Graduate Level Economic - Essay Example

Graduate level Economic essay Grade: (06, 05, 2009) Introduction For close to twenty years now, Global Industries has had to endure miserable experiences with its pension fund. Previously, the firm has resorted to investing in high risk areas with the hope of cashing in on high return. However, the timing has always been wrong, and this has been to the detriment of the corporation. For example, the corporation sought to invest in treasury notes and treasury bills in 2003, only to realise a dismal return of between 2 and 3 percent. In this case, the company missed on a money shower that the other companies were cashing in on, namely investment in the stock market which at the time was doing remarkably well. Again when the corporation opted to invest in the equities in 2007, this was the time when the current global financial crisis was starting and they never recovered. Proper timing and a lack of diversity in investment may be attributed to the failure experienced by the corporation (Palacios & Musalem 2003). Given that the US economy may not improve much in the next three years, there is a need for Global Industries to consider investing in the developing economies, such has India and China. Other emerging markets in South America such as Brazil, and also Africa, may be another option worth exploring. Why have we had such a horrible experience in our pension fund In the past, pension fund managers have been known to risk with the money of taxpayers in equity markets that are characterised by a high level of volatility. The operations of our pension fund system has been such that the decision to take investment risks in the equity markets is often arrived at by a few individuals at the management level but when we experience a market crash, the taxpayers have to bear this risk. Often times, pension fund managers are quick to attribute the loss of taxpayers' money on the world financial crisis and bad markets (Mangiero 2009). It is not often that pension fund managers shall be awake to the realisation that the fund may be governed by investment models that are quite faulty, coupled with crooked actuarial theories. According to a majority of the economists that specialises in the assessment of funds, such plans may at best be viewed as risk time bomb that shall in the long-run result in losses. Inevitably, it is the taxpayer that shall be required to pay for such losses. For this reason, one could argue that the reason why we have had such a horrible experience in our pension fund is because our pension plans and models are faulty, and we have never taken the initiative to revise them accordingly (Caulkin 2009). The practice by the pension fund in the past years has been to heavily invest in equities. What appeared to have led the pension fund managers to such a decision was due to the assumption that the short-term meltdowns that they were experiencing would be offset by the ensuing financial gain in the long-term. Apparently, these fund managers seems not to have heeded the advice of financial economists, as regards the conventional model of investment markets; that "equities provide guaranteed returns over the long term" (Pension pulse 2009). This is a goal that economists have proved to be quiet untenable. Clearly, no one anticipated a global financial crisis of the magnitude that we are faced with, at the moment. It is imperative therefore that we do not repeat past mistakes. What this means is that we should learn to diversity our investments, at least as a cushioning effect against losing all the taxpayers earnings. In high investments such as the stocks or the equity funds, perfect timing is very important. Apparently, Global Industries appears to have opted to make investments at a time when disaster was just about to strike. Another characteristic of the past investments since the early 1990s is that the corporations have failed to adequately diversity its investments. For example, at one time, the corporation was into government bonds, made a loss and then opted to invest in the treasury bills, then the equity market. Diversity is very important in the otherwise volatile equity market, as well as the stock market (Palacios & Musalem 2003). The economy in the United States is projected to get better by 2010. The expected growth prospects may not be stellar, but they shall nevertheless be solid. This trend shall continue up to 2012, a time when the current global financial crisis is expected to have receded (Caulkin 2009). For the developed economies, especially those in Europe, the rate of growth is expected to fall short of the historical average witnessed from 1970 to 2008, by about 2.2 percent. In Asia, Japan is amongst those countries that have been projected to experience a modest rate of growth, at 1.25 percent. Due to this, Japan, along with the European Union will constitute a smaller portion of world's Gross Domestic Product (GDP). India, China, as well as the remainder of arias, shall in the foreseeable future, constitute a large portion of the world' GDP. Nevertheless, one of the factors that may hinder higher level of economic growth in Asia, are the elevated levels of oil prices in the world market (Caulkin 2009). The reason behind this is that in Asia, most of the economies are dependent of the manufacturing sector; a sector that in return heavily depends on oil. As such, the GDP growth for the Asia economy may be said to be more dependent on the oil prices, more than in any other continent. Thus far, China has had one of the most consistent rates of growth of the economy. Apparently, China witnessed more than 10 percent rate of economic growth for the period between 2003 and 2007. Even as this growth may be expected to somewhat reduce, thanks to the global economic crisis, nevertheless, the projected rate of economic growth by 2018 is 7.5 percent (Caulkin 2009). Perhaps it would be worthwhile for the Global industries to look at both Africa and the Latin American regions as possible areas for investing in the future. Recent statistics indicates that even as the rest of the world was engulfed with the global financial crisis, these economies have managed to weather the storm. Furthermore, the two regions have been noted as the emerging markets of today Conclusion Seeing that the current global financial crisis may not at the moment offer much respite to Global Industries and the U S economic at large, the corporation may consider doing two things. First, the corporation may decide to sell some of their shares to private investors. This will then give them a cash injection necessary to make future investments. Secondly, the corporation may consider investing in hedge funds. Owing to the pooling of funds that the hedge fund provides (Palacios & Musalem 2003), it is a safer bet compared to say, the more volatile stock market. Work cited Caulkin, Simon. (2009). It's got so horrible that we ought to be revolting. The Observer, January 11. Retrieved May 06, 2009, from http://74.125.113.132/searchq=cache:RRVkSHnMq4UJ:www.guardian.co.uk/ business/2009/jan/11/recession-protest Mangiero, Susan. (2009). Hedge fund haven gets double whammy from pension plan and new regulations. March 2. Retrieved May 06, 2009, from http://www.pensionriskmatters.com/articles/pension-deficit/ Palacios, Robert, & Musalem, Albverto. Public pension fund management: governance, accountability and investment policies. Washington, D.C.: World Bank Publications, 2003. Pension pulse (2009). A giant experiment March 30. Retrieved May 06, 2009, from http://pensionpulse.blogspot.com/2009/03/giant-experiment.html Read More