Part 3 Flashcards
What are the sectors and their characteristics
FT MUG lS HOT
Financial (BANKS HIGH GEARING, CYCLICAL; GENERAL /NSURERS LOW GEARING, VOLATILE; LIFE STABLE PROFITS, LOW GEARING)
Telecommunicotions (VOLATILE, CYCLICAl)
Basic materials (COMMODITY PRICES, CYCLICAL, AHEAD OF CYCLE)
Utilities (CAPITAL INTENSIVE, LOW GROWTH, HIGH DIVIDEND YIELDS)
Consumer goods (BRAND DEPENDENT, INTERNATIONAL, HIGH GEARING)
Industrial (cyclical, volatile, government spending)
Concumer services (Non cyclical, domestic)
Health care (Non - cyclical)
Oil and gas (Large, risky, global)
Technology (Domestic, non cycclical, labour intensive)
key principles underlying the fínancial services
Skill, care and diligence
Integrity
Customer assets
Info about customers
Financial resources
Other influences
Relations with regulators
Market practice
Info for customers
Conflicts of interest
Internal organisation
What topics should be investigated during research into a company
i. Financial accounts and accounting ratios
ii. Dividend and earnings and growth
iii. Level of borrowing
iv. Level of liquidity
v. Growth of assets
vi. Comparative figures for other small companies
What data could be used to research companies
the financial press and other commercial
information providers
the trade press
public statements by the company
the exchange where the securities are
listed government sources of statutory
information that a company has to provide
ie information provided to the regulator
visits to the company
discussions with company management
discussions with competitors
stockbrokers’ publications
What are the roles of Credit agencies
Ratings agencies apply a mix of qualitative and quantitative analysis in carrying out their assessments, and also have direct access to senior officers of the issuer.
Having carried out their analysis, they form a view and provide an issuer rating and a bond rating (which can be higher or lower than the issuer rating, and differ from other bonds from the same issuer).
Ratings agencies provide significant amounts of detail on their methodologies, however they do not provide detailed supporting information relating to their specific assessments.
Historically, many bond investors have tended to place significant reliance on issuer and bond credit ratings, rather than carry out their own credit analysis independently.
For smaller investors, this may be appropriate on the grounds of lower costs relative to buying independent research or building an internal team of credit experts. However, for larger investors these factors are less compelling and it is generally considered desirable to obtain or carry out independent research in addition to monitoring ratings.
Provided an investor has confidence in the process applied by a ratings agency, an investor can place a certain degree of reliance on bond and issuer ratings.
What is trade cycle
This is the periodic fluctuations of national output around its long term trend.
What is the difference between cyclical and defensive company
Cyclical are companies whose fortune will be dependant on the state of the economy.
The share price will be based on the current market and expected future state of the economy
A defensive company whose fortune is not dependant on the state of the economy
These shares are typically low in volatility than the market as a whole, beta is less than 1. The overall return is lower but more stable.
Source of financing
Equity share issue
Venture capital finance (mainly equity)
Secured debenture
Unsecured quoted corporate bond
Private debt o
Commercial paper (although this is normally only available to large companies)
Bank loans (this seems the most likely in the scenario, so we can expand) such as:
- revolving credit
- evergreen credit
- term loan
- bridging loan
PERs over economic cycle
If the economy moderately buoyant and profits are fairly stable, defensive and cyclical companies similarly rated
As economy moves into recession, PERs for cyclical companies fall, while those of defensive companies remain stable or slightly rises
At the bottom of the cycle, PERs of cyclical companies will probably have risen from their low point as earnings has fallen, but defensive stocks will be more highly rated
As the economy recovers, PERs of cyclical companies as price increase in anticpation of future growth. PERs of defensive companies maybe below those cyclicals
As growth continues, earnings of cyclical companies catch up with share price and PERs fall back
Whare are the main differences in investment characteristics
Types of investments Leverage Objectives Fees Transparancy Liquidity Operational risk
