BHC Australia - Financial Investment Strategy and Development Perspectives in the Australian Market - Example

RUNNING HEAD: FINANCIAL REPORT Financial Report Customer’s Name Institution 2nd November, 2011 FINANCIAL REPORT Executive Summary/ Synopsis The Australian markets are considerably recovering from the global economic crises that hit the world economy in 2008. Recent reports from the Reserve Bank of Australia (RBA) support this argument.1 This report gives the real state of the Australian financial market and the projected outcome. This will enhance in the strategic plan by BHC Australia to invest its AUS$350m obtained from the sale of one of its abroad branches. According to RBA, the interest rate this year has been favorable and remains at 4.25%. Australian exchange rates have also been fairing well with the Australian dollar performing excellently in the region. With evidence of robust economic growth, this report has given a strategic venture for BHC Australia to follow in investing the AUS$350m in corporate bonds issue. Corporate bonds are projected to fair well with the current and projected financial market state. Introduction BHC AUSTRALIA is an international company dealing in hair and beauty products. In the recent past, it has been on a strategic plan of expanding its investment in high return ventures. Therefore, it disposed off one of its branches overseas and the following report explains the financial investment measures in the realization of the company’s mission. The general objective of this report is to devise a strategic channel of investing money acquired from the sale of BHC Australia, Iran branch. Minor objects entail Evaluate current and future Australian capital market conditions. Evaluate the economic factors that probably might influence interest rates. Comment on Australian yields and formulate an opinion theory on the determination of interest rates or exchange rates. The report will be conducted with high integrity, evaluating the current financial market state in Australia and seek to come up with the best mode of investment. After understanding the current and future financial market, this will pave the way for a strategic plan proposal to investment to be presented to the BHC senior management team. The strong GDP growth expected will drive solid growth in the financial market. The Financial Market With the current global economic crises, any investment measure to be made requires that intensive survey be done to ensure that the best is gotten out of it. Interest rates have a strong fundamental relationship with inflation, which is projected to bring in timely interest rate adjustments; when the rate of inflation changes. The rate of inflation directly affects long term interest rates. Australian economy has faired well with exposures to confined to relatively few projects although full and partial refinancing of various mature projects in the future. Interest rate expression organization is the interaction between the time to growth of liability for a given currency and the interest rate. Various traders closely watch treasury securities for various maturities and normally plotted in a yield curve. Yield curves are usually upward inclined asymptotically, and the longer the development, the higher the give in with a retreating insignificant growth. This occurrence can be explained in two; first, when the market is anticipating a hike in the peril open rate. In the event of investors holding off investing at the moment, they receive a better rate in the future. Thus, under the concept of pricing theory; investors willing to hold their money in, need to be compensated for the expected raise in rates-thus the higher interest rates on long term investment. However, interest rates can fall just as they can rise. The second explanation is that longer maturity entails greater risks for the investor (lender). Risk premium ought to be paid as with longer maturities, more catastrophic events might arise and impact the investment. The explanation depends on the opinion that the financial system faces more doubts in the far-off prospect than in the near term, and the possibility of future unfavorable occurrences increases than the possibility of future promising events. This effect is referred to as the liquidity spread. With more market volatility in the future and anticipated decline in, interest rates; this increase in the risk premium may influence the spread and lead to yield hiking. Market View on Current & Future Australian Market Condition In the past two decades, credit demand has outpaced the growth in deposits, and this has resulted to banks accessing wholesale funding markets to support growth in lending. This demand has been orchestrated by Australia’s high level of investment in conjunction with sustained growth momentum of the economy in the past two decades. This resulted to the high demand for credit. The source of demand shifted between household and business sectors from early 1990’s recovery until the financial crisis.2 The aggregate growth was maintained and sustained at a rate of over 10% per annum. Australia is about to get into a boom that should last for decades. (Forex blog, 2011) A putative economic boom taking place in Australia is being driven by high goods prices and surging production and exports. Australian mortgaged-backed securities have performed well through out the crisis period, and the investors did not loose any money in a rated tranche. With the promise from the government on permitting issuance of covered bonds, this will enhance investor confidence thus increasing market capacity.3 Official interest rates in Australia are dependent upon the performance of the economy at any given time. RBA considers a number of factors while determining the fall or rise of rates. The factors include; the current inflation rate, unemployment, consumer price index (CPI), producer price index and level of retail sales. A number of factors affect interest rates; the Reserve Bank owns the responsibility of maintaining the strength of the nation’s financial system and raises or lowers short-term interest in an effort to contain the stability. It involves itself with a number of routine checks like regular interests rate adjustments. With economic growth; companies make profit, employment opportunities arise, and consumers spend more cash: short term rates are therefore, raised to keep the economy at a slow pace and cause rise in inflation. Raising the interest rates slows the economy and higher interest rates means higher borrowing costs of business people meaning less money to spend elsewhere. With economy contraction, the interest rates are lowered to ensure that people can afford ton buy commodities. This increases the buying capacity of products and services. This speeds up economic growth, keeps people at work and ensures the economy does not fall into recession. A recession occurs when consumers hold their money and do not buy the products or services, which the company is operating and workers in their jobs. Other factors affecting interest rates on an irregular basis involve crisis in oil producing nations impacting mainly on the global economy and affect interest rates. Long-term interest rates are not affected easily by economic conditions like the short term rates, but there is a drop down factor and finally the impact is felt. Whenever rates are high, one earns high interest from the deposits unlike while borrowing when one will pay more. When rates fall, it is a lot cheaper to borrow, but the savings earn lesser interests. The federal government headed by Julia Gillard has taken proper measures to ensure that productivity and nation’s finance are sustainable over the medium term. This is a strategy out to support a stronger future for the economy.4 Natural disasters will reduce economic growth but these macroeconomic impacts are expected to be temporary. Medium term fundamentals remain strong, and the economy has been forecast to grow at an above trend rate in 2011-2012 and 2012-2013.5 Robust growth being experienced in Asia is particularly vital in enhancing Australia’s economy stability and towards historical highs. This will create room for resource investment and thus BHC’s investment will be well placed to make reasonable returns. Key risks to the Australian financial market performance will only arise from fragilities in the international economy like; rising world oil prices which might add to existing concerns. The Australian economy is in a strong position, and the outcome seems favorable, with above trend real GDP growth forecast over the next two years. Unemployment has gone down with up to around 5% and employment growth of over 300,000 jobs created in the past year. Inflation has moderated and is around decade lows. Australia’s real GDP growth is forecast to strengthen to 4% in 2011-12, and 3.75% in 2012-2013 led by records of investment in the resources sector.6 The favorable forecast of the economy is supported by improving global conditions, which shows that, the world economy is recovering at a reasonable rate. With investment option, BHC is out to make more profits with the projected increase in interests. Business venture is rapidly gaining force, with continued high prices for Australia’s key export freight in the mining sector. New business investment is bound to grow 16% in 2011-2012.7 Australian exchange rates are out to increase with other currencies. The exchange rate of Australian dollars on the foreign exchange market is principally against the US dollar which is predominantly; an international medium of exchange.8 Public, private partnerships have been widely used in emergent economies for over ten years as a small but important substitute method of procuring economic development measures. With the fall in Australian stocks by 1.5% in the recent past, as weakness among the nation’s leading miners dragging the boarder market low.9 This implies that prices of assets have gone down and will later shoot up with the general economic condition in Australia. Market factors affect investment returns and thus before making any probable investment move, one is bound to assess the prevailing conditions. Particularly, there have been wide fluctuations of the bond market prices in the recent times. This in many cases may reflect a varied series of non-entity unique influences including changes in the economic legislative and political environment like interest rates changes, as well as changes in investor reaction. Natural disasters and terrorism acts are factors that can also impact directly on issuing companies. Financial Investment Strategy With AUS$350, BHC is better placed to place this amount for corporate bond issue. These are debt instruments that will be rendered to other companies seeking to raise funds for purposes of funding expansion, capital expenditure and in some instances used to boost the company’s balance sheet. The issuer will be paying interest to the company at a six month installment for fixed bond rates. This is in the form of coupon rates, which can be fixed rates, or vary with respect to the prevailing 90-day swap rates. On the maturity of the bond, the capital is returned to the bond-holder by paying the face value of the bond. With the prevailing favorable interest rate, BHC is bound to make better returns in this venture. Corporate bonds prices, with which they are traded on the market, will vary inversely with changes in prevailing interest rates. Rise in interest rates leads to low purchase price of the bond sand vice versa. Bonds on shorter term duration are normally less sensitive to interest rate changes in comparison to those on long term which are not affected as much. Thus, the market prices of corporate bonds on short maturity period usually fluctuate less than corporate bond on longer maturity. Buying corporate bonds when prices are attractive and then holding them to maturity; ignoring subsequent fluctuations will yield better returns. Conclusion The corporate bond offer by BHC in the capital markets is out to bring substantial returns to the company. With the prevailing economic boom and projected favorable interest rates, this will ensure that BHC realizes its vision of making a profit from this investment rather than keeping the branch sold. BHC executive management is bound to embrace this strategy as it will bring in profit; also, enhance on understanding more about capital market state at the mean time. Owing to this, they will keep track of the progress of the capital markets to ensure progress of their investments; capital market places a value on the level of accessible information. BHC corporate bond venture is the most strategic and viable venture at the moment to ensure a profit in the company. REFERENCES Forex Blog: Currency Trading & Analysis. Archive for the ‘Australian Dollar’ category (June 29, 2011) available at http://www.forexblog.org/category/australian-dollar Debelle,G. The Australian Bond Market In 2011and Beyond (2011) available at http://www.rba.gov.au/speeches/2011/sp-ag-150311.html#t Reserve Bank of Australia, the Exchange Rate and the Reserve Bank’s Role in the Foreign Exchange Market. (2001-2011) available at http://www.rba.gov.au/mkt- operations/foreign-exchg-mkt.html Statement 2: Economic Outlook, (2011) available at http://cache.treasury.gov.au/budget/2011- 12/content/download/bp1_bst2.pdf Read More