Financial Markets, Capital Allocation, and Economic Evaluation Report

This report provides a comprehensive analysis of capital allocation within financial markets, focusing on both domestic (UK) and international contexts. It begins by defining financial markets and the instruments traded within them, including debt, equity, and derivative instruments, as well as key players such as investors, intermediaries, and regulatory bodies. The report then delves into capital allocation within the UK economy, examining the roles of the Bank of England and fiscal policies, as well as the impact of private companies on capital allocation. Furthermore, it explores capital allocation in international markets, highlighting the influence of organizations like the IMF and WTO, along with the impact of FDI. The report also evaluates emerging economies, using India as a case study, assessing its international trading abilities through exports, imports, and other economic indicators. Finally, the report critically evaluates the challenges faced by companies in the context of industrialization and global trade policies, offering advice to potential investors and comparing the domestic and international scenarios.

REPORT

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................4
INTRODUCTION...........................................................................................................................5
MAIN BODY..................................................................................................................................5
BACKGROUND OF FINANCIAL MARKETS............................................................................5
CAPITAL ALLOCATION WITHIN DOMESTIC ECONOMY...................................................6
CAPITAL ALLOCATION WITHIN INTERNATIONAL MARKETS........................................8
EVALUATION OF EMERGING ECONOMY..............................................................................9
CRITICAL EVALUATION OF CHALLENGES.........................................................................10
COMPARISON OF THE DOMESTIC AND INTERNATIONAL SCENARIOS......................11
CONCLUSION..............................................................................................................................12
REFERENCES................................................................................................................................1
APPENDIX 1...................................................................................................................................3

EXECUTIVE SUMMARY
In this market, both buyers and sellers are at common platform where they can exchange money
or securities. The present report will provide deeper insight about the manner in which capital
allocation takes place in UK’s economy. This report will also depict challenges that companies
are facing due to industrialization and trade policies take place at global level. The report will
focus on giving advice to the potential investor and guide them accordingly. It was highlighted in
the report that in the entire process of global evolution, the major challenge that the companies
are facing is international trade policies.

INTRODUCTION
Financial market refers to the trading of monetary securities and derivatives
comparatively at lower cost level. In the context of capitalist economies, financial market plays a
vital role in ensuring smooth functioning of business operations and functions. Further, capital
allocation is associated with the distribution and investment of company’s monetary resources.
The main motive of firm is to enhance efficiency and maximize profitability aspect through
better capital allocation (Cowling, Matthews and Liu, 2017). In addition to this, it will also shed
light on how capital or fund is allocated in international market such as UK.
MAIN BODY
BACKGROUND OF FINANCIAL MARKETS
Financial market can be broadly defined as a market place where securities or other
similar investments are traded mutually between two or more parties either directly or through a
particular medium. Financial markets basically are categorized into five major types of markets
i.e. Capita; Market, Derivative Market, Commodity Market, Money Market and Foreign
Exchange Market. All these markets involve exchange of goods and services with one another
and money or its equivalent is used as a medium for exchange (Maggiori, Neiman and Schreger,
2018). The major instruments in all these markets can be classified as follows:
 Debt Instruments: These are those instruments that are issued by a particular company or
government in order to raise capital and can be issued in the form of Bonds or
Debentures, Treasury Bills, Commercial Papers etc. and are an obligation for the party
that is issuing such debt instruments (Li and Xing, 2018).
 Equity Instruments: Some of the major equity instruments involve the shares that are
traded on the stock market and are usually issued by the company where the holders of
such equity instruments are referred as the shareholders of the company.
 Derivative Instruments: These type of instruments involve both equity and debt
instruments and are can be traded either over the counter or on a particular exchange.
Forwards or Future or Options or Swaps are some of the major tools that are used in the
derivative markets.
 Money Market Instruments: The securities in this type of markets are usually short term
in nature and can be easily converted into cash within a shorter time duration. These

involve instruments like bills of exchange, certificates of deposits, etc. and are extremely
liquid (Maume-Deschamps, Rullière and Said, 2015).
Apart from these instruments, there are some key players of all the types of financial
market which play a key role and help in regulating and monitoring these markets and these can
be categorized as follows:
Investors or borrowers: These are normal individuals or firms and corporates that are investing
their funds or money in the particular security and are therefore termed as investors. Apart from
these, some of them can be classified as borrowers as well i.e. they are the borrowers from the
market and raise capital either through debt o through equity instruments. These are the main
parties in the entire market ensuring that the economy keeps on operating in a balanced manner.
Intermediaries: These are the middle men or those parties that facilitate trade between two
parties intending to trade with each other (ZHANG and YANG, 2018). Stock Market Brokers,
bankers, investment managers etc. are classified as intermediaries and are also major role players
in ensuring that a fair and just deal takes place between the two parties. These regulate the entire
market ensuring that trade flows in smoothly in the market and there are no major deviations.
Regulatory Bodies: There are number of regulatory bodies that are working towards giving a
safe and protected environment to the parties that are trading with each other. Some of the major
regulatory authorities in UK are Financial Conduct Authority (FCA), Bank of England,
Prudential Regulation Authority etc. and these work towards ensuring that the deals that take
place whether over exchange counters or off the counter, are safe and secure. These help in
regulating the various deals and transactions that take place between two or more countries.
All the major markets categorized under financial markets are the interlinked together
and operate through a particular process which is similar in all the markets i.e. all the markets
follow the same functions i.e. intermediary functions, Financial Functions etc. are similar
(Geddes, Schmidt and Steffen, 2018). There is transfer of resources, formation of capital,
facilitating exchange of financial instruments, promotion of savings and investments etc. and
therefore though the tools of the markets are different, their basic operation is same.
CAPITAL ALLOCATION WITHIN DOMESTIC ECONOMY
For identifying the capital allocation in the home country i.e. UK, first the concept of
capital allocation must be understood. In involves distribution and allocation of the financial
resources possessed by a firm is such a manner that the overall efficiency and profitability of the

company gets maximized. Companies as well as corporations focus on allocation of their
resources and funds in such a manner that the wealth maximization of their shareholders is as
much as possible (Afrifa, 2016). The major purpose behind incorporation of the capital
allocation process is ensuring that maximum returns and benefits can be given to the investors
and a company’s entire success factor depends on this particular aspect i.e. whether the funds of
the company are adequately and smartly allocated i.e. whether the company will give equal
amounts of profitability. It involves identifying the various sources in which the funds, which
have been generated by the company itself or through its shareholders, can be invested and thus
the money can be returned back along with profits to the shareholders or the investors in the
company. Bank of England which is a prominent regulatory authority in England has
formulated various monetary as well as fiscal policy that is implemented in UK. The monetary
policy formulation committee of England takes into consideration the aggregate demand and
supply of UK which it’s then linked to the inflation rate and then, the interest rates of the bank
are determined (Overbeck and Sokolova, 2017). This ensures that the situation of crisis or
breakdown does not occur in the economy. Similarly, Fiscal policies of UK also determine the
rate of taxations imposed, subsidies available, and tax exemptions etc. in the economy and helps
in maintaining the demand supply ratio. In UK, example of monetary policy can be taken as
implementing if the Policy of Quantitative easing by the Bank of England which helped n
increasing the money supply in UK’s economy and other decisions taken by the government of
UK will be covered under fiscal policy like for example providing tax cuts in order to pull the
economy out of recession or increasing the tax rates in case of inflation so that the economy is in
order.
Apart from this, capital allocation of an economy also depends on the methods adopted
by the private companies and corporations operating in the economy and therefore the source
utilised by them for raising their funds are listed down as the major factor that impact the capital
allocation of an entire economy and their performance and profitability links the performance of
the entire country as well (Strauch, Pidun, and zu Knyphausen-Aufseß, 2019). For example,
HSBC holding which a big corporation is operating in UK complies with all legal duties and
regulations and involves equity shares, retained earnings, reserves and other accumulated
earnings, tangible and intangible assets etc. and these all comprise of capital allocation of HSBC
in UK. It can be referred form the figure below that how capital is allocated and further when the

bank recently announced that it is planning to cut the number of jobs all over the world, the
economy of UK was extremely concerned regarding the performance of business and therefore
its impact on entire economy can be observed (Gibb, 2016).
CAPITAL ALLOCATION WITHIN INTERNATIONAL MARKETS
The financial performance and direction in which the international markets apart from the
domestic market i.e. UK is another major factor whole studying the financial allocation. Some of
the major institutes impacting the monetary performance of the entire economy are International
Monetary Fund, World Trade Organization, World, Bank etc. since these are the main
organizations behind determining what monetary and financial standards are to be adopted, what
are trading norms acceptable on a worldwide basis etc. (Mizgier, Pasia and Talluri, 2017). The
stock market of foreign countries also plays a major impact in determining the financial
movement of the different economies. This can be studied by observing some of the major
examples or events that have occurred in the companies connecting different economies like
Toyota has 9 manufacturing plants all over UK and recently announcement that FDI investment
of 240 million pounds in Derbyshire by Toyota was another major event which affected various
economies and led to other major automobile manufacturing companies like Nissan and Land
Rover deciding that they are also opening plants in UK which has boosted the overall economy
of UK (UK’s Economy, 2019). Similarly another economy that got benefitted in a similar manner
due to FDI investment was India when Coca Cola decided to expand themselves in the Indian
Markets and chose FDI as an expansion mode. When chemical infiltration was found by the
Indian Government in the beverage which led to shut down of its plant, it determined to come
back with a better quality product and expand themselves in the economy. They therefore,
decided to invest $2 billion in India and after this investment, the sales of the company shot up
again in 2018 (Indian Economy, 2018). This also led to the rise in the investment made by Pepsi
thus leading to the famous Cola-Pepsi war in the Asian markets of India and China. Therefore,
these two examples show that how investment by own company in a particular economy can lead
to boost in the entire economy by many other competitors of the company getting attracted
(Bauer and Zanjani, 2015). Such investment also contributes a major part in the allocation of the
capital of an economy since these increase the investment avenues of different interested parties
and therefore, the public of that particular economy invest in a better manner thus garnering
increased returns.

EVALUATION OF EMERGING ECONOMY
In order to evaluate another economy apart from the domestic economy of UK, another
country amongst the developing economies, the country whose name immediately pops up is
India. India has been coming in news increasingly due to an assortment of various policies and
schemes that they have adopted and therefore the various statistical information regarding this
economy will be taken into consideration for evaluation of an emerging economy (Indian
Economy, 2018). This can be done by evaluating the key aspects of the international trading
abilities of the country by determining some of the major factors of the economy such as exports,
imports, other logistics and data. Major export products of the Indian economy involve exporting
of agricultural products, fuels such as refined petroleum’s, Diamonds and Jewellery, Rice,
packaged Medicaments amounting to a total of $292 billion in year 2017 (Imports and Exports,
2018). Apart from this, the major imports of the country involve Crude petroleum, Gold,
Diamonds, Palm Oil, Computers etc. and these constitutes $417 billion in the year 2017. It could
be therefore concluded that the imports made by the economy in year 2017 are far more as
compared to the exports of the economy and this resulted in the negative trade balance of the
entire Indian economy amounting to $125 billion in 2017 (Macro Indian Market, 2019). Apart
from this, another important factor is the trade policies that India has adopted i.e. how the
economy deals while trading in the international market i.e. its foreign policies. Until 1991, India
basically operated as a closed economy where they was minimum to no trade with any of the
foreign countries and even if there was, the quantity of restrictions posed by the government
made it impossible to trade. But later the economy loosened itself and the policy of LPG i.e.
Liberalisation, Privatization and Globalisation was adopted where foreign companies were
allowed to invest in the Indian economy and trade options were opened. Slowly over the time,
the competitiveness of the country increased where they increased their investment option and
allowed ventures and FDI to open their business and trade in Indian economy which raised their
standards of living in the entire economy (Macro Indian Market, 2019 ). Another aspect i.e.
financial technology involves around 400 companies with an investment level of $420 million
and it is expected to grow by 1.7 times till the year 2020. Information technology field of the
country is extremely strong where the sector has increased their GDP contribution form 1.2% in
1998 to 79.5% in 2017. The GDP per Capita levels of the Indian economy as on year 2019 are
determined to be $2172 and by rank it is expected to be 119th in the entire world and it can be

significantly concluded that the major component of the GDP growth of the entire economy
belong to 60% from agriculture (Indian Economy, 2018).
CRITICAL EVALUATION OF CHALLENGES
The country India is faced various challenges which are related to financial market. That
is very important to consider at market and for the economic growth.
Environmental Challenges: Pollution is another major challenge that the Indian economy faces
when compared to the economy of UK and the pollution levels of the Indian economy are at
mush worse condition since the increased traffic levels with no concern and measures adopted
for the protection of environment (Edwards, 2017). When the aspect of the trading alliances is
taken into consideration of UK and India, it can be concluded that although previously the Trade
Relation of India were at a much poorer states when compared to the relations of UK, after the
appointment of Indian Prime Minister, Narendra Damodardas Modi, the trade relations of India
has improved significantly and his various international visits have always been productive for
the Indian economy inviting countries to invest in India. Also poor infrastructure and facilities in
the rural and agriculture areas of the country has further affected the balanced regional
development. The agriculture sector contributes towards the majority of the GDP of the country
but surprisingly the industry lacks capital intensive technology and infrastructural facilities
(Peters, Targino and Wüthrich, 2017).
Financial Challenges: The financial challenge is data privacy and security, many of the
financial companies is not recovers the losses of data. As well; as not mentioned the high cost of
profit fines can also hurts the budget of India. This gives negative impact on the country
(Busenbark and et.al., 2017). In the others sides, if country is reducing the risk and establishment
of sources, paper documents are gives positive impact on the India. This create a financial
competition is very strong, the competition is good think because it is better ways for negative
impacts. On the others sides if country is knowing their competitors than they make different
strategies to save financial growth. There exists a huge Income Gap in India and the main reason
behind is its taxation policies. The 90% of India's wealth is held by the 1% population of the
country which itself shows the income inequality in the country (Indian Economy, 2018).
On the other hand, the United Kingdom has the poorest ratio amongst developed countries
when it comes to equal income distribution. The poorest section of the society has further seen
1.6% drop in their annual income whereas the richer population has seen a 20% surge in their net

worth (UK’s Economy, 2019). Thus, it can be said that UK is also suffering from unequal income
distribution which will affect the country's per capita income in the long run.
COMPARISON OF THE DOMESTIC AND INTERNATIONAL
SCENARIOS
When comparing in the domestic and international market scenarios between UK and
India, there are some relevant theories that can be used ion order to substantiate the comparison
that has been made. Keynesian Theory and Ricardian theory has been used in order to compare
the two different economies (Faccio, Marchica and Mura, 2016).
Theories United Kingdom Indian
Keynesian Theory When evaluating the
Keynesian Theory with
regards to the average amount
spent in the entire economy as
compared to the inflation in
the economy, the UK’s
economy all over has
increased by 2% and therefore
under this theory the country’s
economy has suffered a
backlash (UK’s Inflation Rate,
2019).
Indian economy on the other
hand has turned to be
profitable as the inflation has
decreased to 3.05% as on
May, 2019 (Indian Economy,
2018).
Ricardian Theory As per Ricardian Theory, the
UK experiences and utilizes
the benefit of comparative
advantage since the units
produced are more as
compared to the units sold in
the economy thus making the
economy profitable
(KARABARBOUNIS and
VILLEGAS-SANCHEZ,
Indian economy does not fulfil
the requirement of the
ricardian theory i.e. there is no
competitive advantage
available to the economy since
there is no unique production
in the economy.

2017).
CONCLUSION
By summing up this report it can be concluded that, in financial market, trading of
various securities such as equities, bonds and derivative instruments take place. Besides this, it
can be inferred that investors, intermediaries and professional bodies are the main players of
financial market. It has been articulated that significant difference take place in the capital
allocation take place within UK and Indian economy. Moreover, at global level, regulatory
bodies which monitor capital market develops or follows varied policies pertaining to monetary,
fiscal etc. It can be seen in the report that, in UK, Bank of England regulates capital allocation
and thereby financial market. On the other side, in Indian market, IMF, WTO and World Bank
are recognized as the main authorities which are plays a significant role in the effective
functioning of monetary market. Along with this, it can be summarized from the report that
aspects pertaining to industrialization and trade policies are imposing major challenges in front
of business units operating globally.

REFERENCES
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together the capital allocation puzzle. Journal of Management. 43(8). pp.2430-2455.
Cowling, M., Matthews, C. and Liu, W., 2017. The role of loan commitment terms in credit
allocation on the UK small firms loan guarantee scheme. International Review of
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Edwards, B. P., 2017. Conflicts & Capital Allocation. Ohio St. LJ. 78. p.181.
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Mizgier, K. J., Pasia, J. and Talluri, S., 2017. Multiobjective capital allocation for supplier
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<https://www.about.hsbc.co.in/-/media/india/en/financial-information/annual-reports/
190722-annual-report-2019.pdf >
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APPENDIX 1
Figure 1: HSBC Annual Report, 2019
Source: Annual Report: 2019- About HSBC, 2019
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