Foreign Exchange, Stock Market, Financial Crisis, Credit Card, and Payday Lender Issues as Macroeconomic Elements - Assignment Example

Portfolio of Economics due WEEK 6 Topic The London Stock Exchange has been operating for 214 years, having been founded in 1801. For several decades, companies have been scrambling for listing in the stock market as a way of raising capital and growing. Due to the overwhelming number of companies seeking to be listed, the market was divided into categories such as the main market and the alternative investment market. The main market houses big companies drawn from all over the world. About 1350 companies in total are listed in the main market. The past decade has seen the main market raise an estimated 336 billion pounds in capital. FTE100 is a branch of the main market and has indices of 100 top-performing companies in the United Kingdom. The Alternative Investment Market (AIM), on the other hand is a home to several small and medium sized companies. These are companies which may not compete favorably in the main market due to low financial capacity. There are companies that have been able to graduate from the AIM to the main market because of having raised just enough capital at the AIM. The LSE, therefore, is a very pivotal for the success of some of the biggest companies in the world, for instance Barclays Inc. A company in the LSE main market Barclays is one of the major companies listed in the FTE 100 division of the London Stock Market. As of 2014, the company had an estimated employee population of 35000 in the UK alone. The 2014 turnover was 18,953 million pounds, and the profit before tax was 4,874 million pounds. For the past 4 weeks of March 2015, the Barclays stock prices have been rising and dropping between 250 pounds and 268 pounds. On 27th March, the day ended with a stock price of 244.40p, a -2.44% fall. The company’s stock prices have been a bit volatile, rising to as high as 266p and dropping to what was recorded on 27th March 2015. Going by the price changes in March alone, it is easy to predict that the stock prices could still rise to even 270p in the next few weeks. It is attributed to the normal forces of supply and demand. A company in the AIM An example of a company listed in AIM is Globo Plc (Globo: London). It is a telecoms software company that operates worldwide. It had a total of 165 employees in the UK alone, as per the count taken on 25th May, 2014. On 26th March, 2015, shares prices closed at 52.88 pounds. Over the past four weeks, Globo’s stock prices have been rising and falling by a margin of +3.12 and -2.16 respectively. The latest rise in stock prices is attributed to the good performance based on the financial report for the third quarter of the financial period ended December 31st, 2014. WEEK 6 Article: A beginners guide to investing in the Stock Market by Cathy Adams The Basics In the UK, the main stock market is the London Stock Exchange, where public limited companies and other financial instruments such as government bonds and derivatives can be bought and sold. The stock market is split into different indices i.e. the FTSE 100, the FTSE 250, the FTSE Fledgling and the Alternative Investment Market (AIM), which lists small and venture capital-backed companies. Unlike cash, the stock market is not a risk-free investment. It has its ups and downs; however, with the main index FTSE 100 returning 13.59% over the past year to 18 July, it has beaten any savings account hands down. Investing directly There are two ways to access the stock market: directly, and indirectly. Although directly is a misnomer - investing in the stock market is always done through a third-party broker - direct investment means buying the shares in a single company, and becoming a shareholder. Investing indirectly An indirect approach is a more common way of accessing shares, as it spreads risk by investing in a number of companies. This can be done via an open-ended fund, such as an open-ended investment company (OEIC) or unit trust, which is made up of shares typically from between 50 and 100 companies, and can be sector, country or theme specific. Money in these funds is ring-fenced away from the fund provider, so if the firm defaults, the money is still safe. What to be aware of First of all, one needs to decide what they want to achieve, how long they plan to invest and how much risk they are prepared to take. Secondly, Investors must understand the structure of the investment by looking at the fact sheet rather than the glossy market material. Last but not least, it may be disastrous relying on other peoples’ tales of huge gains. One should understand their tolerance to risk rather than appetite for reward; risk and reward always go hand in hand. Cutting cost of investing Dont get swayed by investments just because they are at the top of the performance tables. Strong recent performance should be seen as a warning sign, as the investment gains have already been made, rather than as an opportunity to buy. Review investments every six months to ensure they are performing in line with expectations. If they arent, try and understand why and then look to make changes if appropriate. Week Six article Summary The article educates beginners about how to go about stock trade at the London stock market and AIM. It tells everything that a potential stock investor needs to look out for before they can go on to put their money in the business. AIM is a branch of the London stock market. Both AIM and London stock market help to raise capital to companies by providing of selling shares to the public. AIM is specifically meant to help small companies. It provides more flexible regulatory measures than those in the London Stock Exchange. The article also gives tips on how to cut costs of investing in the stock market. Additional Article: The Stock Market for Beginners How the stock market works The stock market is called a market because it is the place that buyers and sellers converge to buy and sell stock.  Its also called an exchange, because its where investors go to trade their stock for cash and their cash for stock. Over a hundred years ago businesses started raising capital by selling ownership in their business.  After a while, the stock market developed as a place where this could be done.  Back then, orders were taken in person and processed manually.  All buyers and sellers had to be at the same location.  Since then, technology has made the stock market a much larger, more liquid, and efficient marketplace.  Now, buyers and sellers can place orders over their computers, phones or tablets and a computerized stock exchange matches their order with someone else with the opposite order. Stock prices move as supply and demand changes.  If there is more demand for a stock then supply, the price rises.  Thats why individual stock prices move sharply after they report good or bad news.  ABC Stock Investing offers a more thorough definition of how the stock market works. How stocks are valued Stocks have two types of valuations.  One is a value created using some type of cash flow, sales or fundamental earnings analysis. The other value is dictated by how much an investor is willing to pay for a particular share of stock and by how much other investors are willing to sell a stock for (in other words, by supply and demand). Both of these values change over time as investors change the way they analyze stocks and as they become more or less confident in the future of stocks.  Let me discuss both types of valuations. First of all, there is the fundamental valuation. This is the valuation that people use to justify stock prices.  The most common example of this type of valuation methodology is P/E ratio, which stands for Price to Earnings Ratio.  This form of valuation is based on historic ratios and statistics and aims to assign value to a stock based on measurable attributes.  This form of valuation is typically what drives long-term stock prices. The other way stocks are valued is based on supply and demand.  The more people that want to buy the stock, the higher its price will be.  And conversely, the more people that want to sell the stock, the lower the price will be.  This form of valuation is very hard to understand or predict, and is often drives the short-term stock market trends. Recommended ways to invest in the stock market Don’t try to time the market.  Use cost averaging.  Take taxes into account.  Invest as much as possible into tax-sheltered 401K, 403B and IRAs.  Diversify your investments.   Diversify your stocks (mutual funds).  Additional Article Summary This additional article, like the first one, gives a stock market beginner an insight into what the stock market entails and some of the things to consider when going about investing in the market. It defines the stock market in simple terms and describes how it works. It then gives an idea on how stock is valued. Lastly, the article recommends to a beginner some of the ways of investing in the volatile stock market. WEEK 7 Topic: CPI versus RPI Inflation is an issue of macroeconomic concern the world over. There are nations of the world that record extremely high inflation rates periodically, but have policies and mechanisms in place that are useful in controlling the inflation problem. Consumer Price Index, Retail Price Index are some of the tools that are used to determine the rate of inflation. CPI and RPI are different concepts, but are mostly similar. One of the notable differences between the two indices is that whereas RPI includes housing costs such as mortgage interests and council taxes, CPI doesn’t. The nature of RPI is such that apart from the main role of calculating price changes for a constant basket of goods, it is also useful in determining inflation statistics, Developed nations continually make economic policy amendments to suit different economic circumstances. Some of the new policies formulated touch directly on these two indices and, as a consequence, both private and public-sector pensioners get affected in certain ways. It therefore immensely important to understand these two concepts and their usefulness in the overall economic set up so those when there is need to amend existing policies or introduce new ones, the consequences of such amendments or new laws are best understood. How CPI and RPI policy changes affect pensioners Under normal circumstances, the RPI rises faster than the CPI, with a gap of approximately 1.3 percentage points since the introduction of CPI in 1996. In 2011, there was a government policy that would see the uprating of state pensions moved from RPI and CPI. The change has led to a slow rise in RPI, and it is projected that in the near future, the rise would equal that of CPI. In effect, the private sector pensions will be suppressed significantly. Article: The switch in price indices, one cut to rule them all Since governments started to uprate benefits each year to maintain their real value, they have used the retail-prices index (RPI). RPI has been used as a measure of inflation dating back to 1947. From the early 1980s they have also used a variant called the Rossi index, which excludes housing costs, for some payments. Since 1997, official statisticians have also published the consumer-prices index (CPI), which provides a common measure of inflation in European states. From December 2003 the Treasury changed the index used for its inflation target from one based on the RPI to the CPI, but continued to use the RPI for benefits. From next April, Mr Osborne announced, the CPI will be used to uprate benefits, tax credits and public-sector pensions. The switch will save money—a lot of it—because the CPI generally records lower inflation than retail prices. The uprating will as usual be based on inflation in the year to the preceding September. This means that, next year, benefits will be increased by 3.1%; the rate for the CPI published this week, rather than the 4.6% shown by the RPI. That gap is particularly high: the average difference since 1997 has been 0.85 of a percentage point (see chart). Differences between CPI and RPI First and foremost, the two indices use different averaging formulae when calculating price changes for each individual item. Overall, this “formula effect” contributes half a percentage point to the gap between the two. Secondly, and explaining the remaining difference, the RPI includes owner-occupier housing costs, which are left out of the CPI because of the difficulty in establishing a common procedure across Europe. The RPI also includes council tax; the CPI doesnt. The cut that keeps on cutting And, crucially, the policy—which will affect not just benefits but also public-sector pensions—will keep on making extra savings. By 2015-16 it will yield an annual saving of £1.8 billion for public-sector pensions, according to a report by Lord Hutton, a former Labor minister, released on October 7th. Lord Hutton also pointed out that the switch had reduced the value of pension rights to employees in these schemes by 15% on average. There is one big exception: the basic state pension, which makes up about 30% of total welfare spending, will be uprated from next April by earnings, prices, or 2.5%, whichever is the highest. Typically that is earnings. The reform will also affect the private sector, because the government has indicated that the CPI should become the default measure of inflation in occupational schemes, when they uprate the pension rights of people who have left and payments to pensioners. This effect will not be universal, since many schemes specify the RPI as the index to use when uprating pensions. Week Seven article Summary The article give the definitive difference between CPI and RPI as follows: CPI is the measure of change of prices of basket of goods and services, while RPI is a measure of inflation, i.e., a change in a representative sample of retail commodities. Moreover, they use different averaging formulae when calculating changes in prices of the given goods and services. RPI considers owner-occupier costs, which are always excluded from the CPI. RPI has council costs, CPI doesn’t. In April 2010, there was a reform to use the CPI to uprate tax credits, public-sector pensions and benefits policy will affect both benefits and public sector pensions. The reform will also affect the private sector since the UK government has indicated that it would use the CPI as a default inflation measure. Additional Article: Explaining the difference between CPI and RPI Explaining the difference between CPI and RPI In the United Kingdom, two of the indicators used to measure inflation are CPI and RPI. CPI refers to the consumer price index and is often referred to as the Harmonized Index of Consumer Prices (HICP). RPI refers to the Retail Price Index, which is the change in price of a list of products and services over a period of time. What is CPI? CPI is represented as a percentage of the average increase in prices for a group of commodities. There are usually more than 600 items in this group. Every month, the prices of these items are checked at about 12000 stores in the UK. It is published on a monthly basis by the Office for National Statistics. What is RPI? In 1947, the RPI was developed to calculate the effect that rising prices was having on the economy following the end of World War II. It remained the single most important determinant of inflation until the CPI became more important. It is published in newspapers and is still utilized by the government so that it can make appropriate changes in pensions and the amount of money paid on any securities that are linked with these indicators. It also affects the rent increases or reductions for social housing. Many employers also make use of the RPI to fix the wages paid to workers. Difference between CPI and RPI Most people consider RPI to be superior to CPI because it provides a broader perspective on the average increase in prices from month to month. It looks at the prices of a much larger number of items. For example, it includes the amount of interest paid on mortgages, insurance premiums and the depreciation of house values and these are not part of CPI. At the same time, the changes in fees charged by stockbrokers are considered in CPI, but not in RPI. The RPI fluctuates when interest rates change, but this has no effect on CPI. CPI uses a wider portion of the population in its calculations and tends to be lower than RPI. Additional Article Summary The additional article majorly talks about the differences between CPI and RPI. CPI is sometimes known as the harmonized index of consumer prices, while CPI measure price changes on a list of commodities over a definite period of time. It also explains why the RPI is considered to be superior to the CPI. RPI is generally considered a superior tool for measuring inflation and commodity price changes to CPI because it is more broad-based and takes into account interest on mortgages and depreciation. WEEK 8 Topic: Economic data of a country of choice A country’s economy is largely a product of a number of macroeconomic factors. Here, one is required to make a choice of a country and present its detailed economic data. Luxembourg is the chosen nation for this portfolio question. It can be intriguing to imagine how a country as small as Luxembourg, with such a low human population can perform so well economically. the country has one of the smallest GDPs in the globe, but one of the highest income per capita based on GDP. Some of the macroeconomic make up of the country’s economy include service industries such as banking, and manufacturing industries as well. Luxembourg’s per capita is the second highest in the world, after that of the United States. Article: Countries of the world: Luxembourg Economy 2015 This small, stable, high-income economy - benefiting from its proximity to France, Belgium, and Germany - has historically featured solid growth, low inflation, and low unemployment. The industrial sector, initially dominated by steel, has become increasingly diversified to include chemicals, rubber, automobile components, and other products. Growth in the financial sector, which now accounts for about 36% of GDP, has more than compensated for the decline in steel. Most banks are foreign-owned and have extensive foreign dealings, but Luxembourg has lost some of its advantages as a favorable tax location because of OECD and EU pressure. The economy depends on foreign and cross-border workers for about 40% of its labor force. Luxembourg, like all EU members, suffered from the global economic crisis that began in late 2008, but unemployment has trended below the EU average. Following strong expansion from 2004 to 2007, Luxembourgs economy contracted 3.6% in 2009, but rebounded in 2010-11 before slowing again in 2012. The country continues to enjoy an extraordinarily high standard of living - GDP per capita ranks among the highest in the world, and is the highest in the euro zone. Turmoil in the world financial markets and lower global demand during 2008-09 prompted the government to inject capital into the banking sector and implement stimulus measures to boost the economy. Government stimulus measures and support for the banking sector, however, led to a 5% government budget deficit in 2009. Nevertheless, the deficit was cut to 1.1% in 2011 and 0.9% in 2012. Even during the financial crisis and recovery, Luxembourg retained the highest current account surplus as a share of GDP in the euro zone, owing largely to their strength in financial services. Public debt remains among the lowest of the region although it has more than doubled since 2007 as percentage of GDP. Luxembourgs economy, while stabile, grew slowly in 2012 due to ongoing weak growth in the euro area. Authorities have strengthened supervision of domestic banks because of their exposure to the activities of foreign banks. Summary given in PowerPoint WEEK 9 Topic: Currency exchange comparison and how exchange rate changes may affect holiday Currency exchange is an important economic issue because it shows how all the currencies in the world can be traded at certain rates. Exchanging currencies is very important because people move from country to another and will always need to acquire the currencies of the countries of visit so as to be able to pay for goods and services in those countries. Economic thinkers have over time devised tools for comparing how the various currencies perform against each other, and also for making predictions about how the currencies are supposed to exchange in the future in the view of different economic factors that affect currency exchange. Such tools are important for people seeking to travel during the holidays, so that they are best prepared and are able to budget accordingly. These tools are important for holiday budgeting because it compares prices of equal amounts of same commodities in different countries. Article: Interactive currency-comparison tool: Global exchange rates, to go The Big Mac index was invented by The Economist in 1986 as a lighthearted guide to whether currencies are at their “correct” level. It is based on the theory of purchasing-power parity (PPP), the notion that in the long run exchange rates should move towards the rate that would equalize the prices of an identical basket of goods and services (in this case, a burger) in any two countries. For example, the average price of a Big Mac in America in January 2015 was $4.79; in China it was only $2.77 at market exchange rates. So the "raw" Big Mac index says that the Yuan was undervalued by 42% at that time. This adjusted index addresses the criticism that you would expect average burger prices to be cheaper in poor countries than in rich ones because labor costs are lower. PPP signals where exchange rates should be heading in the long run, as a country like China gets richer, but it says little about todays equilibrium rate. The relationship between prices and GDP per person may be a better guide to the current fair value of a currency. The adjusted index uses the “line of best fit” between Big Mac prices and GDP per person for 48 countries (plus the euro area). The difference between the price predicted by the red line for each country, given its income per person, and its actual price gives a supersized measure of currency under- and over-valuation. Week Nine article Summary Big Mac index is used to compare foreign exchange rates among different countries. Fluctuations in foreign rates as measured by the Big Mac index affects holiday travels greatly because it leads to price changes, and means travelling individuals have to make adjustments to their holidaying budget. The Big Mac index predicts the commodity price differences for commodities, thus giving a measure of currency valuation. Additional Article: The exchange rates today for the sterling pound, US dollar and Euro Todays Pound Sterling to Euro (GBP/EUR) and US Dollar (GBP/USD) Foreign Currency Exchange Rate Report The British Pound slumped almost 2 cents against the U.S Dollar on Thursday, largely driven by the correction lower on the EUR/USD exchange rate with a move from 1.1050 to 1.0850 this morning. The correlation is emphatic and with expectations that the Dollar could be set for a further move back towards 1.0625 versus the Euro, the Pound could be trading back under 1.4650 over the coming days. A brief foreign exchange market summary before we bring you the rest of the report: The Euro to British Pound exchange rate: EUR/GBP converts at 0.732. The Pound to Euro exchange rate converts at 1 GBP is 1.366 EUR. The Pound to US Dollar exchange rate: GBP/USD conversion is 1.487. The Pound to Canadian Dollar exchange rate: GBP/CAD conversion is 1.875. The Pound Sterling to Euro (GBP/EUR) Exchange Rate Rises as EUR Loses Ground vs. USD Sterling also made strong gains versus the Euro, rising through 1.37 in early trading this morning, following a low of 1.3531 this morning. It’s likely that the Pound will make a move higher versus the single currency if the Euro continues to lose ground against the Dollar. In terms of fundamentals, the latest UK retail sales data produced a stronger-than-expected result for February with sales up 0.7% compared with the previous month. The report from the Office of National Statistics showed that sales were 5.7% higher than at the same stage in 2014 and that’s a trend that’s likely to continue given the boost in wages and historically low consumer prices inflation. Rising home sales also boosted products such as furniture, while average store prices fell for an eighth consecutive month, falling by 3.6% in February 2015 compared with a year earlier. The steady increase in sales over the past quarter will fuel optimism of a recovering UK economy but there will be concerns that it is becoming over-reliant on consumer spending. UK exporters for example face a difficult time with a strong Pound and weakness in demand from the Euro-zone. US Dollar Exchange Rate Resumes Strengthening Thanks to FED Rate Hike Speculation The U.S Dollar continued its advance for a second day on Thursday, amid further speculation that the Federal Reserve are gearing up to raise interest rates, whilst other major central banks are still embroiled in monetary easing. Additional article summary In January 2014, one pound exchanged for $1.64, and 1.20382 Euros. One Euro, on the other hand, exchanged for 1.36218 dollars and 0.83060 pounds. A dollar exchanged for 0.60976 pounds and 0.73412 Euros. On 28th March 2015, one sterling pound was exchanging for 1.366 Euros and 1.487 dollars. One Euro was trading at 0.732 pounds and 1.0850 dollars. Over the past year, the Euro has slightly weakened against the British pound while the dollar has gained strength against the pound. The Euro has also lost ground to the dollar slightly over the past year. The dollar has been improving against the Euro and the British pound due to the uncertainties in the Eurozone and the impressive ecostats from the USA. The coming UK elections could cause the pound and the euro to fluctuate even more against the dollar. WEEK 10 Personal reflection on portfolio This portfolio runs from week one to week nine. it has been done dutifully and profession, and covers wide-ranging macroeconomic elements such as foreign exchange, stock market, 2008/09 financial crisis, credit card versus payday lender issues among others. The issues that have been covered in the different portfolio weeks have been based on credible information obtained from legitimate article and journal resources. It has been enjoyable doing all that the portfolio covers because they have helped update me on some of the most important macroeconomic issues within UK and even outside it. All the article resources used have been provided and the summaries done covering the most important information. All the questions asked for the different sections of the portfolio have been aptly addressed and references given accordingly. To me, personally, this portfolio study has not only been enriching academically, but also gives me a much needed exposure on how certain macroeconomic issues unfold, their effects and how they should be responded to effectively. That has made me enjoy it and give it all that was required to ensure it was complete for all the weeks. I would like to congratulate myself for giving the assignment the dedication that it required. I am also thankful to everyone else that made it a success, especially in the areas where we worked as a group. This portfolio wouldn’t have been a success were it not for everyone involved playing their part. Lastly, I wish to thank the instructor for the selfless role he played in giving guidance from time to time whenever we required it. References http://www.londonstockexchange.com/exchange/prices-and-markets/ Free financial advice: The stock market for beginners, n.d. Accessed from: http://www.free- financial-advice.net/stock-market.html (27th March 2015) Countries of the world: Luxembourg Economy 2015, 23rd January 2015. Accessed from: http://www.theodora.com/wfbcurrent/luxembourg/luxembourg_economy.html (27th March 2015) The Economist, 14th October 2010: The switch in price indices, one cut rules them all. Accessed from: www.economist.com/node/17251994 (27th March 2015) Adams, C., 1st May 2013. A beginner’s guide to investing in the stock market. Accessed from: www.moneywise.co.uk/investing/first-time-investor/beginners-guide-to-investing-the- stockmarket (27th March 2015) D.H & R.L.W, 22nd January 2015, The Big Mac Index: Global Exchange Rates to go. Accessed from: www.economist.com/content/big-mac-index (27th March 2015) Lawrence, C., 28th January 2015. Exchange rates today for the sterling pound, US dollar and Euro. Accessed from: http://www.exchangerates.org.uk/news/11590/todays-daily-pound- sterling-to-euro-dollar-exchange-rate-report.html (27th March 2015) Read More