Part 3: Chapter 9, 10, 11, 12, 13 Bond and Money markets, Equity and Property markets, Other Investment classes, Behavior of markets, Valuation of Investments Flashcards
Money market: Reasons for holding liquid assets
Protection of monetary value/ Stable capital values to stabilise the solvency postion
Opportunities that arise can be exploited
Uncertain outgo
Short term commitments
Money Market: Economic reasons for holding cash
General economic uncertainty
Recession expected
Interest rates expected to rise (Real asset performance, bond market, nominal returns)
Depreciation of local currency
- hold cash abroad
Risks affecting bonds specifically
Credit risk
Liquidity risk
Actuarial (A-L Mismatch)
Inflation risk
Market risk
Reinvestment risk
Problems with overseas investment
Mismatching domestic liabilities
Tax
Volatility due to exchange rate
Administration
Timezone differences (Opperational)
Expense/ expertise
Regulation might be poor
Political problems
Language barriers
Liquidity
Accounting differences
Emerging market considerations
Added diversification
Marketability/ market regulation
Political stability
Economic growth
Regulation on foreign investment
Currency stability
Prime/Specific property characteristics
Comparable property for pricing
Age/condition
Location
Lease structure
Size
Tenant quality
Usage of building
Development Potential
Merits of indirect investments
Advantages:
Economies of scale - e.g. size of properties
Less admin costs compared to direct investments
Tax and marketability advantages
Access - wider range of investments
Expertise of investment managers
Divisibility of assets
Disadvantages:
Control lost over investments
Management costs
Tax disadvantages
Reasons for foreign investment
Diversification
Increase expected returns:
- higher risk markets
- inefficient markets
Match Liabilities in foreign currency
Advantages of grouping equities into industries when analysing
Practicality
Factors affecting the company are similar
Information from a common source
Expertise only on one area
Portfolio valuation is easy
Correlation due to similar:
Markets
Resources
Structure
The main factors affecting bond yields
SPROEITI
Short term interest rates
Public sector borrowing: the fiscal deficit
Returns on alternative investments, both domestic and overseas.
Tax
Economic growth
Inflation
The exchange rate
Investors preferences are influenced by
Fashion or sentiment altering
Uncertainty in political climate
Marketing
Change in their liabilities
Change in the regulatory or tax regimes
Factors affecting the level of the equity market
Equity Risk premium - Investor perception
Inflation
Alternative investments
Economic growth
Political climate
Overseas equity markets
Taxation
Regulation
Factors affecting the risk of property investment
Uniqueness
Liquidity/marketability
Dealing costs/Insurance costs
Political risk
Tenant default risks
Indivisibility of units
Ways to value assets
Market value
Smoothed market value
Historic (book) value
Adjusted book value
Fair value
Arbitrage pricing
Discounted cashflow model
Stochastic model
Factors affecting a change in the inflation risk premium:
PIGSE
A change in political stability
Inflation levels increasing. Higher inflation = Higher uncertainy of future inflation
A change in Govs commitment to inflation control
A change in the supply of index linked bonds relative to fixed interest bonds
A change in the pace of economic growth
