Module 4. Investments

Transcription

1 Module 4 Investments

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5 Types of investors Arbitrageurs Hedgers Investors Speculators

6 Financial Markets Equities Equities in companies traded on a stock exchange Private shares traded OTC Debt Capital market - Long term debt - Bonds - BESA Money market - Short term debt - Traded OTC Derivatives Futures - Safex Options - JSE - OTC Others Local Market Forex Market Currencies Traded OTC but heavily regulated in SA

7 Securities Services Act 36 of 2004 Listing of securities Custody and Administration Clearing

8 Equity Markets Trading Buying and selling Floor vs virtual Exchange vs OTC SENS Stock Exchange News Service STRATE Share Transactions Totally Electronic (T + 5) JSE Funding Equity often cheaper than debt Enhanced status Fund acquisitions Shareholders Realise shareholding Value through demand and supply Wider base Employees Attract good employees Share incentive schemes Company performance Enhanced status: banks, suppliers, distributors, customers Types Main Board AltX Participants Individual investors Institutionalised investors Importance Raise money (IPO in primary market) Liquidity (secondary market) Economic indicator Financial stability Clearing house Reduce cost and risk Disintermediation Collective investment schemes

9 JSE More than 800 Securities are currently available on the JSE s Equity Market. Approximately 400 companies are listed across the Main Board and the AltX Board. There are approximately 60 Equity Market member firms, authorised to trade on the market JSE Equity Market Data is used by clients and investors in more than 40 countries.

10 JSE listing requirements Main Board listing requirements: a subscribed capital of at least R ; not less than equity shares in issue; a satisfactory audited profit history for the preceding three financial years (an audited profit of at least R before taxation for the previous year); it must carry on as its main activity (by itself or through one or more of its subsidiaries) and independent business supported by its historic revenue earning history and with control over a majority of its assets; if it is a company with a majority of its assets invested in securities of other companies listed on the JSE it must satisfy the "Criteria for listing" for investment entities; 20% of each class of equity securities shall be held by the public to ensure reasonable liquidity. ALTX listing requirements: a Designated Adviser ("DA"); a share capital of at least R ; the public must hold a minimum of 10% of each class of equity securities to ensure reasonable liquidity; the directors must have completed the ALTX Directors Induction Programme or make arrangements to the satisfaction of the JSE to complete it; an executive financial director with the appropriate expertise and experience to fulfil his/her role to the satisfaction of the audit committee; a profit forecast for the remainder of the financial year during which it will list and one full financial year thereafter; the auditors or attorneys must hold in trust 50% of the shareholding of each director and the DA from the date of listing, and a certificate to that effect must be lodged with the JSE by the issuers auditors or attorneys;

11 Stock market behaviour Over-reaction (excessive optimism vs excessive pessimism) Efficient market hypothesis (EMH): an investment theory that states it is impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. Random walk theory: stock price changes are independent of each other, the past movement or trend of a stock price or market cannot be used to predict its future movement. stocks take a random and unpredictable path. Changes in estimated risk: - stop-loss limits = order placed with a broker to buy or sell once the stock reaches a certain price. A stop-loss is designed to limit an investor's loss on a security position. Setting a stop-loss order for 10% below the price at which you bought the stock will limit your loss to 10%. - VAR limits = based on statistical analysis Psychological factors - seeing patterns - group thinking Irrational behaviour - rumours, press releases, emotion Crashes , 1987, 200, 2008 Media information Close Market cap Dividend yield P/E ratio

12 Capital / bond / debt / credit market Term Short-term: < 5 years Medium-term: 5 10 years Long-term > 10 years Definitions Fixed-interest Face value / nominal value / par value Issue price Redemption date Fixed interest rate / coupon rate Current yield Participants Institutional investors Governments Traders Individuals Areas Private sector Central government Municipalities / public corporations Primary market Public issue Private placement Secondary market The market rate = the rate of return that investors want for loans of different maturities and risk Current value of a bond = PV of future cash flows as per the market rate Market structure BESA Settlement risk SARB as price maker for government bonds T + 3 Type Fixed-interest bonds / debentures Zero-coupon bonds Inflation-linked bonds Annuity Corporate bonds Value fundamentals Inverse relationship between interest rates and bond values (p15) Bond market volatility Irrelevant if investor buys and holds the bond to maturity Relevant if investor buys and sells the bond before maturity

13 JSE Debt Market Th e JSE regulates the largest listed Debt Market in Africa, both by market capitalisation and by liquidity. The JSE acquired the Bond Exchange of South Africa. 2013: the JSE had roughly listed debt instruments, totalling more than R1.8 trillion nominal outstanding. More than half of the debt listed on the JSE is placed by the South African government. Other issuers include South African state-owned companies, corporates, banks and other African countries. The SA debt market is liquid and well developed ito number of participants and their daily activity. Roughly R25 billion is traded daily. Government Bonds: More than R1 trillion is currently listed and these instruments account for 90% of all liquidity reported to the JSE. In 1998, the National Treasury appointed 12 primary dealers to make a market in their listed debt. At the end of 2013, there were 8 primary dealers permitted to bid at weekly d ebt auctions. Primary dealers are required to make a secondary market in qualifying RSA paper. Corporate B onds: Since the first Corporate Bond was issued in 1992, more than corporate Debt Instruments have been listed on the JSE Debt Market. Liquidity remains relatively low compared with government debt, but issuance keeps growing. Repo Market: The JSE Repo Market is an active and liquid funding market, with daily funding exceeding R25 billion. It has seen daily spikes in excess of R200 billion, which bears testimony to the liquidity and efficiency of the market.

14 Money market OTC market for short term borrowing and lending < 13 months Cash Investments Loans Types Retail market (<R1m) Wholesale market - NCDs - Bas - Commercial paper - Repo agreements - Role of LIBOR / JIBAR Institutions Individuals Government SARB Banks (commercial / merchant) Mutual banks Unit trusts Corporate companies Foreigners Insurers Instruments Interest add-on instruments - Call deposits - Notice deposits - NCDs - Short-term debentures - Short term government bonds (gilts) - Short-term bonds - Interest rate instruments < 3 years Discount instruments - BAs - Treasury bills - Land Bank bills - Reserve Bank bills - Promissory notes - Commercial paper High liquidity and low risk (p 23) T + 0 SWIFT (Society for Worldwide Interbank Financial Telecommunication) and STP (Straight Through Process)

15 Economic / trade / business cycles Fluctuations in the national income over a variable time span Peak Recession Trough Recovery Investing in the business cycle (p25) 1. Cash and interest bearing instruments 2. Share prices up, bond prices fall with rising interest rates 3. Share prices decline, portfolios biased towards shares and underweight in bonds 4. Shares out of favour underweight in shares and overweight in cash and bonds 5. Movement back to shares with some staying in cash and bonds although interest rates starting to rise 6. Back to shares

16 What happens after the trade? Steps: 1. Order initiation and delivery (front office) 2. Risk management (middle office) and order routing (front office) 3. Order matching and conversion into trade (front office) 4. Affirmation and confirmation (back office) 5. Clearing and delivery / delivery versus payment (back office) Equity market STRATE T + 5 Bond market BESA / STRATE T + 3 Money market SWIFT (Society for Worldwide Interbank Financial Telecommunication) and STP (Straight Through Process) T + 0

17 Structure of Financial Services Regulation: 1. SARB 2. FSB 3. Twin Peaks

18 Financial Services Banks 1. Commercial banks 2. Investment banks Banking services Private banking Investment banks Foreign exchange services Currency exchange Wire transfer Foreign currency banking Investment services Asset management Fund management Wealth / portfolio management Hedge fund management Intermediation / advisory Stock brokers Financial advisers Exchanges

19 Questions / Overview

20 What happens next

21 Thank you