Global Market Shrinking

Following the U.S. sub-prime crisis, stock markets around the globe are feeling the aftershocks. While the world had gotten used to financial market crises being spawned by emerging market countries, the shoe now seems to be on the other foot — that of the industrialized countries, and specifically that of the United States. We wonder: By how much has the capitalization of global stock markets declined over the first three months of 2008 alone?

A. $8.4 trillion
B. $6.5 trillion
C. $2.7 trillion
D. $0 trillion

A. $8.4 trillion is not correct.

Global equity markets reached a peak value of $62 trillion on October 31, 2007. Over the intervening five months, markets have lost a total of $8.4 trillion in value — or 14%.

B. $6.5 trillion is correct.

From January through March 2008, global markets lost $6.5 trillion in market value, according to calculations by Bank of America. That decline equals roughly half of U.S. GDP.

However, the losses in market value are distributed quite unevenly around world regions — with some areas showing a surprising resilience to the widespread market upheaval.

C. $2.7 trillion is not correct.

Asia-Pacific markets lost $2.7 trillion in value over the past three months — or 42% of the global total, the largest share of all major regions. What hurt these markets is that they are generally perceived as being very dependent on exports to the United States. What helped them, on the other hand, are their still strong levels of GDP growth.

By comparison, U.S. and European markets, at least when viewed together, fared worse. They accounted for a loss in market value of $1.9 trillion and $1.7 trillion, respectively. Their combined total of $3.6 trillion exceeds Asia's loss by one-third. Europe's surprisingly high losses are mainly due to the sharp rise in the euro's exchange rate.

D. $0 trillion is not correct.

Often, when there is uncertainty in global financial markets, Latin American countries are some of the first to feel the fallout. However, this time around, their market capitalization has essentially stayed stable.

The same is true for Middle Eastern markets, which are obviously benefiting from high oil prices. More interestingly, even African equity markets have proven to be stable over the past three months — underscoring the fact that these countries, too, are experiencing a solid level of economic growth, which is in part fueled by high commodity prices.

Thus, for the first time in recent memory, some of the most vulnerable emerging markets are holding their own — in contrast to the industrialized countries and also Asia.

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