Capital Markets Play Vital Role in Maintaining Global Financial Stability, ADB VP Says

ISTANBUL, TURKEY (5 May 2005) - As the world becomes more integrated, capital markets are playing a vital role in providing liquidity and investment instruments as well as in maintaining global financial stability, ADB Vice-President Khempheng Pholsena told a seminar yesterday.

"They are not only the markets where debt and equity funds are bought and sold, but also an essential source of financial innovation and opportunities," Ms. Pholsena said.

She was speaking at a seminar in Istanbul on "Capital Markets: What Does the Future Hold?" held on the opening day of ADB's 38th Annual Meeting of the Board of Governors.

Ms. Pholsena said there is a continued abundance of global liquidity and improved credit quality in mature and emerging financial markets, including a rapid growth of assets in Asia.

"Many of these assets have found their way into global and regional capital markets, as investors seek the best prospects for returns," she said.

However, she said potential disruptions to market performance loom in the background. These include stubbornly high oil prices and continued global growth imbalances across industrial countries, which increases the risks of a disorderly adjustment of currency and capital markets.

The seminar brought together four prominent players in the asset management industry who are collectively responsible for managing more than US$1.5 trillion in stocks, bonds and other assets. They provided their insights on what investors could expect from the capital markets in the years to come.

Participants heard that movements in the capital markets have a direct impact on ADB and its developing member countries (DMCs), since ADB borrows funds from the markets for lending to its DMCs as part of its mission to fight poverty in Asia and the Pacific, and thus support sustained growth and improved standards of living across the region.

"The Annual Meeting offered an important opportunity to discuss the challenges facing institutional investors, and I was pleased to participate in what was a dynamic exchange of perspectives and ideas with my fellow panelists and the members", said Laurence Fink, Chair and CEO of BlackRock Inc., a New York-based asset management company.

In his presentation, David Fisher, Chair of the board of Capital International Inc. and Capital Guardian Trust based in Los Angeles, said it is an attractive time for investing in emerging markets even after four years of outperformance. "Given their attractive growth rates, emerging markets will continue to represent a larger of share of the global capital markets," he said.

But Jeremy Grantham, Chair and CIO of Grantham Mayo Van Otterloo, a Boston-based global money manager, was more cautionary. In his presentation, "Skating on Thin Ice: Surviving in a World of Overpriced Assets," Mr. Grantham looked at, among others, inflated house prices in the UK, Australia and US, and the increased role that housing price increases have played in sustaining the expansion of credit and consumption.

"All bubbles break, though not at the same speed," he said. "A breaking bubble in an important asset class will definitely affect animal spirits, investing intentions, and consumption. This effect may or may not be offset or postponed by monetary or fiscal moves."

Mr. Grantham said "nothing that Mr. Greenspan [chief of the US Federal Reserve] and his successor do will prevent this reversion to the mean of asset prices, although their actions may have a substantial and beneficial effect on how badly the economy fares in an environment of falling asset prices - they have probably run out of asset classes to inflate and may be approaching some maximum debt leverage."

On the other hand, Bill Miller, chair and chief investment officer of Legg Mason Capital Management, a US equity manager based in Baltimore, Maryland, said: "I have never seen such angst amid such opportunity as we see it right now". Mr. Miller talked about US investment in a global economic context. He said that the decline US stock prices this year was closely correlated with the resumption of the rise in the price of the world's largest and most important commodity - oil.

In his presentation, "Global Bond Investing: Evolving Strategies and Tactics," Mr. Fink examined the global bond markets, tracing their development in size and complexity over the past 25 years and the forces that continue to drive their evolution globally.

Mr. Fink then turned to the challenges facing institutional investors. "The increasing array of investment choices offer great opportunities to deploy capital advantageously, but to do so, investors must clearly define their investment objectives and have the ability to continuously evaluate and manage the risk/return profiles of their assets and liabilities," he said.

William Pesek, Jr., Asia-Pacific columnist of Bloomberg News, moderated the seminar.

Contact Person

Nick Llave
Tel. No. (+63-2) 632-4444
E-mail: nllave@adb.org