Financial Strategy Magazine 2nd Edition

8/18/2019 Financial Strategy Magazine 2nd Edition

1/15


2/15

04

07

09

04 Oil and natural gas outlook Adley provides an insight into one of

the most volatile markets today.

03 E’

07 Renewable energy investment

Danyal shares an insight into

renewable energy investment potential.

SECURITISATION

EXPLAINED

Chinese Stock Market Outlook The impact of the circuit-breaker and

new government policies on the market

Rouble Crisis

09

14Evaluating the resaons for a collapse

of the Russian currency and its

consecuences for the society

14

Page 2 FINANCIAL STRATEGY Mar-Apr 2016


3/15


4/15

Last year, oil and gas market were showing

bearish signs and experts are predicting tough

years ahead. The continuous decrease in crude oil

prices has severely hit the industry which restricts

the long term planning of individual companies.

Falling oil prices affect various industries by varying

degrees. Aviation industry, which has oil as its highest

cost component, does not translate decreasing oil prices into lower airfares. The ONS ination report

for 2015 shows the largest monthly increase in the

number of UK ights since 2002 between November

and December 2015. "The fact that airlines can increase

prices to this extent demonstrates robust underlyingpricing power and strong consumer demand,» saidmarket analyst Alan Clarke o Scotiabank. Accordingto the government statistics, there is a higher numbero passengers compared to the same month in 2014.«Consumers are spending the windall rom loweroutgoings on ood and [gasoline],» said Clarke.

FUTURE OUTLOOKPeople are more conscious o the environment, therapid development o renewable energies and greentechnologies nowadays, which will translate intodecreasing profits o the oil industry. In June 2015, astatement has been issued by G7 industrialised

nations to end the use o petroleum-based energy bythe end o the century. During the COP21 summit inParis last year, more than 200 world leaders agreed todecrease the net amount o greenhouse gas emissionto zero within the set timerame. In other words, ossil

uel production and consumption will be diminishedin the oreseeable uture.

In the ace o the current challenging situation,analysts rom Deloitte suggest that the industry


OIL AND GAS

MARKET OUTLOOKBY ADLEY CHAN


5/15


is getting stronger by introducing innovation andadjusting to the new economic environment. Oil andgas companies are orced to research more on cost-effective extraction and production methods. In theuture, especially when prices rebound, higher unitmargin and return on capital employed could beachieved.

UpdateForward prices or Brent crude oil brought good newsto the industry at the beginning o March 2016, whichshowed the recovery o more than fify percent romthe 12-year low o $27.10 on January 20. Part o the

effect can me attributed the agreement among OPECmembers and non-OPEC members to maintain thelevel o supply set in January.

However, some analysts view the rise in March andApril as a short term effect and expect a lower averageprice o crude oil in the uture. Te low oil priceshave raised warning by Moody’s ratings agency o

potential declines in output i oil producers deaultedon debt. Due to weak crude prices, Saudi Arabia isexperiencing budget deficit, and Reuters reported thatit was seeking its first significant oreign borrowing inover a decade to help to cover it.


6/15



7/15


RENEWABLE ENERGY

OUTLOOKBY DANYAL ADNAN

greater share in the energy market, as investors growwary o the long-term prospects o oil and look oralternative investments. With the major oil producersrecently ailing to reach an agreement in Doha to capproduction, this situation may not change any timesoon.

Renewable energy investments jumped to a record

$328.9 billion in 2015, with over one hal o theinvestments coming rom the Asia-Pacific region(Bloomberg). China contributed with $111bn with amajority o that sum invested in the solar industry.Tis reflects part o China’s effort to steer itsel awayrom highly polluting energy sources like coal to muchcleaner options. It also highlights the unanticipatedcost-competitiveness o renewable energy sources, asinvestments were expected to stall along with thosein oil and gas, but instead they witnessed growth.

In the US, clean energy outshined ossil uels asthe largest source o new power capacity added toelectrical grids in 2015, or the second consecutiveyear. Renewables accounted or 68% o the addedcapacity, with wind arms making up the largest sliceo the pie (Bloomberg). Similarly in Europe, energygenerated rom wind turbines accounted or 44%o new generating capacity, compared to 21% rom

2016 has proven to be a triumphant year orthe renewable energy industry, owing largely toa supply glut in the oil sectors as well as socialinitiatives undertaken by numerous corporationsand governments worldwide. Public appeal andoptimism around the use o renewables hasstrengthened dramatically over the past ew years,as the consequences o climate change and ossiluel exploitation are being increasingly politicized.Furthermore, the conditions o the ossil uelindustry since July 2015 have created the near-perectenvironment or renewables to excel and control a


8/15


gas, 17.5% rom coal and 15.5% rom hydro, makingwind their third largest source o electricity in 2015.

Banks and other corporations also have beenincreasing the amount o unds they commit torenewables, with Bank o America creating the

initiative to raise at least $10bn or clean energy.Several major banks including HSBC and CreditAgricole joined this initiative in April, helping raise$8bn so ar. Furthermore, the World Bank also plansto increase its direct unding o clean energy projectsby 50%; rom $2.3bn to $3.5bn over the next fiveyears.

Moreover, in the automobile industry, esla ismaking an unprecedented mark as probably the most

prolific electric-car manuacturer in history. Temanuacturer’s success has sparked debate about theneed or disruptive innovation in the automobiles.Tere is disagreement between economists, however,regarding esla’s role as a disruptive innovator. Manyargue that though esla has introduced transormativesystems, it will need to bridge the gap between electriccars and large-scale solar power i it wants its productsto create any real disruption. Te establishment o its“gigaactory” and the introduction o Powerwall areew o the steps esla has taken to bridge that gap,but it may need to introduce new electric productsin order to boost demand or these systems. Itsbrand new “budget” model, the Model 3, is alreadyapproaching 400,000 orders, beating any otherelectric competitors by a long shot. It is expected to

hit the road in late 2017.

In the developing world, countries currently sharea slightly different approach towards the inclusiono renewables to their economy. Oil producingstates o the gul have been historically reluctant to

incorporate renewables in their local grids, but dueto the depressing effect o the current oil supplyglut on their economies, several countries aretaking a renewed approach towards clean energy.Future energy summits, plans or new local banksspecialized in the solar industry, and other initiativeshave emerged with the backing o local governmentsand corporations. India on the other hand is onestep ahead o countries in the developing world inincorporating clean energy in its power systems,

making it the fifh largest wind energy producer inthe world.

Much o the expansion o renewable energyin the past ew years can be attributed to thecollective efforts o governments, organizations,and multinational corporations around the world.Tough most o the extraordinary progress isconcentrated in the developed world, the growingawareness o entrepreneurial opportunity in cleanenergy is increasing its utilization in the developingworld as well. Many corporations and countries arewilling to shif rom labels o “oil producers” and “gasproducers”, to envisioning an all-inclusive uture as“energy producers”; thus finding the expansion orenewable energy as an opportunity, and not a threat.


9/15


CHINESE STOCK

MARKET OUTLOOKBY MYA ZHONG

OChinese economy, the world‘s second largest, hasbeen growing at an average annual rate o 10% over

the last three decades. However, this year the growthrate ell to 6.8%. Chinese stock market suffered thisquite drastically, alling rom 5166.35 to 3507.19 sincethe second hal o 2015. So, what is going on with theChina’s stock market?

Renminbi devaluation:Renminbi devaluation reers to the weakening o yuanagainst the U.S. dollar. As the renminbi slides another6% reaching its lowest level against the dollar in five

years, some experts expect the dollar to buy 7.30 yuanby the end o 2017, up rom previous prediction o6.80. Te policy maker rom Te People’s Bank oChina devoted to pushing the currency even lowerin order to boost the domestic economy. Tat shouldtheoretically raise China’s exports and reduce itsimports. However, the move has unleashed turmoilin both local and international stock markets. Inaddition, the rate hike by Federal Reserve caused theUS dollar index (DXY) intraday to break 96.44 on the13th o July 2015. By doing so, the U.S. government

aims to increase the amount o investment into theeconomy, create more job opportunities and control.Te event has led to a significant decrease o the

valuation o the Renminbi capital, which resulted into

a substantial capital outflow rom the Chinese stockmarket and encouraged ordinary Chinese to converttheir savings into oreign currency and oreign assets,exacerbating the situation at the Chinese stockexchange.

Central Bank cuts interest rate:Te People’s Bank o China cut its key lending rate by0.25 percentage points to 4.6% to calm stock marketsafer the turmoil. In order to increase the flow omoney in the economy, the policy-maker has cut

the amount o cash that banks must keep in reserve,

enabling them to lend more. Some investorsbroadly welcome the radical move. Tis has enabledspeculators to borrow more cheaply and invest in thestock market, which has led to a light increase thestock price. Tese adjustments, to a certain extent,stimulate speculators to spend more, which will boostthe economy in the short run, but it’s not sustainablein the long-term. Tis is because when lower interestrate lasts over a long period o time, it will bring aboutcurrency depreciation and can slow down the rate oeconomic development. Tereore, it can be observed

that the Chinese authorities have taken some steps tohelp stem stock market losses since the market begana series o heavy alls, but the revivification o thestock market cannot rely on the releasing policies.


10/15


Circuit-breakersChinese stock market crashes with the use o circuit-breakers. Operations hit the 5 percent level first andthen closed the market at the 7 percent level soonaferwards. Te trading lasted only or 14 minutesbeore being halted. In theory, the circuit-breaker

should have calmed the markets, as in the example othe U.S.A. Te US circuit-breaker paused trading oall exchange-listed securities throughout U.S. marketsas a response to the May 6, 2010, crash. Tis eventnot only spooked investors, embarrassed speculatorsand regulators, but it has also revealed deep flaws inmarket structure. However, Chinese authorities withthe aid o this mechanism encouraged traders to lockin “sell” orders to make sure they are first to escape themarket beore the market reached the bottom line. Tis

implication seems to help market reduce volatility, butit triggered a panic-driven spiral because o conusionand uncertainty it had caused or individual investors.Hence, the stock price declined during these periods.

Government measures and investors’ reactionNo matter how the policies or external actors affect

the market, currently the most important almsgivingmeasures don’t only depend on governmentpolicies stimulating the stock market. In light o thedepression in the global market and the pressure roman ever stronger dollar, the perormance o Chinesemarket suffered an embarrassing setback. All o thishappening on the background o a lower demandor staple commodities, lower purchasing power andcontinuously alling worldwide consumption. Hence,a decrease o export is not an abnormal phenomenon.

One o the challenges aced by the country is theoversupply o goods, which results in a loss o profit othe producing industries. Hence, investors should notanticipate an increase o returns on their investmentsand take their money out rom the stock market.

Even though the Chinese authorities increase thesupply o capital and then put it into the stockexchange to drag the price up, it does not work in thelong- term according to the evidence o 2009. Tegovernment has offered 4 trillion yuan to strengthenthe confidence o individual investors so as to rescue

the market; however, the end result was below analysts’expectations. Once the capital or given resources aredried up in the market, the depression will return ina vicious cycle. In act, the actual downturns o thestock market could be resulted rom the out-o-dateindustries. I these out-o-date companies transerto sunrise businesses and increase the number o thesunrise companies in the stock market, their goodperormance will push the share prices up.

In particular, the government should give moreroom or development or small and medium sizebusiness to enable greater uture vitality by reducingpotencies o state-owned industries. For instance, thegovernment could encourage emerging business likeNew Over-Te-Counter Bulletin Board to be listedon the stock market so as to broaden the scale o theOver-Te-Counter Market, raising more unds toimprove operations and then expand at a aster pace.

Only i this plan was put into practice, more jobs wouldbe created by these sunrise industries, the income percapital would rise at a reasonable percentage so thatthe spending by both households and firms wouldgrow up. Tis is an essential step to accelerate the flowo money into the domestic market and reduce theamount o offshore capital. Meanwhile, it is beneficialto the real economy. On the other hand, in this context,eliminating sunset industries or restructuring theseout-o-date industries plays a crucial role in revitalizingthe market. Hence, to attract oreign investment into

the domestic stock market or strengthen China’s stockmarket it is better to allow small and medium sizebusinesses to release their potential in the market.


11/15


SECURITISATION

EXPLAINEDBY KIRILL IVANOV

Tanks to the financial crisis, rom which we areyet to recover, most o us have been exposed to a hugeamount o financial terms, which were supposed togive us some insight into the causes o the recession.

Yet some o us, even those studying or finance relateddegrees, still struggle to get an understanding o thekey principles o different financial instruments. Oneo them is “securitisation”. In this article I would liketo outline the key eatures o secured assets, explainstep-by-step how they are ormed and describe therole o various financial institution in their ormation.Securitisation is simply a method o attractingadditional capital to a company or a bank in line withborrowing, issuing extra shares and corporate bonds.However, the key eature o securitisation is that itis done through issuing papers secured by financialassets that generate steady returns (e.g. mortgages,loans, property etc.).Te key instruments are: Mortgage-Backed Securities(MBS), Asset-Backed Securities (ABS), Future-FlowSecurities (FFS).

Why is it needed?When a bank provides a mortgage, it loses some oits readily accessible cash, which will be paid back to

the bank only in the next 25 years. I a bank provideslots o mortgages, soon it will have to significantlyreduce its lending activity, due to insufficient reservesand regulated liquidity norms. Another benefit o

securitisation to a bank is that it allows banks toseparate the risks between those o a bank itsel andthose attached to secured assets.

How does it work?Let me begin with the simple model and additionaldetails will be added along the explanation.In step one, a company (the originator) with loans,

mortgages or any other type o assets that generatesteady returns, identifies the assets that it desires toremove rom its balance sheet and collects them ina so called “reerence portolio” . (1) It then sells theportolio to a special purpose vehicle (SPV) - an entitycreated by a financial institution to ulfil narrow, specificand temporary objectives with the purpose o effectivemanagement o financial flow. (2) Te company thenrepackages the purchased pool o assets into interest-generating securities that could be easily traded at the

capital market, coordinates with underwriters, whoenable the SPV to sell these securities to investors (3).Te SPV then uses this money to purchase the pool oassets rom the originator.However, it only makes sense or the originator toconduct this operation i it is able to gain rom it byattracting money at a lower rate than it would otherwisedo. For example, i a company can borrow rom afinancial institution at 5% interest rate, securitisationwill be appealing i it is paying investors less than 5%.In order to achieve this, it has to assure investors thatthe securities are o the high quality and have low levelo risk. Tis is when insurance companies and ratingagencies come into play.

Te originator agrees with an insurance company tosecure uture payments o the securities, so that i adebtor delays or does not make the payment, theinsurance company will compensate or it and theinvestors will not be affected. (4) Te securities shouldalso be rated by a rating agency such as Standard &

Poor’s and Moody’s to enable investors to weigh theirrisk profile. Mortgage Backed Securities tend to have arelatively low risk as property tends to appreciate, plusuture interest is secured by an insurance company,


12/15


Now, investors become the legal owners o the loansand mortgages. However who is supposed to hold thispool o assets? For this purpose investors nominate atrustee, which will be holding this pool o securitiesand will represent the interest o investors in case anyproblem with debtors or financial institution shouldarise. Te SPV passes the pool o assets to this trustee(5).

As investors are now the legal owners o loans andmortgages, it would be reasonable to assume thatthe debtors have to return their loans to investors.However, in order to make the process much airerand more convenient, the bank now plays the role oa service agent which collects the payments on behalo investors (6) and passes them to the trustee (7). Telatter transers the money received to the investors (8).

TrusteeIt becomes o the vital importance that a trustee is an

investment bank, which is able to control the moneyflow. Why is it important? Let’s say that borrowersmake monthly repayments to the bank, but theinterest/coupon on ABS and MBS is paid only onquarterly or hal-year basis. Tereore, there is a timelag between the date o coupon payment and the dateo receiving this money, which could be used to gainsome small amount o interest in the meanwhile.Secondly, when borrowers make repayments, theypay the interest rate as well as a portion o the amount

borrowed. However, ABS and MBS only mature in 10-15 years, which thereore leaves some o the capitalunused. Investment banks could take advantage othis and allocate it to some more profitable activities.Lastly, let’s assume that the bank is in the USA and

lent the money in US dollars, but the SPV is in theEU and issued its securities in euros. Tis exposesthe instrument to a risk o change o the exchangerate. In order to hedge (reduce) the risk, the trusteecan arrange a currency swap, so that a change o thecurrency rate does not affect the profitability o theasset.

Securitisation for investors

For investors securitisation offers a wide range oinvestable assets with different risk levels, which couldbe tailored or individual preerences o an investor.For example, pension unds require high quality long-term fixed income investments. Furthermore, highliquidity o this type o financial instruments allowsinvestors to adjust quickly to a change o economicenvironment and reduce their risk exposure at arelatively low cost.


13/15


ROUBLE CRISISBY WENYANG MIN

Introduction Te relative value o a specific currency isundamentally determined by its supply and demandin the market (Crespo Cuaresma et al., 2014). Tereare many issues that could impact on the currency`ssupply and demand actors in the market; their effect

on currencies is varied rom one country to another,depending on the characteristics o a particulareconomy. In 2014, currency devaluation has beenconronted by many developing countries, whileRussia is the one that suffered the most.

Since January 2014, Russian rouble lost approximately50% o its value against the US dollar. Te effect hasbeen amplified by the sanctions imposed by westerncountries on Russia and urther exacerbated by a

successive collapse o the oil price.

Main reasons behind the crisisTe problems seem to have been building up overa long period o time. Russian economy is seriouslydependent on oreign trade and investment; withapproximately 70% o Russian export consisting ooil, natural gas and refined petroleum products and50% o government revenue coming directly romthe oil sector (Wilson, 2015).

In 2014 Te Economist reported that the oil price

ell by more than 40%. Te collapse o the oil priceappears to be the most important reason behindRussian Crisis, resulting in a severe shortcut o traderevenue “orcing it to start considering austeritymeasures to avoid draining its rainy-day unds used tocover shortalls in the budget (Spence, 2016)”. FigureA demonstrates a positive relationship between Brentcrude oil price and the value o Russian rouble interms o USD.

Another reason behind the crisis has resulted romRussia`s conflict with Ukraine, causing the EU andthe USA to impose economic sanctions, which havecaused uncertainty and encouraged a significantoutflow o capital rom the country. Tere are threetypes o sanctions that were imposed on the economy,each playing its negative role. Firstly, a significantrestriction on access o Russian national statecompanies and banks to the world financial markets(Gilmundinov, 2014). According to Kahn, given thehigh external debt o Russia, “a rapid deleveraging o

Russian financial institutions could cause losses or


14/15


Russia and its external investors”.

Secondly, sanctions imposed restriction on accesso Russian companies to some oreign technologies.For example, due to Russian backwardness in thehorizontal drilling, an embargo implemented onexport o some designated high-technology in oilexploration could have a negative effect even in thelong run. Tirdly, sanctions also imposed restrictiono the embargo on dual-use goods and militaryequipment designated to Russia (Review, 2015).As a result, the problem o increasing capital flightand urther accelerating inflation growth raised. Teslumps o crude price leads to Russian a tougherinternational trade environment and stark decrease intrade revenue. Both actors lead to decrease demand

or Rouble and increase supply o Rouble in the worldmarket.

Further influencesTe Russian Crisis is posing a major threat to ninecountries, along its southern ringe, whose economiesrely heavily on remittances- billions o dollars shipped

by their citizens working in Russia. Te drop in Rouble value has not only decimated the value o remittancessent home by workers rom Caucasus and centralAsia, but is discouraging migrants rom staying workin Russia and could lead to political unrest.According to Guardian (2015) “About 40% oremittances to Armenia, Georgia, Moldova andUkraine are rom Russia, rising to 79% or Kyrgyzstan.”which in turn causes a devaluation o the currencieso those countries. Te most vulnerable countriesare Kyrgyzstan, ajikistan and Uzbekistan wherethe economies and political systems are in largeproportion backed up by the money rom its nationworking in Russia (Walker & Nardelli, 2015). I allthese people return it will cause a social explosion. InUzbekistan, ageing dictator Islam Karimov said there

is little work in Uzbekistan, where £100 per month isconsidered a good salary and many towns simply donot have any opportunities to work at all. Accordingto regional experts, i the money flow rom migrantlabourers dries up, rulers like in Karimov would getinto serious trouble.


15/15

IN PARTNERSHIP WITH

Date post:	06-Jul-2018
Category:	Documents
Upload:	kirill
View:	216 times
Download:	0 times

Financial Strategy Magazine 2nd Edition

Documents