Wednesday, January 06, 2010

Don't Invest In Very Big Financial Companies!!!

Mainstream media had to make some people happy when the market capitalisation of listed companies on Bursa Malaysia breached the RM1 trillion mark on Tuesday. That is about 1.62 times of the gross domestic product for 2009. The all-time high market value of Bursa Malaysia was RM1.1 trillion, which was recorded during the early part of 2007 before the market collapsed due to global financial crisis in the second half of 2007. Bear in mind that RM1 trillion @ 3.4 = USD294bn.

That prompted me to look back to my old postings on market cap, and this:

Monday, March 27, 2006

Stock Market Capitalisation - A Reality Show

Finding Your Space In The World

Sometimes when we talk about financial markets, we miss the bigger picture of how things are. One could be the minister of finance or a big hedge fund trader or a big shot analyst... in various countries in Asia or Australia for that matter, we tend to get lost and self absorbed in our own world, exaggerating our importance. Many Asian investors and management often wonder why foreign investing institutions or foreign investors do not buy more shares of Asian companies. Some government authorities try their darndest to drum up interest among the foreigners. Maybe if we look at comparative market capitalsations, we will get a better picture.

Market capitalisation is calculated by multiplying the number of outstanding common shares of the firm and the current price of those shares. The term capitalisation is sometimes used as a synonym of market capitalisation; more often, it denotes the total amount of funds used to finance a firm's balance sheet and is calculated as market capitalisation plus debt (book or market value) plus preferred stock. Below are the approximate total market cap of the "domestic listed companies only" on the respective exchanges as at end-2005 (or figures as close to end-2005):

NYSE US$13.3 trillion
Nasdaq US$3.6 trillion
Tokyo Stock Exchange US$4.6 trillion
London Stock Exchange US$3.1 trillion
Euronext US$2.7 trillion
Deutsche Bourse US$1.2 trillion

In Asia-Pacific, the HKSE's figure was US$1.05 trillion. The Jakarta Stock Exchange has a paltry figure of US$50 billion. The Singapore Exchange at US$203 billion. The Taiwan Stock Exchange at US$480 billion. The Bombay SE comes in at US$592 billion. The KLSE at US$190 billion. The Thailand SE at US$142 billion.

The 10 largest US companies listed on NYSE according to market cap:

1) Exxon Mobil US$365 billion
2) General Electric US$347 billion
3) Citigroup US$230 billion
4) Bank of America US$212 billion
5) Procter & Gamble US$197 billion
6) Pfizer US$193 billion
7) Wal-Mart US$188 billion
8) Johnson & Johnson US$179 billion
9) AIG US$170 billion
10) Altria US$150 billion

Bearing in mind, I didn't even venture to include some of the big companies on other exchanges such as Microsoft US$279 billion, BP Plc US$236 billion, Royal Dutch Shell US$206 billion, HSBC US$190 billion, Petro China US$182 billion, Toyota US$174 billion, etc..

Just looking at the exchanges value and market cap of some of the biggest companies, theoretically speaking the ENTIRE KLSE is only as big as HSBC!!! Which means HSBC can basically own all the one thousand over companies listed on KLSE in exchange of their shares!

Either Citigroup or Bank of America could do the same for all the domestic companies listed on Singapore Stock Exchange. When just ONE company can account for your entire country's exchange market capitalisation - that's a reality check. That should give us a better sense of where we are in the economic world. I mean the CEO would almost be able to proclaim himself/herself as KING/QUEEN of the country - if I "control" all the companies on the Singapore Stock Exchange, that is a pretty powerful position, even PAP would have to give way man!!!

This game is quite fun, say Exxon mobil could just borrow a little bit more and then it could take over all the companies listed on Taiwan Exchange. General Electric should do this, it could buy out all the companies on KLSE and Thailand Stock Exchange in exchange for GE shares. instead of running GE from a tiny building, you could run companies over two decent sized countries, with lots of island resorts to boot.
That posting was way back in 2006. You can play around with market caps as many single stocks are larger than the entire market cap of a single exchange. That wasn't my main point, the funny thing was the list of ten biggest US companies in 2006:

1) Exxon Mobil US$365 billion
2) General Electric US$347 billion (US$165bn now or 47% of what it was in 2006)
3) Citigroup US$230 billion (US$79.34bn now or 34% of what it was in 2006)
4) Bank of America US$212 billion (US$130bn or 61% of what it was, not too bad considering all that has transpired)
5) Procter & Gamble US$197 billion
6) Pfizer US$193 billion
7) Wal-Mart US$188 billion
8) Johnson & Johnson US$179 billion
9) AIG US$170 billion (gulp, its US$4bn now, meaning it has lost 97.7% of its value)
10) Altria US$150 billion

Have a look at the biggest companies now (in USDbn):

Exxon MobilXOM$323.81
Microsoft MSFT$268.50
Wal-Mart StoresWMT$201.37
Google Inc.GOOG$189.18
Procter & GamblePG


Johnson & JohnsonJNJ
Apple Inc.AAPL$176.08
Int'l Business Mach.IBM$168.02
General Electric GE


JPMorgan ChaseJPM$161.37
AT&T Inc.T$161.22
Berkshire HathawayBRK.A$156.56
Pfizer Inc.PFE$147.67
Bank of AmericaBAC$130.02
Cisco SystemsCSCO$134.21
Wells FargoWFC$125.57
Oracle Corp.ORCL$122.02

Its tongue in cheek of course, but think about it, what else can whack off so much market cap from very big companies... financial bubbles bursting, now, how often do that happen... way too often, too often for investors to buy and hold financial stocks as a significant portion of asset allocation, in particular for conservative investors.

It used to be very safe to buy and hold blue chip banks. Now its different with all the big ones being international, having the same toes and fingers in every instrument, leveraging up when others are doing likewise so as to not be left out. The big ones are making sure they will be in everything, and when crises hit, they are also inadvertently making sure they have the likewise exposure. A caveat, I think regional and local banks are different animals.

Yes, there will be other kinds of crises - inflation, deflation, tech bubbles, country debt defaults, wars, major currency realignment, etc... - how well do your so called BLUE CHIPS stack up when they come face to face with these kind of crises? We got very close to going into a depression, yes other big caps would have tumbled as well, but you would not have a large part of your capital being wiped out. Because when your capital gets wiped out, you need to raise funds, which dilutes everything - that is capital destruction. Companies that suffer dips in revenue and profits in a downturn but NOT capital destruction, will always bounce back when things recover. We must really rethink the way we regard finance stocks as the next financial bubble is just around the corner..., there is always one just around the corner.

p/s photos: Sayuri Anzu

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