AFE-7-IFI

International Financial Market

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Table of Contents

Question 2: Fixed-Income Valuation and Analysis

2.1 powerful role central banks play in bond markets

The majority of emerging-market nations’ governments and central banks engage in the market for sovereign bonds. There are a variety of ways that governments might raise money to cover their fiscal shortfalls. Central banks issue their own securities to support investments in assets. In particular, foreign currency reserves. The open market is also where they do their business. The selling and purchase of government debt is involved. Everything works out in the best interest of everyone concerned (Monnin, 2018). The central bank has a direct impact on the mix of short- and long-term securities held by the public. A company’s financial health may be at risk due to debt management’ judgments on the maturity structure of its debt. Analogous to monetary policy’s effects debt managers’ maturity judgments are based on a theoretical framework (Dikau and Volz, 2018). These judgments are not influenced by macroeconomic or financial market objectives. In the actual world, on the other hand, decisions about debt management, on the other hand, may be made with a great deal of freedom and are subject to a lot of scrutiny (Volz, 2017). The central bank’s debt issuances and the government’s debt issuances may sometimes clash with one another. Central banks are responsible with maintaining macroeconomic stability (i.e., price stability), while debt managers are tasked with ensuring that government borrowing costs are kept as low as feasible. Due to the fact that short-term bills are more practical for everyday liquidity operations, central banks may choose to issue long-term bills rather than short-term bills (Monnin, 2018). This might have unfavourable consequences for the term structure, which is responsible for the transmission of money.

2.2 discuss whether the current U.S. debt profile is approaching bubble territory

Interest rate reductions enacted by global “central banks in the aftermath of the 2008 financial crisis” have resulted in a considerable increase in debt held by both sovereign and corporate issuers, respectively (Faugère, 2020). Just in the last three years, the total amount of business (non-financial) bonds outstanding in the United States has climbed by 67 percent, reaching a total of $6.3 trillion. According to the Dallas Federal Reserve, a considerable “portion of this debt was used to fund share buybacks, dividends, and merger” and acquisition operations, among other purposes. After increasing by 154 percent since 2008, the total amount of outstanding government debt in the United States has reached a record high of $16.2 trillion (Prates, 2020). Since the end of the previous recession, corporate debt has increased by more than $9.7 trillion, representing a record high. A cause for concern is that roughly half of all investment grade (IG) credit, or around $3 trillion, is rated “triple-B,” which is one notch above “junk bond” classification (Guerraoui, 2021). Keep in mind that the BBB sector of the IG bond market accounts for more than double the whole size of the junk/high yield index combined. To put it another way, there is a tremendous quantity of debt accumulated just outside junk’s door.

2.3 How Ray Dalio’s investment strategy generates high returns and then discuss its advantages and disadvantage

Ray Dalio is widely regarded as the first hedge fund manager to recognise a difference between alpha and beta performance in the financial markets. The term “alpha” refers to the additional return received over and above the return on the market. The return on a complete market, which is the return on a stock market, is identical to the return on a stock market beta (Dalio, 2019). In addition to the Pure Alpha fund, each of Bridgewater’s two basic investment funds is committed to one of these strategies, with the All Weather fund concentrating on beta and the Pure Alpha fund concentrating on alpha, respectively, while the Pure Alpha fund concentrating on both beta and alpha. Dalio has been able to produce some outstanding returns via the utilisation of macro patterns and a concentrate on either alpha or beta approaches, among other things (Dalio, 2018). Despite the fact that many hedge funds had a horrible year, Dalio’s Pure Alpha fund had returns of 19.5 percent after fees, outperforming many of its competitors, according to the fund’s manager.

Advantages

1. “According to Dalio, one of the” most significant “benefits of the All Weather portfolio” is that it may assist to decrease risks since it performs well in four different economic scenarios at the same time (Guides, 2019). To put it another way, portfolio risk is managed irrespective of the state of the economy at the time.

2. “Another key benefit of the All Weather portfolio” is that it consists of assets that are only weakly related to one another in terms of their performance. As with the preceding professional, this professional is concerned with how the investor manages the risk of his or her investment portfolio.

Disadvantages

1. It is necessary to evaluate “if an investor can simply” purchase the S&P 500 and obtain returns that outperform those of “the All-Weather Portfolio” since there is no volatility and no risk management in place (Guides, 2019). When using the All-Weather Portfolio, investors received an average yearly return of 9.7 percent on their money between 1984 and 2013.

2. First and foremost, Dalio’s All-Weather Portfolio incorporates a significant amount of bonds. One of the portfolio’s advantages is its overall allocation to assets with low correlation to one another as well as asset classes that perform differently in different economic cycles. The assets of the portfolio are also more diverse, which is a positive development. When interest rates are at historically low levels, an investor who retains more than 55 percent of his or her portfolio in bonds may be taking on an excessive amount of risk.

2.4 justify why credit rating agencies rate Disney’s debt higher than its peers

The analysis of a company’s financial structure aids analysts in understanding the company’s strategic connection with and dependence on external funding sources. Having a more conservative capital structure and relying on operational cash flows to move the firm forward are reasonable trade-offs for a well-established organisation such as Disney (DIS). Disney’s financial structure is comprised mostly of debt, with the corporation also owning a diverse range of other assets (Sun, 2021). The market capitalization in October 2019 was $235 billion, an increase over the previous month’s value of $149 billion. Making a determination on the market capitalization of a firm is as easy as multiplying its total number of outstanding shares by its current stock price. Due to the fact that the number of Disney shares owned by the corporation remained relatively constant over this time, it is reasonable to assume that the increase in Disney’s capitalization is linked to an increase in the stock price (Bogart, 2020). It is true that Disney’s stock price increased from $87 per share in October 2014 to $129 per share in mid-October of this year.

2.5 Calculate the yield-to-maturity on a Disney bond

PV = 1,480.26

FV = 1,000.00

N = 26

PMT = 35

So, i = 1.31

This is a semiannual rate.

Annual yield to maturity = 2 * semiannual rate = (2*1.31) = 2.62%.

Question 3: Equity Valuation and Analysis

3.1 Disney Stock’s Intrinsic Value Using Four Models

There are four valuation models for valuing Disney’s stock price, like – “Constant Growth Model”, “Multiple Stage Growth Model”, “Discounted Dividend Model” and “Market Multiple Approach”.

3.1.1 Constant Growth Model:

It is also known as “Gordon Growth Model”; it is a way of valuation of share. It assumes that a company’s dividend will continue to go up at a “Constant Growth Rate” indefinitely. It helps to investor and financial experts to determine the fair price to invest in a stock today based on future dividend payments (Gacus and Hinlo, 2018).

In case of Disney this method assumes that a constant growth model for Disney’s stock price, So, the intrinsic value of Disney stock will be calculated as:

Intrinsic value of Disney Stock = P = D1/ (k-g)

Here,

D1= “Value of next year Dividend”

P= “Stock Price”

k= “Required Rate of Return”

g= “Growth Rate”

So, after calculating the Constant Growth Rate Disney’s stock price = $111.06

Disney’s Stock intrinsic value by using Multi-Stage Growth Model is below.

3.1.2 Multi-Stage Growth Model:

It is a “multi-stage dividend discount model” which is an “equity valuation model” which builds on “Constant Growth Model” through applying varying growth rates in the calculation. In this method changing growth rates are applied in different times (Jayananda et al., 2020)

In case of Disney this method can assumes that there are certain changes that will occur in the dividend growth rate

It is calculated by this way,

Dividend per share in a year= Current Dividend *(1+growth rate in a year)

So, after calculating this method the end result is $250.56

Disney’s intrinsic value by using Discounted Dividend Model is below.

3.1.3 Discounted Dividend Model:

It is a quantitative method which is used by investors and the financial experts for predicting the “stock price” of a company based on the theory that its current prices worth the sum of all of its future dividend earnings when discounted back to their “present value” (Peng and Zhang, 2020).

Discounted Dividend Model = Intrinsic value = (Sum of Present Value of Dividends + Present Value of stock sale price)

After calculation, the price stock of Disney is 241.64

Disney’s intrinsic value by using Market Multiples Approach is below.

3.1.4 Market Multiples Approach:

It is a “valuation theory” of stocks which is based on the idea that is similar assets sell at similar prices. It helps to assume that the type of ratio which is used in “comparing firms”, like “cash flows”, it is same across similar firms (Derin, 2018).

The simplicity of using Multiple Approach is an advantage as well as a disadvantage because it simplifies complex information into a single value. It also can be difficult to compare companies.

In case of Disney this method will be calculated as,

Market Multiples Approach = performance metric A / Performance metric B

And in case of Disney its value is 1.86

All the calculation is shown in the below sheet from excel:

Equity Valuation and Analysis
In $
Required Data
Average Growth Rate (2005-16)			16.09%
Return On Equity			19.50%
Dividend Payout Ratio			24.30%
Current Stock Price			113
Earnings Per share (2019)			7.36
2020			8.24
Earnings per share of 1 year			0.88
Rate of Gain			11.96%
Retained Earnings			75.70%
Intrinsic Value by Using Constant Growth Model
Dividend for Coming Year			D1
Required Growth of Return			K
Return on Equity + (Market Risk
Premium * Beta For Equity)
Growth Rate of Divided (G)			16.09%
Market Risk Premium			4.13%
Beta			0.97
Required Rate of Return (K)			23.51%
Disney Stock Price			111.06
Intrinsic Value by Using Multiple Stage Growth Model
Growth Rate of Dividends			16.09%
Required Rate of Return			19.50%
Number of Compounding Period			2
Present Value Factor			0.70
Terminal Value			250.56
Intrinsic Value by Using Discounted Dividend Model
Price of Disney Sock			241.64
Intrinsic Value by Using Market Multiple Approach
Current Stock Price			113
Earnings Per Share (2019)			7.36
2020			8.24
P/E in 2019			15.35326087
Stock Price 2020			1.86

Question 5: Risk Analysis

5.1 Influence of the mentioned factors on USA

Greek Bailout is a dangerous crisis in the history of Greece, it was a sovereign bond crisis which immensely effect on the Greece economy as well as in more countries of the world. In the year 2009 Greece shows a budget deficit about 12.9% of their GDP. In 2014 Greece’s economy is seem to be grow as they grew by 0.7% and the government of the Greece successfully sold the bonds and balanced their budget. Greek Bailout began in the year 2010, and it was the biggest debt crisis in the world. In 2015 Greece failed to pay its debts, they fell into arrears and it also failed to pay € 1.6 Billion to “IMF (International Monetary Fund)”, it was first time in the history that a developed country fails to pay such that amount. Greek only makes 0.3% of the global economy in 2015 (Lim, Moutselos and McKenna,2019).

Greek Bailout effects on many countries in this year, as well as USA also impacted by the Greek Bailout. S&P 500 index has been dropped by more than 2% in 2015. It has impacted global stock market heavily. In the year 2015, Aug 24 S&P 500 was opened at 1965.15within a few minutes it was dropped by 5% to a low of 1867.01.

The timing of interest rate rises in the USA: Federal of USA set hike in interest rate in between 2014-2016 which impacts on the economy of USA as well as it also impacts on S&P500 in these years. Main motive to increase interest rate of Fed is to increase the cost of credit in the country. Higher interest rates make loans expensive for business and individuals both. It decreases the loans in the country and higher interest rate also encourage peoples to save money and they don’t want to take loans, for that reason money supply in the market is going to be control. It also helps to reduce inflation in the country and to make a moderate economic country (Auerbach, Gorodnichenko, and Murphy, 2020).

Higher rate of interest impacts negative in the stock market of a country. When Fed increase rate of interest, then doing business is expensive for the public or private companies. Higher rate of interest and lower business, that means businesses or firms not generating a good revenue so it impacts on their business and the prices in stock market. When Fed announces higher interest rate many investors sell their investments without thinking about long term and this also effect on the stock market negatively.

Dramatic falls in the price of oil and many other commodities: In the year 2014 to 2016 collapse in oil price was decline. And the global economy faced one of the largest oil price declines in modern history. In the year 1986, the 70%-piece decline because of the period was World War II; after some years 2014 to 2016 again oil prices were decrees. That time over all glob bought oil and sold US dollars.US dollar getting makes stronger and more expensive to buy in outside countries,

When falls in the price of oil, that times some effects in S&P 500, as per analysts measure the all profits of “S&P companies in total track to be decrease like 5.8% in the year 2015”. If strong companies were removing from that figure, all profits would be a better of 5.7% for whole year. That profit directly leads to down share price that is weigh on overall indexes. Also, investors are selling companies shares that may have vulnerability to the oil companies. Like determine “banks”, and “price of oil now decrease low” and that investor also worried that its mean global economic growth is weaker than expected, which could hurt overall companies.

5.1 Comparison of Apple Inc’s performance with the relevant sector indexes in USA

In the year between 2014-2015, there were many factors that influenced the global market like, Greek Bailout, Slowdown in Chinese Economy, falling in price of Oil etc. Greek Bailout, Slowdown in Chinese market and falling in price of Oil majorly effects on USA’s market. S&P 500, NASDAQ and DOW JONES these are the main benchmark index of USA which represent the market condition of USA.

In 2015 stock market selloff in that time declines the value of stocks in globally. As in that time Greek Bailout, Chinese market slowdown happened then USA’s stock exchange was affected means S&P 500 was opened at 2058.20 point in the beginning of the year 2015 but in during of this year that index was fell down to 1867.61 points, closing point of this year was 2043.94. So, the annual change of S&P 500 was 0.73%, as it’s fell down in that year so each sector of the benchmark index was affected like technology, health, financial sectors affected in that year.

In term of Technology sector one of the major stocks in technology was Apple Inc. in the S&P 500. Apple’s stock was in peak at $133.00 in 20th February,2015 and it was reached at $132.37 in 20th July, 2015 but it was fell down to $105 by 21st August, 2015. It was the major shock in the market in those year, that affects all markets over the world. As S&P 500 was affected, all sectoral stocks were affected by these factors. As technology sector was affected by these factors simultaneously Apple’s stock was also affected by these factors and as per the data Apple’s stock was under performed in the year 2015. Apple was facing first decline in 15 years of a decrease of 8% in their annual sales. It was a major company in technology sector and it fells down their annual sales from $244 billion to $217 billion in 2015.

Geographical coverage of Apple, they operate in America, Japan, Europe, Greater China and many other countries in Asia Pacific in 2015.In America segment it includes North and South America, it also operates in India, European Countries. Its product and services coverage were like iPhone, iPad, Mac, Apple Watch, Apple TV, iCloud, streaming etc in the year 2015.

References

Auerbach, A., Gorodnichenko, Y. and Murphy, D., 2020. Local fiscal multipliers and fiscal spillovers in the USA. IMF Economic Review, 68(1), pp.195-229.

Bogart, L., 2020. What Does It All Mean?. In Media Mergers (pp. 17-27). Routledge.

Dalio, R., 2018. It’s Time to Look More Carefully at ‘Monetary Policy 3 (MP3)’and ‘Modern Monetary Theory (MMT)’. Bridgewater Associates Daily Observations, 4(30), p.2019.

Dalio, R., 2019. Why and how capitalism needs to be reformed. Economic Principles.

Derin, A., 2018. Evaluation of young companies/startups based on the multiples approach and DCF method.

Dikau, S. and Volz, U., 2018. Central banking, climate change and green finance.

Faugère, C., 2020. Ambiguity Resolution, the Coming US Market Crash of October 2020 and Ensuing Golden Age of Finance. Available at SSRN 3692057.

Gacus, R.B. and Hinlo, J.E., 2018. The Reliability of Constant Growth Dividend Discount Model (DDM) in Valuation of Philippine Common Stocks. International Journal of Economics & Management Sciences, 7(1), p.2018.

Guerraoui, D., 2021. Development Economics from the Bubble Burst to the Search for a New Paradigm. A Few Historical Milestones and Theoretical Approaches. In New Paths of Development (pp. 79-87). Springer, Cham.

Guides, T.S., 2019. Hedge Fund Strategies and Tools used on Wall Street.

Jayananda, M., Aadhiseshan, K.R., Kusiak, M.A., Wilde, S.A., Sekhamo, K.U., Guitreau, M., Santosh, M. and Gireesh, R.V., 2020. Multi-stage crustal growth and Neoarchean geodynamics in the Eastern Dharwar Craton, southern India. Gondwana Research, 78, pp.228-260.

Lim, D.J., Moutselos, M. and McKenna, M., 2019. Puzzled out? The unsurprising outcomes of the Greek bailout negotiations. Journal of European Public Policy, 26(3), pp.325-343.

Monnin, P., 2018. Central banks and the transition to a low-carbon economy. Council On Economic Policies, Discussion Note, 1.

Peng, X., Su, W. and Zhang, Z., 2020. On a perturbed compound Poisson risk model under a periodic threshold-type dividend strategy. Journal of Industrial & Management Optimization, 16(4), p.1967.

Prates, D., 2020. Beyond Modern Money Theory: a Post-Keynesian approach to the currency hierarchy, monetary sovereignty, and policy space. Review of Keynesian Economics, 8(4), pp.494-511.

Quan, X.I. and Sanderson, J., 2018. Understanding the artificial intelligence business ecosystem. IEEE Engineering Management Review, 46(4), pp.22-25.

Sun, J., 2021. Will Disney’s Acquisition of 21st Century Fox Boost Its Stock Price?. SAGE Publications: SAGE Business Cases Originals.

Volz, U., 2017. On the role of central banks in enhancing green finance.

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