In this report, the economic and industry conditions of the Australian economy as a whole and the equity market in particular have been discussed. Australian economy is quite developed and it is also one of the largest economies with the mixed market industries. Till 2017 it has achieved a GDP of Australian dollars 1.69 trillion and also it ranks second position as a wealthiest nation in the world.
The economy of Australia is primarily dominated by the service sector and therefore almost 65% of total GDP of the country is generated through the service sector only. In the 10 years from 1999 to 2008, prior to great recession, the GDP of Australian economy grew at the rate of 3.4% on an average per year. In 2009, the economic growth rate had declined to 1.6% due to global financial crisis but from 2010 to 2013, the economic performance of the Australian economy has been improved. Due to this the GDP rate was averaged at 2.7%. The rate of GDP has been fluctuating since last few years. In 2016, the rate was 2.65% which has declined to 2.27% in year 2017. However, the GDP rate in year 2018 has increased to 2.96%. This increase in the GDP rate is showing a positive sign of the sound economic condition of the country’s economy as a whole. Even though the country has strong economic conditions the global growth rate of the international monetary funds has been steadily downgrading since 2015. In July 2015, the global growth rate was projected at 3.8% but has been actually downgraded to 3.1% in October 2016 and also there were projections for 2017 at 3.6% but it has been downgraded to 3.4% (Fatai, Oxley and Scrimgeour, 2004). Therefore, the investment in these monetary funds must be reduced so as to optimise the overall the return of overall portfolio investment.
The inflation rate in Australia has been continuously fluctuating in last 5 years. The average rate of inflation in 2012 is 1.71% and therefrom it increased to 2.45% in year 2013 and 2.51% in year 2014. Since 2015 the inflation rate declined to 1.51% and then in year 2016 it has further declined to 1.25%. However, after 2017 the rate of inflation has increased to 1.97% in year 2018. The increasing inflation in the prices of various commodities and services the total income of the Australian citizens is weakening because of increased expenses. Driven by higher fuel and other costs, the inflation rate in last 3 months has edged up. Due to the increased inflation in the economy, the potential investors are running short of income savings and hence they are not investing their funds in the shares and securities.
The above data indicates that the Australian economy had to suffer immensely due to the declining gross domestic product rate and increasing inflationary rate. But in year 2018 the GDP rate has increased to 2.96%. Due to down gradation of GDP rates till 2015 the market index of AXS 200 has also been reduced from 2014 to 2015. At the year- end 2014, the market index was $ 5588.30 which got reduced to $ 4880.90 at the year-end 2015. However, after, 2015 the market index of ASX 200 has increased to $ 5620.90 at the year-end 2016. In year 2017 and 2018 also the market index has been increased due to increase in the GDP rate of the Australian economy. The strengthening of market index of ASX 200 indicates that the capital market of Australian economy is performing well by far.
BHP Billiton belongs to the industry that deals in global resources. It is indulged in the business of producing various commodities such as iron ore, coal and copper. The prices of BHP Billiton have been declining since last few years as the financial and operational performance of the company is not sound. But, in the last 3 months, there has been considerable change in the prices of its stock which indicates that it has improved its performance in the last few months. Therefore, its stock is attracting the potential investors of the market. Though current prices of the company’s stock indicate that it will be profitable for the proposed client to invest more funds in the company but the current growth is not always an indication of its continued positive outlook and hence investment decision must be based on the past track records along with the other variables such as performance of other stocks, industry performance etc.
Qantas Airways is the largest Airline Company dealing with both domestic as well as international bookings. The company belongs to Aviation Infrastructure Industry which has been performing well since last many years. Also, the financial performance of the company is sound enough therefore it is beneficial to invest in its stock.
The Australian and New Zealand bank operates in Australia and New Zealand in the financial sector. The policies of the reserve bank Australia affect the performance of the banks. The change in the cash reserve rates is shown in the chart given below:
The cash reserve rates in Australia could be seen to be going down in the recent times. This RBA has come up with expansionary monetary policy to boost the banking sector up. The reduction in the cash reserve rates gives leverage to the banks and it improves the liquidity position of the banks. The impact of reduction in the cash reserve rate is expected to affect the financial performance of Australia and New Zealand bank positively in the upcoming years.
The overall return of portfolio has increased to 22.34% which is quite higher than that on 26th Feb, 2018 i.e. 6.09%.The increased return is the result of increased value of various components of the portfolio. The value of BHP Billiton, BAPCOR, Aristocrat Leisure, SEEK, Qantas Airways and Authorised Investment Fund’s units has increased and value of Challenger and ANZ Bank along with Global master fund and VAF (ETF) has decreased
Since 26TH Feb, 2018 to 15th May, 2018, the prices of all the components of the proposed portfolio have changed on the daily basis. The fluctuation in the stock and unit prices has resulted into change in the overall return of the portfolio constructed for the client in the present case. The prices of equity stock of BHP Billiton, Aristocrat Leisure, BAPCOR, SEEK, Qantas Airways and Authorised Investment Fund’s units have increased by $ 20.85, $5.01, $0.60, $0.54 and $ 0.63 and $ 0.05 respectively. Therefore, they have generated positive returns for the investors. These companies have positively contributed to the portfolio return and hence they could be called as the contributors of the portfolio. However, the stock prices of Challenger and ANZ Bank along with the units of Global master fund and VAF (ETF) have decreased by $ 1.10, $ 0.02, $0.04 and $0.16 respectively (Yahoo finance, 2018). This has resulted in negative returns. The stock and units of such companies and funds are therefore the detractor components (Reilly and Brown, 2002). However, the overall performance of the portfolio has increased by 16.25%. There are various forces that cause strong or mild volatility in the stock prices of the components of proposed portfolio (Grinblatt and Keloharju, 2000). The increase and decrease in the value of the stock prices occurs due to the changes in the exchange rates of the country and the individual performance of the companies in financial and operational terms. When the financial performance of the company is not sound then the investors tends to withdraw their interests from such companies which ultimately results in decline in the stock prices in the stock market. Moreover, the demand and supply of the stock in the market also affects the stock prices in the market. If the number of potential and willing buyers for the stock in the market is higher than the number of willing sellers , than the demand of the stock in the market increases thereby increasing the price of the stock. On the other side, when the number of willing sellers of the stock increases than the number of willing and potential buyers, then the stock prices decreases in the market.
The overall performance of the proposed portfolio has improved in the last three months from February to May as the total return of the portfolio has increased considerably. However, as a basic phenomenon, it is generally observed that the risk and return of the portfolio are directly proportional to each and therefore with the increase in return of the portfolio, the risk of such portfolio also increases (De Clercq, Goulet, Kumpulainen and Mäkelä, 2001). The major measures of portfolio performance are the risk and the return factor. Portfolio return is the weighted average sum of individual returns of the portfolio and risk is the volatility in the prices of the stock of all the components of the portfolio.
Conclusion and Recommendation
Recommendations for the better performance of the portfolio that has been constructed for the client:
The overall return of the proposed portfolio has increased to 22.34% in May, 2018 as a result of significant increase in the value of stock of BHP Billiton. Therefore, the investment in BHP Billiton must be increased by reducing the investment in stock of Australian and New Zealand Bank Group and Challenger Technologies. If the total investment amount is to be kept intact at $ 1500000, the individual proportion of the investment in the various components must be changed according to the return generating capacity of the invested stock. Therefore, the invested amount in the stock of ANZ group, Challenger Technologies, Global Master Fund and Vanguard Australian Fixed Interest must be withdrawn by selling them in the stock market to the potential buyers and the proceeds of such stock sale must be re-invested in the stock of BHP Billiton, Aristocrat Leisure, BAPCOR, SEEK and Qantas Airways and Authorised Investment Funds as these companies and funds are generating positive returns. As per the requirement of the case, the total proportion of the investment in equity shares- buying position as well short sales, Equity traded funds, Listed Investment Companies Funds must be kept intact but the proportion of their sub-components must be changed to improve the return of the portfolio. The proportion of investment in LICs and ETFs must remain unchanged at 20%.However, the proportion of investment in the sub components of LICs and ETF must be changed and more funds must be invested in the Authorised Investment Fund by withdrawing the funds from Global Investment Fund, VAF ETFs. Also, as the value of buying position in the equity shares has increased due to upward movement in the stock prices the number of hedge contacts must also be increased to carry the proper hedging position in the market. The market index of the ASX 200 has also increased since Feb, 2018 and therefore the number hedging contracts must be more than 3. If 4 or more hedging contracts are entered then, the buying position of the shares will be adequately balanced.
References:
De Clercq, D., Goulet, P.K., Kumpulainen, M. and Mäkelä, M., 2001. Portfolio investment strategies in the Finnish venture capital industry: A longitudinal study. Venture Capital: an international journal of entrepreneurial finance, 3(1), pp.41-62.
Fatai, K., Oxley, L. and Scrimgeour, F.G., 2004. Modelling the causal relationship between energy consumption and GDP in New Zealand, Australia, India, Indonesia, The Philippines and Thailand. Mathematics and Computers in Simulation, 64(3-4), pp.431-445.
Grinblatt, M. and Keloharju, M., 2000. The investment behavior and performance of various investor types: a study of Finland’s unique data set. Journal of financial economics, 55(1), pp.43-67.
Harrison, T., 2018. Why I think the Bapcor Ltd share price is a buy today. [Online]. Available at: https://www.fool.com.au/2018/01/24/why-i-think-the-bapcor-ltd-share-price-is-a-buy-today/ [Accessed on: 04 April 2018].
Reilly, F.K. and Brown, K.C., 2002. Investment analysis and portfolio management. ?????.
Reserve Bank of Australia. 2018. Cash Rate. [online]. Available at: https://www.rba.gov.au/statistics/cash-rate/ [accessed on: 02 June 2018].
Statista. 2018. Australia: Inflation rate from 2012 to 2022* (compared to the previous year) [online]. Available at: https://www.statista.com/statistics/271845/inflation-rate-in-australia/[accessed on: 02 June 2018]
Statista. 2018. Australia: Real gross domestic product (GDP) growth rate from 2012 to 2022. [online]. Available at: https://www.statista.com/statistics/263602/gross-domestic-product-gdp-growth-rate-in-australia/ [accessed on: 02 June 2018]
Yahoo finance. 2018. Australia and New Zealand Banking Group Limited (ANZ.AX). [Online]. Available at: https://finance.yahoo.com/quote/ANZ.AX/history?p=ANZ.AX [Accessed on: 02 June 2018].
Yahoo finance. 2018. BHP Billiton Limited (BHP). [Online]. Available at: https://finance.yahoo.com/quote/BHP/history?p=BHP [Accessed on: 02 June 2018].
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