This interim report aims to present the result and major development of our investment portfolio from 9 October 2009 to date. Britain's economy is still struggling despite global recovery, according to recent data showing the UK economy unexpectedly contracted in the third quarter. FTSE 100 index had raised only half per cent in October. By the time of quantity easing is completed, a total amount of £175bn will have been injected into economy. On one hand, a large proportion of the stock market's earnings and dividends come from companies that generating sales in US dollars. On the other hand, sterling has appreciated against US dollar this year which has been considered as a weak currency. As a consequence, the 13% rise in the value of sterling against the dollar since the beginning of the year has affected the earnings per share (EPS) of FTSE 100 companies. Meanwhile, stock market still has to face an overall uncertainty of risks amongst recovering economies, such as Dubai. The value of portfolio has fallen 0.84% to £19822. In order to reduce the losses on our shares, some adjustments had to be made following the market trend as discussed below.
Analysis of individual companies and stocksBarclays Plc
Barclays has performed well in the third quarter compared other companies in the banking sector. The company's shares have jumped eightfold since their January lows, closing on Friday, 9 October 2009, at 377p. However, the whole market has been slumped since then by fears of uncertainty and high volatility. Beta coefficient of 1.7 shows a high risk when market slumped, therefore, in order to reduce risk we decided to decrease its value by £1000 on November 16.
On the 12 October Barclays planned to sell £4bn asset to ease shareholder. Nevertheless, some analysts argue that Barclays is still exposed to risk, because loan repayments would be endangered if the underlying assets deteriorate further. On 20 October, Qataris holding sold 3.5% Barclays's stake. As a consequence, Barclays's shares price fell 5%, closing at 363.8p. On 26 October, Barclays announced it agreed to pay £226m for acquisition on Standard Life Bank. Movements in share price showed that investors were not optimistic about this initiative, closing at 319p two days after, a drastic fall. Moreover, the delay of repaying debt of Dubai would virtually be a financial default. As a result, stocks price falls with a serious market panic. Economist suggests that the share price will rebound when economy starts growths in 2010. Barclays is also setting out an opportunity to buy or hold.
Appendix 7.1 compares Barclays PLC with the whole of the Banking Industry. The company has underperformed on some level as compared to the industry. This is because it is a multinational company and the world's economic crisis had a huge impact on it. This can be shown through a 10.92% decrease in dividend growth in the last 5 years. Although the banking sector was largely hit by this crisis, Barclays plc has a better performance than the industry with such a capital spending has grown by 50.67% as compared to the industry's 13.72% in the last 5 years because of acquisition worldwide. Another significant figure is the EPS for 5 years which has grown by 16.73% whereas the industry has decreased by 24.27%. Because of the loss incurred since the start of the portfolio, we decided to move £1000 from Barclays's to SABMiller to limit to loss. We did not sell the shares as we still have confidence in the long-term performance of the company.BG GRP
The share price of BG has been fluctuating a lot since the start of the portfolio decreasing by just 1p on December 4, closing at 1100p as shown in Appendix 3. The news that Santos Basin Guara in Brazil, contains 1.1 to 2.0 billion recoverable barrels which will provide contribution to production and cash flow of BG for many years (Repsol, 2009), gave confidence to investors on BG's shares increasing its share price. Share price fluctuated regardless of news and peers in the industry. The reason of high volatility on share price may be because of the change of oil and gas prices and costs.
Appendix 7.2 shows that BG has been performing at the same level as the industry on many levels. The price of its share has been fluctuating around the buying price since the start of the portfolio (i.e. £11/share). The return on equity, on average, for the last 5 years is 26.09% which is better than the industry which is 18.59%. Overall, BG gives us a low risk and return investment. We decided to move £1000 to SABMiller which is showing more prospects for the future. Selling the shares was not an option as is the safest company in our portfolio. Brokers are also recommending to hold the shares held in BG (Investors Chronicle, 2009).Morrison (WM.) Supermarket Plc
Since the start of the portfolio the shares of Morrison has increased steadily as shown in appendix 4.1. This shows that the company is performing well regardless of the economy's state. However, the share prices suffered a major set back on 18 November 2009 when Chief Executive officer (CEO), Marc Bolland, announced he will leave the company at the end of the financial year (i.e. 1 February 2010) for Marks and Spencer (Financial Times 2009). The share price started to peak up again during the last few days and Morrison experienced the strongest growth than the rest of the companies in the sector as at 31 October 2009 (Financial Times, 2009).
Looking at appendix 4.2, the ALPHA coefficient of Wm Morrison is positive (i.e. 0.0012), which means the portfolio is earning an excess return. The VOLATILITY figure of 18.0729% confirms that less uncertainty and risk in the company's share. Comparing Wm Morrison with the Food and Drugs Retailers Industry (Appendix 7.3), the latter has performed better than the company on the most level. However, the most promising data on the table is the revenue and capital growth of the company which is 24.05% and 22.50% respectively over the past 5 years. Therefore, we decided to hold the shares in the company as we have confidence for its performance. Also, a larger number of brokers recommended buying shares in Wm Morrison even though of the change in the CEO which is good news (Investors chronicle, 2009).SABMiller
With 13.9% increase of share price from 9 October to 4 December, SAB has the best performance in the portfolio as shown in Appendix 5. Diageo, a competitor in the FTSE 100, share price has also increased but at a lower percentage. SABMiller share price has increased steadily regardless of the tough economic climate, although has incurred a 2% drop of profit in the half year report (Guardian, 2009).
The strong performance may be due to SABMiller's decrease in input costs and favourable currency movements and also the plan to buy Mexico's second largest brewer, Femsa Cerveza (Times Online, 2009).
The statistics in appendix 7.4 prove the good performance of SABMiller. Its 5 years dividend growth is 14.09% as compared to the industry's which is 11.48%. Its EPS has increased by 18.63% whereas the beverage industry has decreased by 2.43% during the last 5 years. Capital growth of 30.10% is also much high than the industry over the last 5 years. Brokers are recommending holding the shares in SABMiller as they are expected to go up (investors Chronicle, 2009). Therefore to reaffirm our confidence in the company, on 16 and 27 November, we moved £1000 from Barclays Plc and BG respectively to SABMiller.Unilever Plc
Unilever share price has been constantly fluctuating since the start of the portfolio but since 30 November 2009, it has incurred a sharp rise as shown in appendix 6.1 which is near to its highest price of 1,899p over the last 52-week figures. This is due to the announcement of the sale of its Italian frozen food unit (Findus Italy) expecting a revenue of £760m. Unilever decided to part with the Italian company as it managed to secure a significant market share in the Italian men's grooming market as a result of this partnership. The market is now generating a good level of income and is secure, which led to the choice ending the partnership as it is now targeting the personal care market (Financial Times, 2009). Also, The Combat Climate Change, of which Unilever is part, has recently emphasized on reducing CO2 emission which shows that these companies care for the environment and has consequently had a positive effect on share price (Financial Times, 2009).
Appendix 6.2, shows that the ALPHA coefficient of Unilever is positive (i.e. 0.0025), meaning that excess return is being earned. The VOLATILITY figure of 18.8239% represents low uncertainty and risk in the company's share. The company is performing quite well as compared to the industry and on some level even better as shown in appendix 7.5. The most significant figures on the table are the EPS and Return on Equity growth over 5 years is 39.66% and 37.76% respectively. We decided to hold shares in the companies the performance in the future is promising and many brokers recommendations also are to hold the shares (Investors Chronicles, 2009).Analysis of Portfolio
Stocks price may not reflect all relevant information about a particular stock. Stock Prices are determined by earnings, dividends, risks, interest rate and future growth rate. In order to identify mispriced shares, some fundamental analysis will be introduces to value our shares, such as holding period return valuation model and ratio analysis. There is a wide-ranging valuation approach on stock prices. In this paper, only a one period return model included. The formulae are explained in Appendix 1.1.
P/E ratio is taken commonly as proxy for the expected growth in earnings. As it shown in appendix 1.2, Morrison and SABMiller's P/E has increased with an increased share price while Barclays and BGs P/E was decreased with a decreased share price. In general, an increasing P/E ratio indicates that the company's development potential has been recognized by investors.
The expected price P1 and E1 deduced by analysis of performance of each stock and the results generated by the model shows in appendix 2.
Stocks price current traded at P0, further we know that the current LIBOR rate (rf) for 6 months is 0.6075% (Thisismoney.co.uk, 2009) and the expected risk premium on the FTSE 100 is equal to 6.4% (rm - rf).Conclusion
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