Australian Securities Exchange - Report Example

Financial Markets Table of contents Table of contents 2 Executive Summary 3 The Market View 5 The strategy 8 Conclusion 10 Reference 11 Executive Summary The global market has undergone a great transitional phase after the onset of financial crisis of 2008 in US. Australia being lucky enough did not face the extreme phase of economic recession which many others did. At that time the Australian government took certain steps to support its financial market but as the economy managed to come back on growth tracks, the government is trying to regain the control on economy. In early November 2009, Australian government raised the interest rate for second time to tighten the monetary policy. This is expected to affect all the companies who were planning to raise finance for their business. So an in-depth analysis has been done to determine if debt or equity will be a good option for raising capital from the market. The data revealed that due to the environment of uncertainty it is better to maintain a portfolio of both debt and equity instruments. The different debt and equity options are discussed in the report so that companies can maintain tradeoff between risk and return and design the financial plans accordingly. Introduction ABC is an Australian company listed in Australian Securities Exchange (ASX). The company is in service sector and enjoys a high credit rating. It has been found that ABC enjoys sound financial structure as well. At present the company is planning to undertake expansion strategy and for that it has to raise capital. Before finalizing any decision, the management would be interested to evaluate the future of Australian Interest rates in coming months. For determining the future interest rate, a thorough analysis of Australian market needs to be done; taking into consideration all those factors which directly or indirectly influence the interest rate. Emphasis should be given on both domestic as well as international market conditions. This paper will also research to determine the appropriate financing instrument for the company as per the future interest rate condition. The main aim of the management is to develop a balance between cost of capital and risk factors. The research information and data is documented under different section. The first section provides an in-depth analysis of present and future market condition in Australia. The future prospect of interest rate is forecasted undertaking all the factors which influences it. In the second phase a strategy will be developed that helps ABC to finance their business according to the future market scenario and finally in the last section a discussion to support the recommended strategy and how the company will be benefited in long term is presented. The Market View The financial slowdown which started in U.S. engraved all other nations and affected their financial markets some way or the other. The Australian financial market was no exception, but it was not hit so hard as compared to many other developed nations. The total fall in Australian equity was 54 percent and it reached to the levels of mid 2003 (Debelle, 2009)). As compared to other developed countries, Australian banks performed relatively better. (Source: Debelle, 2009) With the signs of recovery in the world economy, many banks and corporate sectors have started issuing bonds, where Australia’s participation is quite high. In a bid to attract the investors, Australian banks also started providing a guarantee on their issuance. This guarantee scheme proved highly successful through which Australian banks managed funds to handle growing demand in the coming phase. (Source: Debelle, 2009) Due to the financial crisis, Asset Based Commercial Paper (ABCM) market also got affected in Australia. As the demand for commercial paper went low, the cost of issuing and its maturing period got shorter. To strengthen the market, the Government widened the pool of collateral for asset backed papers. Due to financial recession, Australian dollar (AUD) depreciated against dollar (USD), but on considering the overall trading in AUD against UDS it was found it traded above the average mark. (Source: Debelle, 2009) The foreign exchange swap market got affected by the liquidity crunch in global markets, as there developed a global shortage for USD. Later on US Federal Reserve entered into an agreement with Reserve Bank of Australia (RBA) to introduced more USD in the swap market. Thus it can be concluded that the impact of the financial crisis was not so drastic on the Australian economy (Debelle, 2009). As per OECDs Interim Economic Outlook which was released in March, the world is facing a drastic and most synchronized recession phase and in response to it, different nations had cut the interest rates (including Australia). The Australian government announced a “Nation Building and Jobs Plan” which will provide 90,000 jobs in 2009-2010. This plan will help the domestic economy to attain a higher growth rate (Sherry, 2009). There are many other factors that will help Australian economy to recover at much faster rate like stimulus package, injection of liquidity and lower interests (Austrade, 2009). Among the G-20 members, Australia is the first one to enhance its interest rate after the onset of financial crisis. On October 05, 2009 RBA increased interest rates by 25 basis points to reach the level of 3.25 percent. As per the government, the worst economical phase is over (CNN.Money, 2009). Again on November 3, 2009 RBA announced hike of further 25 basis point and interest rate is 3.50 percent at present (FXStreet, 2009). There are many other factors which influence the interest rate of a nation; some are specifically domestic while others are international. In Australia the financial markets are performing well; S&P/ASX 200 index hiked almost by 20 percent in last year, demands are increasing and inflation is at moderate rates which might go higher in the coming future. So the future outlook for domestic market is quite positive. Information from the international market gave clues that conditions are improving, though at a slower rate, but in future the world economy will be in healthy state. So undertaking all these factors it can be concluded RBA will hike interest rate soon in days to come. Extreme lower interest rates often distort the GDP rate as it results in excessive liquidity, higher inflation and uncontrolled growth of financial market. To maintain a healthy economical growth rate in Australia, government will hike interest rate and try to bring it back in 5-6 percent slab. The strategy There are many instruments which the company can undertake for financing its business, among them issue of bond can be a good option because the company enjoys high credit rating. As the government of Australia has enhanced the pool of collaterals, so ABC can also issue Asset Backed Commercial Papers (ABCP). Basically ABCP are used for short term financing, but in general practice, after maturity it gets further extended. When the interest rates go higher, hedging can be a good option for the company and it can go for interest rate hedge; care should be taken that economical and political risks of the counter country should be in a stable condition (Standard & Poor’s, n.d.). On the same time too much of debt instrument can enhance financial risk for the company and in near future if market faces any minor shock, profitability of the firm will be adversely affected. So the best option for the company is to raise finance partly by the debt instrument and rest from the capital market. As compared to other developed economies, the condition of Australian market if far better, hence it is advisable to concentrate more on domestic market. Higher interest rates will be effective in attracting foreign investors; hence it will be beneficial to go for IPO and to raise long term capital. In last few months equity market has already gone 20 percent high and as per market analysts it is going to perform much better in coming future; hence issue of equity can be a cheaper way to raise finance. At present interest rates are low, so company can issue warrants which will give an option to warrant holder to convert the warrant in equity share on its maturity date. At present the investors are risk averse, they will prefer to go for a debt instrument and if they find the market conditions favorable in future, they might convert their warrants in equity shares. While developing the portfolio, ABC should maintain certain degree of debt to take advantage in tax. For long term financing, IPO will be taken into consideration. As many foreign investors are interested in making investment in Australian markets; so company can utilize Depository Receipts (ADR, GDR, EDR) for attracting them. Many foreign companies are interested in diversifying their business through joint venture and partnership; hence ABC can plan for allowing Foreign Direct Investment (FDI). Conclusion Unlike for many other developed countries (US, EU, UK) impact of financial rescission was not so major on Australia, but still it faced certain downfall in economical and financial structure. The government took certain measures like reduction in interest rates, injection of liquidity in economy, stimulus packages. It also made its policies more relaxed to support financial market. But the latest data released by domestic market gives a clear picture of an economic recovery. The government is in a mood to raise interest rate further high in coming future. ABC should take advantage of lower interest rate and should go for short term debt instruments like ABCP, bonds or bank credits to finance its working capital. While considering bright future of equity market it is good to issue equity shares or warrants in the capital market. The company can also think of utilizing foreign capital (IIF or FDI) for raising finance. The Australian economy is at a crucial phase and in coming days it will undergo many policy changes, so while raising finance ABC should develop a tradeoff between risk and opportunity in domestic and international market. Reference Austrade. September 2009. Beyond The Financial Crisis: China, Austrade Market Monitor September 2009.Australina Government. [Pdf]. Available at: http://www.austrade.gov.au/ArticleDocuments/1775/BeyondGFCChina.pdf.aspx [Accessed on November 07, 2009]. CNN Money. October 6, 2009. Australia hikes interest rates. [Online]. Available at: http://money.cnn.com/2009/10/06/news/international/australia_rates.reut/ [Accessed on November 07, 2009]. Debelle, G. March 31, 2009. Some Effects of the Global Financial Crisis on Australian Financial Markets. [Online]. Available at: http://www.rba.gov.au/Speeches/2009/sp_ag_310309.html [Accessed on November 07, 2009]. FXStreet. November 17, 2009. The RBA: more rate hikes may be appropriate over time. Online]. Available at: http://www.fxstreet.com/fundamental/analysis-reports/top-fundamental-stories/2009-11-17.html [Accessed on November 07, 2009]. Sherry, N. H. April 21, 2009. Australias Policy Response to the Global Financial Crisis. Address to the Institute of Actuaries of Australia Biennial Convention 2009: Sydney. [Online]. Available at: http://ministers.treasury.gov.au/DisplayDocs.aspx?doc=speeches/2009/011.htm&pageID=005&min=njs&Year=&DocType= [Accessed on November 07, 2009]. Standard & Poor’s. No date. Global Asset-Backed Commercial Paper Criteria. [Online]. Available at: http://www2.standardandpoors.com/portal/site/sp/en/au/page.article/2,1,9,1,1133546800665.html [Accessed on November 07, 2009]. United Nations Conference On Trade And Development. 2009. Report on G-20: Trade and Investment measures. [Pdf]. Available at: http://www.unctad.org/en/docs/wto_oecd_unctad2009_en.pdf [Accessed on November 07, 2009]. Read More