International trading in equity securities is expanding at a much faster pace than most experts realize and may continue to grow at a "fairly enormous" rate, according to the author of a just-released Salomon Brothers report.
The report indicated international equity trading amounted to nearly $750 billion (gross purchases plus gross sales) in 1986, up about 80 percent over the estimated $400 billion level in 1985."It's a big market but no one realized just how big it was before," says Michael Howell, a London-based European equity strategist with the big investment banking firm. "The market is up for grabs."
In a telephone interview, he said the study justifies recent moves by big investment and commercial banks to expand their securities trading operations in financial centers such as New York, London, and Tokyo. It also confirms what financial experts refer to as the trend toward "globalization" of securities markets, he said.
International trading in West German, British and French equity securities made up a larger than expected share - about $200 billion - of the total volume, the report concluded. About three-fourths of that amount was traded in London, underscoring that city's dominant position as a European securities trading center, Mr. Howell said.
The United States received the largest share of foreign funds in 1986, according to the report. Net purchases by foreign investors in U.S. equity securities markets amounted to nearly $18.6 billion, including $4.7 billion by U.K. investors and $3.3 billion by the Japanese.
In contrast, foreign investors were net sellers of Japanese equities in 1986, a development Mr. Howell said reflected a widely held view by foreign investors that these issues were overpriced. Mr. Howell said that view proved to be largely mistaken. "If you look at Japan it looks expensive," he said. But, he added, "Do you want a market that looks expensive or do you want a market that goes up?"
Big current account imbalances are largely responsible for the huge growth in international equity trading, Mr. Howell said. Another major factor is the aging of the populations of industrial nations and the accompanying growth of pension funds, much of which is invested in foreign equities. Additionally, he said the 1979 move by U.K. Prime Minister Margaret Thatcher to eliminate exchange controls has been largely responsible for interest by U.K. investors in foreign equities.
Although trading of foreign equity securities has trailed that of bonds by a wide margin, Mr. Howell said he expected that difference to narrow with the growth of pension funds, which tend to invest more heavily in equities than in bonds.
The report also concluded that U.S. investors buy and sell their foreign equity securities at a much faster clip than their Japanese or British counterparts. Comparing total transactions to net transactions, Salomon Brothers found that in 1986 every dollar of foreign equity securities bought by U.S. investors generated $21.30 in trading volume. In contrast, one dollar bought by British investors and Japanese investors produced only $7.10 and $4.80 in business, respectively.
"The U.S. investor trades very aggressively. There's a lot of turnover," Mr. Howell says. "It reflects the fact that U.S. investors are very sophisticated." Japanese investors, on the other hand, "don't trade. They don't have many assets worldwide in equity markets. They're accumulating positions."