The recent financial markets' volatility forced Greece, Belgium, France, Italy and Spain to extend bans on short-selling. The updated news regarding the measures taken by EU competent authorities to prohibit market abuse were published on the European Securities and Market Authority’s website on August 25, 2011. The other warning to shield financial institutions was reported by Christine Lagarde. The Managing Director of the IMF encouraged speeding European banks’ recapitalization at the Federal Reserve Bank of Kansas City’s annual conference in Jackson Hole on August 27, 2011. So, are the fears of the financial system’s collapse reliable and are protective actions reasonable?
One of the main ratios to capture the value of a public company is the price-earnings ratio (P/E), which is equal to the market capitalization divided by the net income. If a company generates steady cash flows and its share price falls it may seem that undervalued stocks are an attractive investment opportunity. However, danger may lie in its leverage. A company defaults once the market value of its liabilities exceeds its assets. Such being the case retained earnings may be used to increase capital, or the firm can issue new shares if it has access to the capital markets. Thus, the market value of debt-equity ratio is very important as it reflects a company’s solvency.
An inaccurate measure of a bank’s solvency may arise according to the leverage ratio which is introduced by the Basel Committee on Banking Supervision in the Basel III: A global regulatory framework for more resilient banks and banking systems. A measure of the minimum Tier 1 leverage ratio of 3% is based on banks' accounting balance sheets these do not reflect the performance of the market.
Market value matters for public companies. Banks recapitalization should not be ignored.
About Me
- Asta Pravilonytė
- Every manager can call him or herself a good strategist if he or she only works within an environment that is favorable; however, it is only in times of stress that one truly learns what one's capabilities are!
Tuesday 30 August 2011
Wednesday 10 August 2011
Interventions in financial markets’ shocks
The US congressional leaders’ agreement on an increased debt ceiling until 2013 and a reduction of $2.4 trillion spending over 10 years has retrieved the US bond market; however, the concerns about the ongoing US fiscal and economic challenges and the S&P’s downgraded US long-term credit rating from the AAA to AA+, as well as set a negative outlook for the US economy, has driven down the major stocks indexes and commodities’ prices sharply. The panic in the global financial markets has boosted the gold price above $1,700 per ounce and surged the Swiss franc to 1.350 against the US dollar, these being the prices of the assets considered as secure investment to preserve investors’ capital until the fundamentals of the investments are reassessed.
The last week was notable for governments’ and central banks' interventions. The US attempted to tackle the possible default on sovereign debts, announced the debt reduction plan and raised the debt ceiling. Italy initiated constitutional changes to strengthen the budget discipline and the ECB purchased Spain’s and Italy’s bonds to calm the rally of the sovereign bonds’ yields. The Swiss National Bank rushed to decrease the three-month LIBOR to 0,00-0,25% and announced the expansion of banks' deposits to CHF80 billion as well as their intentions to repurchase outstanding the SNB bills in order that the appreciated currency wasn’t threatening the Switzerland economy. The Bank of Japan sold up to Y4,000 billion due to the similar currency appreciation threats to domestic economy. The US Federal Reserve promised to keep unchanged low interest rates until 2013 to stop panic stocks sales. It seems that only the price of gold, - the alternative currency, may not be easily manipulated by government interventions. Consequently, private and institutional investors might be willing to increase their gold reserves to hedge assets from the depreciation.
Considering the alternative investments, the Pregin’s, a research and consultancy firm which focuses on alternative asset classes noted that hedge funds become more “mainstream” rather than “alternative” within institutional portfolios. According to the Pregin’s Hedge Fund Spotlight published in August 2011, the percentage structure of institutional investors in hedge funds are the following: 21% Funds of Hedge Funds, 15% Foundations, 15% Endowment Plans, 13% Public Pension Funds, 12% Private Pension Funds, 6% Asset Managers, 5% Family Offices, 4% Insurance Companies, 2% Banks, 1% Investment Companies, 1% Sovereign Wealth Funds and 5% Others. Analysis of banks investing in hedge funds reveals that 60% of European banks, 13% of North American banks, 10% of Asian banks and 17% from the rest of the world are investing in hedge funds. The most active five banks investing in hedge funds are the Royal Bank of Canada with $751.9 billion of AUM, Pictet & Cie with $302.3 billion of AUM, F. Van Lanschot Bankiers with $29 billion of AUM, Investec with $4 billion of AUM and Credit Mutuel de Maine-Anjou, Basse-Normandie with $0.2 billion of AUM.
So, do we need it that governments and central banks were focused on short term financial markets’ shocks when financial alternatives may be used to transfer risks in the financial markets?
The last week was notable for governments’ and central banks' interventions. The US attempted to tackle the possible default on sovereign debts, announced the debt reduction plan and raised the debt ceiling. Italy initiated constitutional changes to strengthen the budget discipline and the ECB purchased Spain’s and Italy’s bonds to calm the rally of the sovereign bonds’ yields. The Swiss National Bank rushed to decrease the three-month LIBOR to 0,00-0,25% and announced the expansion of banks' deposits to CHF80 billion as well as their intentions to repurchase outstanding the SNB bills in order that the appreciated currency wasn’t threatening the Switzerland economy. The Bank of Japan sold up to Y4,000 billion due to the similar currency appreciation threats to domestic economy. The US Federal Reserve promised to keep unchanged low interest rates until 2013 to stop panic stocks sales. It seems that only the price of gold, - the alternative currency, may not be easily manipulated by government interventions. Consequently, private and institutional investors might be willing to increase their gold reserves to hedge assets from the depreciation.
Considering the alternative investments, the Pregin’s, a research and consultancy firm which focuses on alternative asset classes noted that hedge funds become more “mainstream” rather than “alternative” within institutional portfolios. According to the Pregin’s Hedge Fund Spotlight published in August 2011, the percentage structure of institutional investors in hedge funds are the following: 21% Funds of Hedge Funds, 15% Foundations, 15% Endowment Plans, 13% Public Pension Funds, 12% Private Pension Funds, 6% Asset Managers, 5% Family Offices, 4% Insurance Companies, 2% Banks, 1% Investment Companies, 1% Sovereign Wealth Funds and 5% Others. Analysis of banks investing in hedge funds reveals that 60% of European banks, 13% of North American banks, 10% of Asian banks and 17% from the rest of the world are investing in hedge funds. The most active five banks investing in hedge funds are the Royal Bank of Canada with $751.9 billion of AUM, Pictet & Cie with $302.3 billion of AUM, F. Van Lanschot Bankiers with $29 billion of AUM, Investec with $4 billion of AUM and Credit Mutuel de Maine-Anjou, Basse-Normandie with $0.2 billion of AUM.
So, do we need it that governments and central banks were focused on short term financial markets’ shocks when financial alternatives may be used to transfer risks in the financial markets?
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