Australian Capital Market - Case Study Example

Australian Capital Market Australia as a country has had a robust capital market and a vibrant stock exchange market over the past few decades according to Mallesons (2010). Some of the stocks that have featured prominently in the country’s stock market ion the past include the National Australia Bank, Rio Tinto, BHP Billiton, Telstra Corporation, and Commonwealth Bank of Australia among others (Ernst & Young, 1994). The main market index which is made up of the leading 200 shares is known as the S&P/ASX 200. With the global crisis doing its thing, the country has had to make certain changes and implement certain provisions if only to salvage the country’s economy from hitting the rock. This paper will discuss the Australian Capital Market and will also focus on the impact of the global financial crisis on the country. Recent Capital Raising Activities in Australia The capital markets have been faced with challenges especially during this period of global financial crisis. The global financial crisis has negatively affected the Australian capital markets and therefore there has been a pressing need for a serious counter action to raise the country to its usual state according to RICS Research (2007). In the last three months, positive change has been recorded in Australia’s money market. More initial public offers by private companies have been noted and indications show that this trend will most likely continue. This has increased the share market performance of the various industries. Indications show that banks are reluctant to provide financing in terms of debt financing. Companies have adapted merger and acquisitions to survive through the recession like Tolhurst Noall which merged with Patersons securities (RICS Research, 2007). This has prevented them from dropping out of the industry. Companies are diverting attention to the ecommerce/digital media companies that’s taking a significant market share from newspapers and magazines. The country has seen a lot of reluctance in debt financing since financial institutions have preferred to fund businesses through equity as opposed to debt. Companies that seek to increase their capital, one viable option has always been to give up a generous portion of their shareholdings. While IPOs were a common way of cashing out investments in the last couple of years, this is no longer the case as many investors have not been able to venture into new businesses due to restrictions on IPO’s according to ResearchWhitePaper (2010). The country has however continued to enjoy a lot in terms of issues. In 2007 for example, Ivanhoe Australia acquired about 12% shares in Exco to become the major shareholder in the company. Australia has quite a number of sectors that are shining. Some of these include E-commerce, Agriculture, medical services and Cleantech (Research White Paper, 2010). All these have played a great role in ensuring that the country’s capital market remains strong and stable. Recent Australian Government Economic Policies Due to increase in inflationary pressures and the global financial crisis, the economic policies of Australia need to be strong (RICS Research, 2007). The government has instituted some reform oriented economic policies in order to strengthen the economy. The economic policy is the major determinant of the rate of growth of economy in Australia. Over the past sixteen years the economy of Australia has fairly expanded, thus giving a favourable economic picture of the country. The economic policy includes improvement and development of education system, reorganization of industrial relations and product markets, increase in labour supply and putting stress on infrastructure and water management according to RICS Research (2007). The most important in the context of economic policy is the labour supply. The country has put a number of measures that are aimed at reducing the rate of unemployment in the country. Many of the economic policies have faced hindrances due to shortages of skilful manpower and shortages of adequate manpower. There has been an increase in ageing population putting even more pressure to the availability of skilled and adequate manpower. Incentives for work should be enhanced at all level responsible in formulating the Australian economic policy (RICS Research, 2007). Proper incentives should be put in place for group workers like women with families and single parents. The economic policies also include provision of benefits to workers with disabilities above the age of fifty five. It has been noted that immigration is a chief contributor to labour supply. Skill shortages should be reduced at all costs. Product and labour market reforms have been continuing since the 1990’s which has led to growth in terms of employment, productivity and growth performance. Reduction in geographical segmentation of markets should be introduced as this slows down labour efficiency. Use and misuse of water in the rural and urban areas has led detrimental environmental consequences. Water security is a major issue for Australian economic policy and reforms have been aimed at reduction in over exploitation and wastage of water and natural resources. Though there will be slow down of job growth and the growth rate of the GDP will be below par, the budget of Australia will remain in surplus. Comparison of the Australian Response to the Global Financial Crisis versus other Countries During the 2008 global financial crisis, Australia’s fast response saved the economy from an economic recession like the one that occurred in the United States. Australia responded to the crisis by releasing a $10.1 billion fiscal stimulation package, immediately they noted that there was a problem. Australia’s innovative government policy is the one that saved the country from the financial crisis. Some economists argue that global financial crisis would not have affected Australia since; the bank’s lending had been kept within sensible lending limits by the Australian Prudential Regulation Authority, together with their management teams. Secondly government stimulus measures put a floor under retail spending, housing and construction activity. Other than the government action of realizing the $10.1 billion to save Australia from the global crisis, the mining industry also contributed in the 1st phase of the global crisis, by creating employment opportunities for more 16% of the citizens There was also the a pre-crisis budget boom that helped make the budget stimulus more effective. Australia believes that its approach to the crisis was as a result of a consortium of private equity banks that comprise of TPG, Caryle and Blackstone which have presented a non-banking proposal of $5.75 a share. The US federal government issued at least one stimulus package during the crisis, a measure that the Australian government also took to ensure that the country’s economy arose from the ashes. Recent Corporate Failures in Australia There has been a large number cooperate collapse in Australia with the number increasing over time. The worst corporate collapsed happened in the year two thousand and four and it involved an insurance company known as the HIH Australia (RICS Research, 2007). The organization collapsed leading to a loss of about five billon and three hundred million dollars. Before its collapse, the company had assets whose total worth was 7.8 billion dollars. In a period of one year alone, over eight thousand companies have either been placed under receivership or liquidation and this includes some big brands like Klein, Midas and Strathfield. The collapse of the big corporate organizations is the worst in any economy because it leads to great losses to the country and in most cases it also leads to the collapse of the small businesses doing business with them. This has been so because most small businesses have the tendency of supplying goods to one customer especially if they get a big corporate as their customers thus when the corporate collapses it affects them negatively. In order to minimize the rate of corporate collapse the shareholders should become active members by monitoring the activities of the corporate since its only then that they can see any danger and raise alarm. Judges and regulators should also help protect investors from big losses. The investors could also play a major role by encouraging the management thus making them to create a culture of observance. Those who preside over the collapse of the corporate body worsen the situation as they use the money from the collapsed body to enrich themselves. Australia’s Superannuation Industry and Real Estate Industry in Response to GFC Superannuation in any context means the contribution of employees in the foreseeable future event of retiring. In Australia, the funds are used for investment projects and the earnings are credited to the contributors account depending on the amount invested. More than 1.2 trillion dollars have been invested in the superannuation assets in Australia according to a survey in 2009. This is a growth since the inception of Superannuation Guarantee Charge (SGC) where it was estimated at 135 billion dollars. Many individuals and companies in Australia depend highly on the superannuation assets. The companies and the individuals running the businesses often benefit from the fact that most members are not well informed and therefore are not capable to manage their own superannuation assets. Its is expected that the superannuation pie will continue to grow progressively as the employment levels increases because unlike other countries, superannuation is compulsory in Australia. the growth and the strength of the Australian economy is to be credited for the superb performance of the industry. The development of the SGC has also ensure a steady growth in this industry. The high control measures of the superannuation industry and the highly skilled players have also ensured the success of the industry. The involvement of many stakeholders in the industry has also contributed to the progressive growth of the industry. Recent Development in the Housing Industry According to a preliminary survey in 2009, the average established home price index rose by about 4.2% excluding inflation effect in its third quarter. In the second quarter of the same year, the industry recorded a rise of 4.1% after a 0.7% decline in the first quarter of the year. From a different perspective, the prices of acquiring a house are constantly rising due to increased investor activity and the revival of the sector due to the return of the second and the third homebuyers. The move towards a high cost of housing is seen as a risk in the undesirable strong growth in housing prices. This would leave quite a number of people not been in a position to purchase a house due to the upward trend. Actually, in 2009, all the eight Australian capital cities recorded an increase in house prices. The Australian market on houses indicated a constant growth between the mid-90s to the early 2000s. The Cause, Effect and Consequences of the Global Financial Crisis Quite a lot has been said of the global financial crisis that was witnessed most recently. Many scholars and experts have agreed to the fact that the very epicentre of the global financial crisis was the United States of America as noted by Berner (2007). The crisis is believed to have begun with the credit crunch in mid 2007 as noted by Ambrose (2007) and Soros (2008). Several factors have been attributed to the crisis as noted by various quarters. Mwega (nd) on his side believes that the financial crisis that affected the entire globe – Australia being no exception – was a result of five major factors. According to Mwega (nd), these factors, in particular order of impact, included the housing boom coupled with sub-prime lending; excessive taking of risks by financial institutions; the availability of easy money and overconfidence in the financial sector; grade inflation and rating agencies; and lastly opaque and complex securitization. The crisis burst forth with the housing bubble according to Global Issues (2009). This resulted in the collapse of major financial institutions and the failure of many credit markets. Some of the most affected financial institutions most affected by the crisis included AIG, Merrill Lynch, and Lehman Brothers according to Berner. (2007). Many experts have noted that the Australian economy, compared to many other countries, was less affected by the crisis. Somehow, it was insulated against the effects of the crisis and therefore suffered less in many ways as noted by Canstar (2010). In spite of the afore-stated fact, it must also be noted that the Australian capital market has been affected greatly by the global financial crisis. First, it is evident that the country’s currency has weakened against the US dollar. The country has felt the impact of the crisis more especially because many of its major capital acquisitions come from countries such as the United States, Canada and England all of which have been affected by the crisis (Asian Defence Industry Monitor, 2009). Yet again, the country has witnessed a slowdown in its economic growth with an increase in its unemployment rate. Although the country does not anticipate a recession, it cannot be ignore that the country has had to reconsider spending on certain acquisitions according to the Monitor. In fact, the country has had to reschedule some of its major plans with an aim of accelerating planned spending in areas that will generate money fast to better drive the economy. Strategies and Plans for Recovery after the Global Financial Crisis: Australia Australia, like all the other countries that have been affected by the global financial crisis has implemented a number of measures to reduce the effects of the crisis and possibly to curb the future occurrence of such a crisis. The Australian Treasurer and the Prime Minister, in 2007, developed a budget that was aimed at cushioning the country from the adverse effects of the crisis, and to fight the high inflation that was a major problem for the country (Canstar, 2010). . Later in 2008, October, the Australian government declared that it was planning to guarantee bank deposits. The government also released an economic stimulus package of at least 10.4 billion dollars according to Canstar (2010). A second stimulus package was later released in 2009 at a cost of close to 47 billion dollars (Canstar, 2010). This was specifically aimed at boosting the economy of the country and was thus shared between schools, new homes, infrastructure and road repairs, and small business tax breaks among other beneficiaries. Conclusion Like many other countries around the globe, the capital market of Australia has had its good and bad times. The market has grown almost each passing year for the last few decades until when the global financial crisis hit. The crisis saw the country’s capital market slow down significantly albeit not to the same extent as other countries including the United States and the United Kingdom. The stock market has witnessed a few countries get listed in the Australian stock exchange while issues have not been uncommon in the country. During the global financial crisis, Australia’s currency lost value against a few countries and the government had to reschedule a number of events that required huge investments such as road construction and military expenditure. References Asian Defense Industry Monitor (2009) Impact of the Global Financial Crisis on Australia Defence, retrieved June 7th, 2010 http://asiadefence.wordpress.com/2009/02/03/impact-of-the-global-financial-crisis-on-australia-defence/ Canstar (2010) Global Financial Crisis - What caused it and how the world responded, retrieved June 7th, 2010 http://www.canstar.com.au/global-financial-crisis/ Berner R. (2007) Perfect Storm for the American Consumer, Morgan Stanley Global Economic Forum. Ernst & Young (1994) Australian capital market, Australian Business Australian Consolidated Press. Ambrose E. (2007) Dollar tumbles as huge credit crunch looms, retrieved June 7th, 2010 http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/07/25/cnusecon125.xml. Retrieved 2008-10-15. Global Issues (2009) Global Financial Crisis, retrieved June 7th, 2010 http://www.globalissues.org/article/768/global-financial-crisis RICS Research (2007) “Placing Commercial property in the Australian Capital Market”, RICS Research Paper Series, Vol 7 (12) Mallesons (2010) Capital Markets retrieved June 7th, 2010 http://www.mallesons.com/Expertise/capital_markets/5501557w.htm Mwega F. (nd) The Effects of the Global Financial Crisis: A Case Study of Kenya, University of Nairobi. Nairobi.  Soros G. (2008) "The worst market crisis in 60 years", Financial Times (London, UK), retrieved June 7th, 2010 http://www.ft.com/cms/s/0/24f73610-c91e-11dc-9807-000077b07658.html?nclick_check=1 Research White Paper (2010) Capital Raising in Australia – Highlights, retrieved June 7th, 2010 http://researchwhitepaper.com/venture-capital-blog/capital-raisingaustralia-highlights-533.html Topic:  Australian capital market Instructions: ATTACHMENT 1-EXAMPLES OF PROJECT TOPIC The project should research events related to Capital Markets and based on recent events that are no later than three years old. 50% of the report must be related to the Capital Markets in Australia, and the remaining from any other countries if necessary. You may not copy any material from any textbooks, although you may use any other reference material. e.g. magazines, newspapers, websites, company reports etc. A qualitative approach is preferred, extensive quantitative analysis is not encouraged. Some topics of interest are as follows: 1. Recent Capital raising activities in Australia 2. Recent Australian Government Economic policies 3. Comparison of the Australian response to the GFC vs other countries 4. Comparison of current financial crises vs previous crises 5. Recent Corporate failures 6. Recent changes in the Risk Management regulations and policies due to GFC 7. Recent development of the Superannuation Industry in response to GFC 8. Recent development of the Real Estate (mortgage, housing) market 9. The cause, effect and consequences of GFC, and the strategies and plans for recovery after GFC The report must not exceed 3000 words, and the following format is suggested. 1. Use Portrait orientation 2. Use Times New Roman font, size 12 points 3. Use 1.5 spacing 4. Use A4 paper, single or double sided 5. Staple at the top left hand corner 6. Do not put the report in plastic sleeves or folders The report must contain the following: 1. Cover page-including Course name, Title of report, Full name and Student ID. 2. Content 3. Executive Summary-A one page summary of the key findings of your research 4. Introduction-Provide a road map of how the report is structured 5. Body-Use as many headings as possible. Do not combine too many issues under one heading 6. Conclusion and Recommendation-This is not a summary, but to state some of the key issues you have found from the research, and any recommendation you may have as a result of your research. 7. Bibliography: You may use any system for referencing, a helpful guide can be found at: http://www.usq.edu.au/library/Breeze/Fac_Business/HarvardAGPS/ Instructions files attached: Read More