International fund means investing in the companies situated in the countries other than the domestic country. Making an international fund will help the portfolio managers to diversify their portfolio and also help in overall development and diversification of the country. This report contains an overall economic and political analysis of two overseas economies named as USA and UK. The economic performance and major asset classes performance are been measured and then decision is taken by Australian fund manager about establishing an international fund in one of these economies. Advantages and disadvantages to Australian investors, of making global investment in one of the economy is also mentioned in this report along with the recommendations and conclusions.
United States was recognized as anew nation in 1783. The country is federal republic in which the powers are shared among president, congress and federal courts as per the constitution. It is the second largest democracy and the most influential nation economically and politically. The US congress consists of upper chamber known as Senate. According to Global Peace Index, the US has considered to be the less peaceful country due to its political instability followed by the victory of Donald Trump in presidential election last year. Increase in inequality and rising perceptions of corruption resulted in overall decline in peace in North America area.
The United States has the world’s largest economy and is recovering from the recession since 1930. The country has a highly developed mixed economy. The key indicators used to measure the economic performance of the country are GDP growth rate, interest rates, exchange rates, employment and unemployment levels, key industries and balance of external current account. Data is taken for the past five years that is from 2012 to 2017. These key statistics provide a comprehensive and up-to-date view of USA economy. Following are the indicators:
The data for this indicator for USA is taken from Q1 2012 to Q4 2016. During this period, the GDP growth rate was highest 3.8% in 2015 Q1 and lowest 1% in 2013 Q2. The increase in the growth rate was moved by private consumption, increased employment rate and low interest rates. After 2015 Q1, the rate slowed down to 1.2% in Q2 2016 as a result of lower consumption and investment. A rebound was noticed in 2017, where the GDP growth rate rises and reaches to 3% in quarter 3 of 2017 (Udland and Finance, 2018).
The lending interest rates is the rate at which bank provides loan to the lowest risk borrowers in private sector. It is usually that rate which meets the short term financial obligations of private sector. According to World Bank collection, the lending rate in USA was reported at 3.51 in 2016. It was a sudden increase
The rate determined by the national authorities or by the legally sanctioned exchange market is known as official exchange rate. The data is provided by the International Monetary Fund and is taken for years 2012-2016. For the past five years, the value remains the same that is 1 local currency units per dollar.
The unemployment rate is defined as a percentage of total labour force which remains unemployed. The percentage is the number of people who are without work but seeking for employment. The data is taken from 2015 to 2017. During this period, the unemployment rate was highest with 5% in 2015 and lowest with 4.2% in 2017 and the average value for USA was 4.6%. Data is derived from the U.S Bureau of Labour Statistics (Tradingeconomics.com, 2018).
Employment rate is the percentage of the people who are engaged in the economy as paid or self- employees. Employment data is also taken for the same period and from the same source. The average value was 152.07 million employed people with highest of 154.35 million employed people in 2017 and lowest of 150.03 million employed people in 2015.
The current account is considered to be a very important indicator of a country’s economy. It refers to the sum of the net exports less imports, net income earned from abroad and net current transfers. According to the data collected by U.S Bureau of Economic Analysis, the balance of external current account remains in deficit after 1992. A negative or deficit balance indicates that the country is a net borrower. The balance in year 2012 is -94,037 million currency units and in 2017, it is 100,566 million currency units.
According to the Export-Import Bank of the United States, the industriesthat have great potential, high growth rates and are very competitive in the global market are considered as key industries of USA (Exim.gov, n.d.). These are:
The political system of the country is a multi-party system. A constitutional monarchy is there in which the queen is the head of the state and the prime minister is the head of government. The political instability arises due to the Brexit vote which affected the country economically. As per the analyst, political uncertainty continues in the long run which results in more dissatisfaction and continued polarization (Business Insider, 2016).
UK is the third largest economy in Europe and a leading trading power and financial centre. Agriculture sector is highly mechanized and intensive, producing 60% of the food needs using less than 2% labour force. The country is the net importerof energy and has large resources of oil, coal and natural gas. The banking, insurance and business services are key drivers of country’s GDP growth (Eubusiness.com, 2017). The key indicators of UK’s economy are:
The data for this indicator has taken from the period starting from Q1 2012 to Q3 2017. In 2012, weak consumer spending and low business investment affected the GDP. However it grew to 2.2% in Q3 2013 and 3% in Q3 2014, reasons being the recovery of housing market and more consumers spending. In 2015, the GDP increases to 3.3% and later decreases in subsequent years. It was reported at 1.7% in the third quarter of 2017 (Ons.gov.uk, 2018).
The average interest rate on the loans offered by commercial banks to the businesses is known as business credit interest rate. The rate fluctuates in the period 2012-2017 and highest was noticed at 3.64% in 2016 and lowest at 2.43 in second and third quarter of 2015.
As per the data provided by International Monetary Fund for the period 2012-2016, the exchange rate has increased from 0.63 local currency units per dollar in 2012 to 0.74 local currency units per dollar in 2017. The maximum rate was reported in year 1985 with 0.78 units per dollar.
During the period of 2012-2017, the unemployemnet level for UK was high at 8.3% in 2012 and later on continues to decrease and reaches to a level of 4.3% in 2017. The data for unemployement and employement rates is taken from Office for National Statistics of the United Kingdom.
Employemnt data for UK is also taken for the same period as of the unemployment data. It was reported that the employment rate of the country has subsequenbtly increased from 2012 to 2017 with a high of 32.14 million people employeed in june 2017 and a low of 29.39 million people employeed in january 2012.
According to the data taken from Office for National Statistics of the United Kingdom, external current account balance remains in deficit after Q3 1998. The highest balance was reported in 1981 with 2654 million currency units. The balance in year 2012 Q3 was-16,776 million currency units and in 2017 Q3 it was -22,784 million currency units (Ons.gov.uk, 2018).
The US treasury bond yeild 2.35% in last 5 years at the price of $98.97. The return reduces as the price reduces. In last three months the return was 1.44% at a price of $1.41. Treasury Inflation Protected Securities (TIPS) yeild 0.35% at a price of $99.06 in the last five years. The return earned is lowest as compare to the returns earned in the past 10-20 years (Bloomberg.com, 2018).
The UK Gilt five year yeild was 0.85% at the price of £98.47. The return reduces as the price increases. The two year Gilt yeild was 0.57% ata price of £101.77 (Bloomberg.com, 2018). The gilt yields are falling because investors are avoiding investment in them due to the political and economical changes which impact UK economy. There were expectations that Brexit vote could hinder the economic growth of the country and the chances of increasing interest rates by Federal reserve could affect the bonds to a great extent and may became one of the reason why investors decide to move out of the asset class.In the first half of 2017, US stock markets were the strongest. The S&P 500 stock index and Dow Jones industrail average each rose by 8% in the first six months. Nasdaq was also increased by 14% in the year. The Trump administration resulted in more gains and companies making more profits. From the last year NASDAQ has been increased and is currently trading at 7,261.06. it was reported at 4,596.01 in february 2016 and after that it continues to rise with 6,937.65 on 1 january 2018 (Washington Post, 2017).
The Brexit vote and victory of Donald Trump resulted in a severe decline in the performance of UK equities in 2016. S&P latest analysis represented that the UK equity underperfomed the market. The actively managed equity fund provided a return of 11.2% which is lower than 17.1% returned by the UK equity index. The other reason for this underperformance was instability in financial stocks (Ft.com, 2017).
The housing prices in America were highest in year 2006, continuously rising from the past ten years. along with that the property prices reinforced by low interest rates endure ahead. Although the real estate market has covered all the losses from the crash of 2007 but it is still 20% below the 2006 peak, when adjusted twoeard inflation. After 2006, the prices fall and were lowest 293.4 in first quarter of 2012. After that an increase was there and by the end of second quarter of 2016, they were reported at 354.8 points. So the price have risen from the past 5 years (Economist.com, 2017).
As reported by Office for National Statistics, the summary report of October 2017 holds that the average price of the property in UK was £223,807 with an annual price change of 4.5%. The monthly price change in the property of UK was -0.5%. Though the house prices grew but experienced a 0.3% point decrease from the previous month. The main contribution to the increased prices was from England where the property prices rose by 4.7% in October 2017. As it can be seen from the graph that, the peak point of the curve was reported at October 2014 which means UK property prices were highest in that year. After that a fall can be noticed but prices do rose in 2017 (Gov.uk, 2017).
For Australia, to invest in overseas economies, UK and USA are considered to be the two largest destinations with $617 billion and $351 billion respectively (Department of Foreign Affairs and Trade, 2017). It was always better for the country to maintain good investment realtions with US as compare to UK. More than 1200 australian firms are operating in United states and generating income more than US$60.6 billion (Ussc.edu.au, 2017).
Advantages
Larger market: The GDP of US is $18 trillion with 325 million people, which offers a large consumer market to the investors. Household spending is highest and its free trade agreements, that is continuing to work with foreign partners helps in increasing the opportunities for U.S exporters. Moreover, the capital markets , espically debt market of the country are a key source of capital for many australian companies. The big four banks of australia rely heavily on the wholesale funding of US debt markets (Selectusa.gov, 2018).
Workforce: US has large and diversified talented workforce and is considered to be the most productive one in the world. Moreover, the employment rate has also increased in past years, reported 154.35 million people to get emolyment in 2017, which is very much higher than the UK employment statistcs (Selectusa.gov, 2018).
Capital access: Australian investors can find it beneficial to establish the fund in US as the country provides a wide range of funding sources. It has the most flexible, liquid and develop financial markets ranging from investment firms to venture capitalist and angel investors.
Valuable equities : as per DSP BlackRock Mutual Fund, US equities represents close to 50 percent of global equity indices. The american companies earn more than 50 percent revenue from non-american markets. The quity market of US is very much diversified and is performing well as compare to UK. Currently S&P 500 index is trading at 13 times forward earnings than their longterm average of 16.9 times (Businesstoday.in, 2012).
Disadvantages
Despite of the fact that the US is economically stable, there are certain factors which can affect the economy. Making investment in US treasury bonds may not prove to be fruitful because of reducing trend in the yields of treasury bonds. Moreover, political instability of the country can also be a disadvantage to the australian investors.
Conclusions
According to the above analysis of both countries economies, USA economy is performing much better than UK economy. As a portfolio manager, one should make his portfolio strategy keeping in mind that the portfolio made must give positive returns with minimum risk involved. For making a portfolio, managers need to consider an appropriate asset mix and divide the capital between the asset classes. As the USA has larger GDP and the equity market is being the strongest last year, so managers should make their portfolio in such a manner that more percentage to total capital is invested in equities. As an increasing trend is been noticed in the stock prices from past years, favourable returns can be expected from the same. Portfolio manager should then allocate a small amount of its capital in US bonds because of their reducing yields. Though they are fixed interest income but a declining trend in noticed in past years so it is better to invest less in them.
USA properties have also performed well in recent years and the house prices have gone up in the past five years. It will be better to invest in the US property market as it can yield high rental income for the Australian investors. So overall, to establish an international fund, Australian investors should go for United States rather than United Kingdom.
References
Economist.com. (2017). American house prices: realty check. [online] Available at: https://www.economist.com/blogs/graphicdetail/2016/08/daily-chart-20 [Accessed 15 Jan. 2018].
Selectusa.gov. (2018). Why Invest in the United States | SelectUSA.gov | SelectUSA.gov. [online] Available at: https://www.selectusa.gov/why-invest [Accessed 15 Jan. 2018].
Internations.org. (n.d.). The Economy of the UK: An Overview. [online] Available at: https://www.internations.org/great-britain-expats/guide/29457-economy-finance/the-economy-of-the-uk-an-overview-16160 [Accessed 15 Jan. 2018].
Eubusiness.com. (2017). United Kingdom: country overview — EUbusiness.com | EU news, business and politics. [online] Available at: https://www.eubusiness.com/europe/uk [Accessed 15 Jan. 2018].
Ussc.edu.au. (2017). Indispensable economic partners: The US-Australia investment relationship — United States Studies Centre. [online] Available at: https://www.ussc.edu.au/analysis/indispensable-economic-partners-the-us-australia-investment-relationship [Accessed 15 Jan. 2018].
Department of Foreign Affairs and Trade. (2017). Where does Australia invest?. [online] Available at: https://dfat.gov.au/trade/topics/investment/Pages/where-does-australia-invest.aspx [Accessed 15 Jan. 2018].
Businesstoday.in. (2012). Investment tip: Merits and risks of investing in US equity market. [online] Available at: https://www.businesstoday.in/moneytoday/investment/investment-merits-risks-of-investing-in-us-equity-market/story/187456.html [Accessed 15 Jan. 2018].
Washington Post. (2017). First half of 2017 is the strongest U.S. stock markets have seen in years. [online] Available at: https://www.washingtonpost.com/news/get-there/wp/2017/06/30/first-half-of-2017-is-the-strongest-u-s-stock-markets-have-seen-in-years/?utm_term=.955528559e12 [Accessed 15 Jan. 2018].
Ft.com. (2017). 87% of active UK equity funds underperformed in 2016. [online] Available at: https://www.ft.com/content/3fceed90-13ae-11e7-b0c1-37e417ee6c76 [Accessed 15 Jan. 2018].
Russellinvestments.com. (2018). UK Economic Market Outlook | Russell Investments. [online] Available at: https://russellinvestments.com/uk/insights/market-outlook/uk-outlook [Accessed 15 Jan. 2018].
Bloomberg.com. (2018). United Kingdom Rates & Bonds. [online] Available at: https://www.bloomberg.com/markets/rates-bonds/government-bonds/uk [Accessed 15 Jan. 2018].
Bloomberg.com. (2018). United States Rates & Bonds. [online] Available at: https://www.bloomberg.com/markets/rates-bonds/government-bonds/us [Accessed 15 Jan. 2018].
Exim.gov. (n.d.). Key Industries | EXIM.gov. [online] Available at: https://www.exim.gov/learning-resources/key-industries [Accessed 15 Jan. 2018].
Business Insider. (2016). Brexit is just one example of the political problems Europe is facing. [online] Available at: https://www.businessinsider.in/Brexit-is-just-one-example-of-the-political-problems-Europe-is-facing/articleshow/52890628.cms [Accessed 15 Jan. 2018].
Udland, M. and Finance, Y. (2018). U.S. GDP growth tops expectations. [online] Finance.yahoo.com. Available at: https://finance.yahoo.com/news/u-s-gdp-growth-top-expectations-123409984.html [Accessed 15 Jan. 2018].
Tradingeconomics.com. (2018). United States – Economic Indicators. [online] Available at: https://tradingeconomics.com/united-states/indicators [Accessed 15 Jan. 2018].
Ons.gov.uk. (2018). Economy – Office for National Statistics. [online] Available at: https://www.ons.gov.uk/economy [Accessed 15 Jan. 2018].
Gov.uk. (2017). UK House Price Index summary: October 2017 – GOV.UK. [online] Available at: https://www.gov.uk/government/publications/uk-house-price-index-summary-october-2017/uk-house-price-index-summary-october-2017 [Accessed 15 Jan. 2018].
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