Finance Analysis Questions
Please use Harvard referencing system
The overview of another member’s performance for Question 1:
The portfolio value of $ 96, 863.50 had a portfolio ranking of 203 out of 213 with a negative portfolio return of 3.14 %. Only 34 trades were made out of the expected trades of 9966. Long securities were the highest at 64.1%, short securities at 30.4% and cash of 5.5 %. The market value was indicated at $ 42,045.70 for short positions, and $ 88,731.30 value for long positions.
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The first week of operation was to construct the portfolio. The portfolio was not 100% allocated to shares because of several global macroeconomic headwinds. With China PMI announced on Thursday, I would rather be conservative because the macroeconomic performance of China will affect shares listed in Australia, especially resources stocks. In that case, I have picked defensive stocks such as Telstra and Woolworths in the portfolio. I have a balance portfolio by allocating equal weight to major sectors in ASX200 index. With confidence of global economy and consensus earning decreasing, I would rather keep half cash and half equity. Low commodity prices and strong US dollar can lead to headwinds for resources stocks. Only major players with compelling valuation should be picked. That is why BHP is chosen in the portfolio. It should be noted that credit environment and commodity prices should be two dominant factors for the construction of portfolio. With RBA signalling the end of easing monetary policy, more macroeconomic headwinds should be faced by Australia. In other words, with tightening in credit environment, profit margins of companies should reduce and as a consequence.
Besides, the yield curve suggests that economic growth is slightly below the trend and financial conditions in neighbouring emerging markets are relatively weak. Demand for commodities may not be likely to face a boost and extra supply remains. We use Qantas to hedge against commodity shares like BHP because profit margins of Qantas are most sensitive to global oil prices. Further addition in equities should depend on earnings outlook in coming two weeks and Federal Reserve Bank’s annual Jackson Hole conference. This should shed the light on the direction of the monetary policy in the states. With quantitative easing from the US coming to an end, market remains uncertain about the timeline for interest rate hike cycle, which will cool down the overheated property markets in Australia. I decided to stay away from property sectors this week without seeing any short-term catalyst ahead.
This week i have made several rebalancing of the portfolio on the basis of three reasons. The first reason is the increasing likelihood of having additional easing from european central bank. With extra liquidity, equity market is likely to have more inflow of capital as investors are more prode to risk with additional liquidity. I express this view by adding financial stocks such as commonwealth bank of australia and westpac bank in the portfolio. i believe that financial stocks are likely to outperform the market with additional liquidity ahead.
The second key change made in the portfolio is to unwind the position in FMG. It has touched the preset five percent stop loss limit during trading hours in wednesday and its momentum is weak. With stronger US dollar commodity prices are likely to suffer from short term headwind. To leverage on this view I have created a short position on newcrest mining. This company shows high correlation with gold prices. The price of gold is inversely related to the strength of USD. With rate hike expectations going ahead more capital should flow into the US to chase for return. This will lead stronger dollar and as a consequence, weaker gold price. Thus, I express my short term bearish view on gold by short selling NCM as a proxy.
The third major change of the portfolio is to increase equity position. As stated in the first point global equity market is expected to attract more. Capital and stocks added to the portfolio are trading at multiples below their long term averages. This provides a catch up opportunity for this stock. Due to lack of tech stocks in asx 200 index I have picked computershares ltd (CPU) as the technology shares in the portfolio. The stock has outperformed the market in the last 2 months and with increasing risk appetite investors should be more keen in high beta stocks so as to achieve higher return
To summarize. I have added risk to the portfolio by allocating capital into financials and tech shares. I consider putting an underweight on commodities due to stronger USD and lower inflation expectations. I also put capital on value stock to capture the potential convergence of valuation multiples of those stocks to the market.
The portfolio faced some headwinds this week. The benchmark index did not perform well this week. The benchmark ASX index was down 1.9% since the beginning of the month and the portfolio has outperformed the benchmark by 0.5%. However, the portfolio has underperformed the benchmark by 2.5% since inception. This was a poor performance because of the following. We failed to increase the weight of equity in the portfolio when the market was in a rally in August. The market rose 2.5% in the month of August and the portfolio
With the short position introduced to NCM and gold prices, our portfolio started to improve. However, the overweight stance on financials did not pay off. Underweight on resources should be kept in the last week of trading. Global commodity prices are expected to face short-term headwind on the back of strengthening USD. Next week will be the announcement of interest rate decision of Federal Reserve Open Market Committee (FOMC). It is market consensus that FOMC will provide further guidance on interest rate hike and inflation expectations. This should shed the light for equity market. With the strengthening of USD, AUD is going to weaken and the macroeconomic data of Australia has not supported further upside of the equity market in the week ahead. Thus, I have trimmed down financials stocks and underperforming stocks this week so as to reduce the overall equity position. By increasing the amount held in cash, this can help the portfolio to outperform the benchmark index.
Valuation wise, there does not have many changes in terms of price-to-earnings ratios for stocks in the portfolio. Stocks in the portfolio have traded in appealing multiples. As most stocks in my portfolio are large caps, they have betas similar to market portfolio and their outperformance did not get in. No further catalysts on particular stocks can be found ahead.
Two more positions are added this week. One is the purchase of Aristocrat Leisure. This is a momentum trade. Another is short sell position on BHP. The stock has underperformed the market and global geopolitical risk and overall weakness of the market should drag BHP further