the financial system to exercise control of developing

countries' economies.


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Crises of global finance system:

The global financial crisis, brewing for a while, really started to show its effects in the middle

of 2008 and into 2009. Around the world stock markets have fallen, large financial institutions

have collapsed or been bought out, and governments in even the wealthiest nations have had

to come up with rescue packages to bail out their financial systems. On the one hand many

people are concerned that those responsible for the financial problems are the ones being

bailed out, while on the other hand, a global financial meltdown will affect the livelihoods of

almost everyone in an increasingly inter-connected world. The problem could have been

avoided, if ideologues supporting the current economics models werent so vocal, influential

and inconsiderate of others viewpoints and concerns.

The scale of the crisis of global finance System:

The extent of the problems has been so severe that some of the worlds largest

financial institutions have collapsed. Others have been bought out by their competition at lowprices and in other cases, the governments of the wealthiest nations in the world have resorted

to extensive bail-out and rescue packages for the remaining large banks and financial

institutions. The total amounts that governments have spent on bailouts have skyrocketed.

From a world credit loss of $2.8 trillion in October 2009, US taxpayers alone will spend some

$9.7 trillion in bailout packages and plans, according to Bloomberg. $14.5 trillion, or 33%, of the


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value of the worlds companies has been wiped out by this crisis. The UK and other European

countries have also spent some $2 trillion on rescues and bailout packages.

Role of investment in global finance system

Investment:

The most people are familiar with the term saving, and probably have an account or two with a

commercial bank or a credit union; others are intimidated when we talk about investing, which

seems to bring to mind images of financial genius, reserved for a chosen few. In fact investing is

not a complicated concept, and the majority of investors are individuals just like you and me,

preparing for their childrens college education, planning their retirement, making

arrangements to pay off a mortgage or simply trying to generate additional income.

Saving and investing have similar objectives. Saving is about putting away the money you have,while taking only minimal risk. So you work hard, get extra cash and put the money in a safe

place. Investing is using the money you have to make more money. Because your expectations

for returns are higher, there is greater risk involved, but these can be minimized with careful

planning

In finance, the purchase of a financial product or other item of value with anexpectation of favorable future returns. In general terms, investment means the use

money in the hope of making more money.

In business, the purchase by a producer of a physical good, such as durable equipmentor inventory, in the hope of improving future business.


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ROLE OF INVESTMENT INCONSTRUCTION INDUSTRY:

I have chosen construction industry to analyze the role of investment in global financial system.

Also a brief description of trend analysis in construction industry has been depicted in this

paper. Investment can be bifurcated into two segments i.e private sector investment in

infrastructure and public sector investment in infrastructure.

PRIVATE SECTOR INVESTMENT IN INFRASTRUCTURE:

The most pressing challenge facing the construction industry in most developing countries is

that of increased investment in infrastructure, which ultimately depends on economic growth

of a country. The ability of an industry, or even a government, to address the economic growth

of a country is very complex, and there have been very few examples of successful intervention

strategies in the developing world over the past 50 years or so. Notwithstanding this, there

have been some notable success stories in attracting increased funding for infrastructure in

developing countries which provide some useful learning for developing strategies forconstruction industry development.

As noted by Chege (2002), the most notable shift has been that from public to private sector

investment in public construction projects in both developed and developing countries. Several

factors have strengthened this shift towards private sector investment in infrastructure,

including:

The current levels of demand for infrastructure services have outstripped supplybecause of lack of sufficient funding due to budgetary constraints in most countries;

The infrastructure investments gap in most developing countries is colossal, which hasbeen caused by growth (for example in East Asia) and by low levels of past investmentand cannot be funded solely by the public sector;

The public sector is often fraught with inefficiencies and there is a generaldisenchantment with public provision of infrastructure, whereas there are often

efficiency gains from utilizing the private sector;

The private sector is more likely to ensure economic pricing of infrastructure servicesrendered than the public sector; and

Technological developments, for example financial innovations, have introduced a widearray of financial instruments that are suitable for financing of infrastructure projects.

This change has led to various options for private sector participation in order to provide

mechanisms to effectively utilize private sector investment in infrastructure projects such as:

Public ownership with private operation for example through leases and concessions;and

Private ownership and private operation through divestiture.


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The International Finance Corporation (IFC, 2002) notes that the potential for profitable

investment in developing countries is there the real question is how to identify potentially

profitable projects and how to abate the risks in a climate of uncertainty.

The IFC (Duff, 2002) identifies the following as the key elements for attracting private sector

investment

A Business-Friendly Legal and Regulatory Environment: Infrastructure projects incountries with sound legal and regulatory structures start off on a sounder footing.

Transparency, efficiency, enforceable contracts, equitable bankruptcy laws, provision

for international arbitration, and strong environmental and social standards provide

project sponsors with some assurance that the playing field is level and that the risk of

being blindsided by unanticipated legal obstacles is minimized.

Managing Currency Mismatches: While currency mismatches cannot be avoided anytime that foreign investment is involved in the deal, successful investors will find ways

to manage those mismatches. Even with perfect local capital markets, there would behigh rates of foreign investment in infrastructure because governments want the

technology transfer that comes with foreign management and technical practices.

Market Access: Market risk in infrastructure sectors is generally much lower than thedefault risk of the publicly owned utilities in the sector. Public utilities in the developing

countries are among the worst-run companies in the world. Many cannot meet their

basic operating costs from revenues. Most have inadequate investment resources to

maintain their existing assets in good order or to expand to meet growing demand. In

developed countries, for example, where demand for infrastructure services of all kinds

is growing at about 1% a year, utilities reinvest about half their cash in system

improvements and expansion; in the developing world, where demand is growing at

about 8% per year, investment is barely half that amount. It follows that a build-operate-transfer (BOT) project that can sell only to an uncreditworthy public utility is

itself implicitly uncreditworthy.

Strengthening Local Capital Markets: Encouraging infrastructure investment providesunique opportunities to help deepen capital markets and maximize the local financing,

thus preventing consumers from being held hostage to currency fluctuations. Countries

that have used privatization for developing local savings have seen those savings rates

grow impressively. Privatizing infrastructure and seeking local funding also serve to

expand local opportunities to supply equipment and services to infrastructure

companies. Recognizing that potential for business expansion, a number of countries

are actively developing local capital markets for infrastructure services. In addition, localinvestors can join infrastructure consortiums and are often invaluable advisors on local

conditions.

It is argued that the industry can in fact make a contribution to addressing at least someof the above, and in particular:

promoting a more business-friendly legal and regulatory environment; and


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improving market access to investment in public infrastructure.

Similarly, the IFC (2002) has also identified steps that can be taken to build business capacity

and investment promotion to support the involvement of the private sector, namely:

Strengthen and develop institutions:

Professional associations / chambers of commerce;

Business support services;

Investment promotion agencies;

Establishment of financial institutions; and

Privatisation and restructuring.

Build skills:

Management training;

Post-financing of enterprise support; and

Project development;

Promote investment:

Foreign direct investment promotion;

Foreign portfolio investment promotion; and

Information dissemination.

In addition to the IFC recommendations given above to strengthen the private sector capacity,

strengthen of public sector delivery management capacity is also essential and in particular

expertise in relationship to public-private partnerships.

Public Sector Investment in Infrastructure:

While increased investment in the form of private sector investment is clearly a priority focus

area, in many countries, much can also be done to address improvements in public sector

spending. There are certain issues identified for under-spending (or lack of efficiencies) in public

sector spending depicted as under

An unclear procurement framework in which the current public sector initiatives aimedat improved performance management are ignored and, in which corruption can

flourish;

A plethora of tender and contract documentation, much of which is outdated and poor,leading to adversity and litigation, and disempowering the emerging sector;


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Inability of departments to introduce contracting strategies which embrace state-of-the-art technology and know-how;

Poor forward planning resulting in hasty and inadequate design and documentation,poor contract administration, claims by contractors, budget over runs, delayed

completion and poor quality control;

Poor tendering criteria and procedures which emphasize contract price rather thanvalue for money, quality and lifecycle costing;

Delays in the award of tenders caused by regulation and the non-value adding controlsexercised by state and provincial tender boards;

Ineffective management of post award delivery, particularly at provincial and municipallevel, and including delayed payment to suppliers, which impacts negatively on the

sustainability of industry, particularly the emerging sector;

Delivery delays and an inability to hold accounting officers responsible for delivery; and An inability to monitor efficient and effective delivery of infrastructure, improvement

and the attainment of socio-economic objectives.

In support of the above, the Construction Industry Development Board (CIDB) in South Africa is

presently developing a program to support infrastructure procurement and delivery

management in the public sector, comprising of:

y Best practice guidelines in the form of a Procurement and Delivery Management System(PDMS) tool kit which will be tested with key delivery agencies;

y Capacity building support in which private sector expertise will support public sectoragencies in the introduction of best practice procurement and delivery management

practice; and

y Promotion of centers of excellence in the public sector where proven capability isdemonstrated.

Three Roles of the Investment in Co. Finances:

The investment banker serves multiple roles as an adviser to a company. The banker must

understand the current situation of the company and help it move in the direction it wishes to

go. This means assisting the company to improve its competitive standing while adding and

subtracting assets and liabilities in order to strengthen the position of the company. Bankers do

this by finding takeover candidates, leading sales of stock and bonds or suggesting newinvestment techniques. The ability of the banker to understand the thinking of a corporate

client is key to his or her success.


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Achieving Strategic Objectives:Investment bankers meet regularly with management to discuss what objectives the company

is strategically focusing on. The banker also needs to provide an outside view of what

competitor companies are doing and what, if any, strategic complications this provides. Bankers

must provide solutions for achieving objectives and have the financial strength to lead bond

and stock offerings on behalf of the company.

Fairness OpinionsAnother document necessary for the purchase of one company by another is the fairness

opinion. The fairness opinion is written by the investment banker and provides detailed

determinations, often using several investment metrics, to demonstrate that the company did

not overpay for the acquired company. Fairness opinions allow management to show that

substantial effort was used to get the best price possible for investors. An investment bankermay be sued by shareholders if it is later learned that his opinion was incorrect.

Due DiligenceIf a company has made a bid for another company an outside third party such as the

investment banker will need to supply an opinion regarding the careful study and decision

making that went into acquiring the company. This is called a due diligence report. The due

diligence report is a necessary document and requires that the investment banker ask probing

questions and ascertain that the company did everything in its power to uncover problems that

might arise later.

Managing Stock OfferingsInvestment bankers are responsible for bringing new companies to the public markets for the

first time (also called an IPO or initial public offering), raising capital for privately held

companies, or improving the capital strength of existing public companies by redeeming debt

with additional stock offerings. Taking a company public is a difficult task as the stock offering

may not be received well if it is overpriced or will rise greatly in value if it is under-priced. It is

the job of the banker to negotiate terms and get all legal, accounting and regulatory documentsprepared. In addition, the investment banker will work with the sales force and other

customers to buy the stock.


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Managing Debt OfferingsInvestment bankers suggest ways to finance or refinance financial obligations. In a period of

low interest rates a banker may demonstrate cost savings by redeeming outstanding debt at

higher interest rates and substituting a new, lower interest cost issue. The banker earns fees for

the underwriting while guiding the company's efforts to choose the proper size and maturity of

the offering as well as handling negotiations with the debt rating agencies.

CONCLUSION:-

The effects of investment are positive both for individuals and for economy as well. When

investment brings positive changes in macro level i.e. in massive level then automatically

reaches to individual levels. Investment is the key indicator to measure the progress and

growth of an economy. When it affects the whole economy, it is studied under the subject of orbranch of macroeconomic analysis where as when it considers the individuals demand, needs

and effect then it is studied under the subject of micro economic analysis and presentations. It

is considered by the economist that a nation with abundant investment make progress by leaps

and bounds where as an economy lacking investment flows may not progress until and unless

adequate investment is not deployed in that economy. The investment effects not only to a

whole economy but also to an individual as well. As investment causes to setup the massive

industries, these industries demands for labor which increases the employment options and

these employment opportunities increases the living standards, per capita incomes, or cultural

development and eliminate all social evils like social injustice, poverty, nepotism, bribery and

corruption.


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Presented Byqasim

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