Australian Economy: Stock Market - Example

Australian economy: Stock Market By: Foundation Course- Tutor: University of: Department of: 1st April 2016 Table of Contents 1.0 Introduction 3 2.0 A-REITS 3 3.0 INFRASTRUCTURE FUNDS 3 4.0 AUSTRALIAN ETFS 4 5.0 INTERNATIONAL ETFS 4 6.0 CHOICE OF EXCHANGE TRADED FUND (ETF) 5 7.0 International Exchange Traded Fund 6 COMPUTATION OF THE TRACKING ERROR 8 7.0 Discussion 9 8.0 ROLE AND SIZE OF SHARE MARKET OF SOUTH AFRICA 11 References 15 1.0 Introduction The Australian stock market provides investors with accessibility to investments as illustrated below 2.0 A-REITS Australian Real Estate Investment Trusts (A-REITS) are entities that provides investors with accessibility to property assets, that is, they provide exposure to the real value of the real estate assets that they own plus their capital growth as well as the rental income. They include:- Abacus Property Group (ABP); This is a diversified property investment entity that provides exposure to a portfolio of commercial, industrial property, investments in mortgages, syndicate development channels and property funds management initiative. 3.0 INFRASTRUCTURE FUNDS Infrastructure funds often provides the opportunity for investment in vital public assets to a wide range of users . Based on the nature of these infrastructural assets, their returns are often stable over a long period of time hence making them quite attractive to investors looking for good returns. Although these infrastructures assets have high return output, there tend to be low level of competition among the investors in this field (Yong and Singh 2015). The following is an example of entity providing infrastructure funds:- APA Group (APA); this is one of the largest natural gas infrastructure business entity in Australia. It operates energy assets approximately to be close to $19 billion The following are the three asset allocations for infrastructure funds Airports; these are the public assets that facilitates easier movements of passengers aboard a flight from one point to another. Communications; these are those assets that facilitate easier transmission of information from source to recipient such as selective satellite systems, network cables and telephone communication towers. Energy and Utilities; these assets enables provision of energy that is essential for humanity such as water treatment gadgets and distribution mechanisms, Oil and gas pipelines, systems for transmission and distribution of energy and regulated electricity assets. 4.0 AUSTRALIAN ETFS These are financial products traded in Australia Securities Exchange (ASX) that gives exposure to securities as well as other assets. The number of units supplied depend on the market demand; Entities providing accessibility to Australian ETFs include:- ANZ ETFS S&P/ASX 100; its main purpose is to provide investors with returns before the expenses and fees involved are taken into consideration. In the process it enables tracking of the performance of S&P/ASX 100 index 5.0 INTERNATIONAL ETFS These provides the Australian investors with the possibility of accessing investments not only in Australian market but also globally. They include:- ANZ ETFS S&P 500; these are high yield low volatility ETFs with goal of providing investors with returns that tracks the performance of the S&P 500 Low volatility with high dividend index Portfolio Allocation Date Adj Close Return ZOZI Returns ZYUS Returns ABP Returns APA Expected Return on Portfolio 3/1/2016 11.09 2/1/2016 10.6 -4.418% 0.490% 0.000% -0.439% -0.753% 1/4/2016 10.63 0.283% 0.000% -8.432% 1.762% -0.944% 12/1/2015 11.67 9.784% 9.268% -1.583% -1.299% 5.232% 11/3/2015 11.33 -2.913% 0.804% -4.152% -0.877% -1.016% 10/1/2015 11.61 2.471% 1.683% -0.595% 0.426% 1.142% 9/1/2015 10.94 -5.771% -11.063% 4.174% -8.475% -6.224% 8/3/2015 11.42 4.388% 2.057% -3.432% 1.389% 1.394% 7/1/2015 12.4 8.581% 5.278% -5.034% 0.456% 3.141% 6/1/2015 12.01 -3.145% -9.389% 1.397% 0.696% -4.071% 5/1/2015 12.75 6.162% 1.806% 6.361% 2.457% 4/1/2015 12.63 -0.941% -1.183% -0.784% -0.483% 3/2/2015 12.85 1.742% 1.197% 0.790% 0.646% 2/2/2015 12.79 -0.467% -0.451% -0.392% -0.220% 1/5/2015 12.01 -6.099% -1.032% -1.575% -1.611% 12/1/2014 11.61 -3.331% -3.127% -3.600% -1.675% 11/3/2014 11.33 -2.412% -2.413% -2.065% -1.154% 10/1/2014 11.58 2.207% -5.229% -0.333% -0.393% 9/1/2014 11.18 -3.454% -0.176% -1.219% -0.900% 8/4/2014 11.81 5.635% 0.000% 0.412% 1.189% 7/1/2014 11.77 -0.339% -6.163% -1.230% -1.177% 6/2/2014 11.28 -4.163% -1.223% 0.415% -0.954% 5/1/2014 11.46 1.596% -3.601% -3.984% -0.819% 4/1/2014 11.34 -1.047% 1.423% -9.959% -1.490% 3/31/2014 11.17 -1.499% -1.403% -4.148% -1.132% 6.0 CHOICE OF EXCHANGE TRADED FUND (ETF) Australian Exchange Traded Fund The best choice for the Australian ETF was BetaShares FTSE RAFI Australia 200 ETF (QOZ), this is due to the fact that this fund normally provides an investment return even before the fees and expenses that tracks the FTSE RAFI Australia 200 index as well as the distribution performance of the securities in the same index before taking into consideration the accounted fees and expenses (Della and Yermo 2013). Likewise the cost of QOZ is often lower than traditional active managers besides providing absolutely low constituent turnover that aims to reduce capital gains events and transaction costs involved (Duan and Lin 2014). The chart below shows the daily prices for the security QOZ for six months 7.0 International Exchange Traded Fund One of the most preferred International ETF is the Betashares NASDAQ 100 ETF (NDQ) since it provides opportunity for Australian investors to invest in many of the global most innovative firms that continue to revolutionize the livelihood of humanity such as amazon, google and apple (Aggarwal and Schofield 2014). These investors will be have exposure to the US Equities and US currency as well thus able to explore the global market quite easily. Unlike the cross-listed alternatives, NDQ has very simple tax administration platform at its disposal The chart below shows the daily prices for the security NDQ over a duration of six months Factors that influence performance of funds International taxes; when an investor purchases units in an ETF located in a foreign country but traded in Australian market, the foreign taxes may be applicable in such ETFs. For instance, suppose an investor purchases US ETF, the US estate taxes will be imposed upon the investor’s death (Aggarwal and Schofield 2014). Currency risks; in a situation where ETF tracks the overseas assets, the subsequent changes in value of the Australian dollar may end up affecting the value of the investment hence it is necessary to have some of these ETFs currency hedged so as to minimize the risks involved. Exposure to low liquid investments; Some ETFs may be exposed to investment in small companies, emerging markets or commodities that may make the EFT difficult to sell in some circumstances and therefore COMPUTATION OF THE TRACKING ERROR Date Portfolio Returns Benchmark Returns Active Returns (P-B) 3/1/2016 2/1/2016 -0.753% -0.03972 3.219% Tracking error 2.69% 1/4/2016 -0.944% 0.025528 -3.497% 12/1/2015 5.232% 0.058016 -0.570% 11/3/2015 -1.016% -0.02443 1.428% 10/1/2015 1.142% 0.01411 -0.269% 9/1/2015 -6.224% -0.04157 -2.067% 8/3/2015 1.394% 0.03692 -2.298% 7/1/2015 3.141% 0.094527 -6.312% 6/1/2015 -4.071% -0.04215 0.144% 5/1/2015 2.457% 0.058289 -3.372% 4/1/2015 -0.483% 0.002216 -0.705% 3/2/2015 0.646% 0.01753 -1.107% 2/2/2015 -0.220% 0.006331 -0.853% 1/5/2015 -1.611% -0.05743 4.132% 12/1/2014 -1.675% -0.03173 1.498% 11/3/2014 -1.154% -0.01811 0.657% 10/1/2014 -0.393% 0.040203 -4.413% 9/1/2014 -0.900% -0.0423 3.330% 8/4/2014 1.189% 0.062935 -5.105% 7/1/2014 -1.177% 0.001244 -1.301% 6/2/2014 -0.954% -0.04211 3.257% 5/1/2014 -0.819% 0.01794 -2.613% 4/1/2014 -1.490% -0.00062 -1.428% 3/31/2014 -1.132% -0.01718 0.586% 7.0 Discussion Based on the computation the expectected returns of the portfolio diviates from the set benchmark by 2.74%. This implies that the mutual or hedge funds that had been invested by the Australain invested did not work efficiently as anticipated and therefore created an unexpected gain or loss by a margin of 2.74% (Homich and Moore 2005) Influence of the Return and Volatility of the Australain dollar The worst expected deviation would be 4.42% (Excel workings) Return on China Equity Market Based on the analysis of the China equity market, 17.58% of the portfolio will be influenced either upwards or downwards in terms of output (Excel workings) Date Portfolio Returns Returns ZNH Benchmark Active Return 3/1/2016 2/1/2016 -0.753% -9.475% 8.722% Tracking error 17.58% 1/4/2016 -0.944% 5.941% -6.884% 12/1/2015 5.232% 27.336% -22.105% 11/2/2015 -1.016% -2.936% 1.920% 10/1/2015 1.142% 13.773% -12.631% 9/1/2015 -6.224% -13.221% 6.997% 8/3/2015 1.394% -14.633% 16.027% 7/1/2015 3.141% 57.962% -54.821% 6/1/2015 -4.071% 17.587% -21.658% 5/1/2015 2.457% -14.758% 17.216% 4/1/2015 -0.483% -1.387% 0.904% 3/2/2015 0.646% -26.509% 27.155% 2/2/2015 -0.220% -30.827% 30.607% 1/2/2015 -1.611% 6.298% -7.908% 12/1/2014 -1.675% -9.811% 8.136% 11/3/2014 -1.154% -5.732% 4.578% 10/1/2014 -0.393% -22.148% 21.755% 9/2/2014 -0.900% -6.956% 6.055% 8/1/2014 1.189% -0.797% 1.985% 7/1/2014 -1.177% 2.841% -4.018% 6/2/2014 -0.954% -9.910% 8.956% 5/1/2014 -0.819% -5.159% 4.340% 4/1/2014 -1.490% 3.648% -5.137% 3/31/2014 -1.132% 8.898% -10.030% CASH ALLOCATION As witnessed in recent times, investors have continued allocating their investment funds to cash due to the fact that equity allocations have been on a downward decline since January 2016. Therefore in order to sustain long term stability and growth, there is need to diversify risk in the market (Della and Yermo 2013). 8.0 ROLE AND SIZE OF SHARE MARKET OF SOUTH AFRICA Size of the Share Market of South Africa The South Africa’s stock market has Johannesburg Stock Exchange (JSE) as the largest trading market in Africa. According Della and Yermo (2013), economic data released in 2003, JSE had established itself with an estimated number of listed companies 472 and market capitalization hitting approximately US $182.6 in addition to the average monthly traded value of US$ 6.399 billion. As at end of 2013, the market capitalization of JSE had grown to US$ 1,007 billion. In the beginning of 2009, JSE acquired the initial body known as Bond Exchange of South Africa for approximately R240 million and changed its name to JSE debt market while incorporating the government of South Africa and the corporate bonds in addition to the interest rate derivatives to its product set to improve its market relevance. In the mid of 2012, JSE was accepted to be founder member of the United Nations Sustainable Stock Exchange initiative due to its size thus enabling it in 2014 to re-brand so as to portray itself the modern Africa Marketplace that was capable of connecting investors to existing growth opportunities within South Africa and Worldwide as well. Role of the Share Market of South Africa Based on the size of JSE, it has been able to provide conducive market where shares and securities are able to be traded at free will based on the regulated procedures. This process has facilitated channeling of funds into the South Africa’s economy while providing investors with good returns on their investments in the form of dividends. Likewise, the growth of JSE has played a great role in raising primary capital through distributing cash resources into productive economic activity and therefore promoting economic growth while enhancing job opportunities and wealth creation among the investors With the launch of the real-time Stock Exchange News Service, there has been possibility of enhancing market transparency and advancing the confidence of the investors. As a matter of fact, the augmented JSE listing requirements has given corporate entities the possibilities of disseminating commercial news as well as price sensitive information on the service before the usage of the existing media outlet. These has therefore been able to give corporate entities first-hand information in the stock market before the entire public assess the same (Aggarwal and Schofield 2014).a Difference between Australian equity market and the South Africa market The South Africa’s equity market is considered to be an emerging market and thus its main index, the All Share Index is normally incorporated in the Emerging Market Index. On the other hand, Australia is considered to be a developed economy and thus its major stock market index, the Australian All Ordinaries index is classified as part of the World index. Likewise, the developed market of Australia somehow highly correlated with the emerging market of South Africa. This is due to the fact that both the economies of these countries are based on natural resources (Aggarwal and Schofield 2014). In this case therefore, when an investor invests in these two markets at the same time, there may not be much difference in the returns as would be expected by the investor. The same has been illustrated in the chart below. The Returns of Australia’s All Ordinaries Index and South Africa’s All Share Index As indicated in the graph above, although the two stock markets’ trend is almost the same, Australia seems to be a little bit volatile and thus produced better returns during the economy boom between April 2003 and April 2007 Exchange Traded Funds Performance As demonstrated in the stock market performance, the 5-year performance of the iShares MSCI Australia (EWA) as well as the iShares MSCI South Africa Index fund (EZA) seems to be almost the same as well. The chart below illustrates In conclusion therefore, when an investor wants to choose a market for diversification purposes, it would be considerate to choose the right countries so as to achieve the desired output. References Yong, J. and Singh, A., 2015. Interest rate risk of Australian REITS: A panel analysis. Pacific Rim Property Research Journal, 21(1), pp.77-88. Ehlers, T., 2014. Understanding the challenges for infrastructure finance. Della Croce, R. and Yermo, J., 2013. Institutional investors and infrastructure financing. OECD Working Papers on Finance, Insurance and Private Pensions, (36), p.1. Duan, C.W. and Lin, J.C., 2014. The predictive power of volatility models: evidence from the ETF market. Aggarwal, R. and Schofield, L., 2014. The Growth of Global ETFs and Regulatory Challenges. Advances in Financial Economics (Advances in Financial Economics, Volume 16) Emerald Group Publishing Limited, 16, pp.77-102. Homich, A.J., Doerzbacher, M.A., Tschantz, E.L., Piazza, S.J., Hills, E.C. and Moore, J.Z., 2015. Minimizing Human Tracking Error for Robotic Rehabilitation Device. Journal of Medical Devices, 9(4), p.041003. Read More