Security analysis and portfolio management


The Global Financial Crisis has been called by leading economists the worst financial crisis since the one related to the Great Depression of the 1930s.

  1. It contributed to the failure of key businesses, declines in consumer wealth estimated in the trillions of U.S. dollars, substantial financial commitments incurred by governments, and a significant decline in economic activity.
  2. Many causes have been proposed, with varying weight assigned by experts.
  3. Both market-based and regulatory solutions have been implemented or are under consideration,
  4. While significant risks remain for the world economy.
  5. The collapse of a global housing bubble, which peaked in the U.S. in 2006, caused the values of securities tied to housing prices to plummet thereafter, damaging financial institutions globally.
  6. Questions regarding bank solvency, declines in credit availability, and damaged investor confidence had an impact on global stock markets, which suffered large losses during 2008. Economies worldwide slowed in late 2008 and early 2009 as credit tightened and international trade declined.
  7. Critics argued that credit rating agencies and investors failed to accurately price the risk involved with mortgage-related financial products, and that governments did not adjust their regulatory practices to address 21st century financial markets.
  8. Governments and central banks responded with unprecedented fiscal stimulus, monetary policy expansion, and institutional bailouts.

Global Contagion

The crisis rapidly developed and spread into a global economic shock, resulting in a number of European bank failures, declines in various stock indexes, and large reductions in the market value of equities and commodities.

Derivatives such as credit default swaps also increased the linkage between large financial institutions. Moreover, the de-leveraging of financial institutions, as assets were sold to pay back obligations that could not be refinanced in frozen credit markets, further accelerated the liquidity crisis and caused a decrease in international trade.

World political leaders, national ministers of finance and central bank directors coordinated their efforts to reduce fears, but the crisis continued. At the end of October 2008 a currency crisis developed, with investors transferring vast capital resources into stronger currencies such as the yen, the dollar and the Swiss franc, leading many emergent economies to seek aid from the International Monetary Fund.

What are the causes of Economic Recession

A recession is primarily caused by the actions taken to control the money supply in the economy.The Federal Reserve is responsible for maintaining an ideal balance between money supply, interest rates, and inflation. When The Federal Reserve loses balance in this equation, the economy is forced to correct itself.

The Feds monetary policy of injecting tremendous amounts of money supply into the money market has kept interest rates lower while inflation continues to rise.Inflationrefers to ageneral rise in the prices of goods and services over a period of time. The higher therate of inflation,thesmaller the percentage of goodsand services that can be purchased with the same amount of money. Inflationcan happen for reasons as varied asincreased production costs, higher energy costsand national debt.

In an inflationary environment, people tend tocut out leisure spending, reduce overall spending and beginto savemore. As individuals and businessescurtailexpenditures in an effort to trimcosts, this causes GDPto decline. Unemployment rates rise because companieslayoffworkers to cut costs.It is thesecombined factorsthat cause the economy to fall into arecession.

These circumstances coupled with relaxed policies in lending practices making it extremely easy to borrow money can result in unsustainable economic activity and the economy coming to a near halt.

It is also said that recession can be caused by factors that stunt short term growth in the economy, such as spiking oil prices or war. However, these are mostly short term in nature and tend to correct themselves in a quicker manner than the full blown recessions that have occurred in the past.

Effects of Recession

An economic recession can usually be spotted before it happens. There is a tendency to see the economic landscape changing in quarters preceding the actual onset. While the growth in GDP will still be present, it will show signs of sputtering and you will see higher levels of unemployment, decline in housing prices, decline in the stock market, and business expansion plans being put on hold. When the economy sees extended periods of economic recession, the economy can be referred to as being in an economic depression.

About the only good thing about a recession is that it will cure inflation. The balancing act the Federal Reserve must pursue is to slow economic growth enough to prevent inflation without triggering a recession. Currently, it must do this without the help of fiscal policy, which is generally trying to stimulate the economy as much as possible through lowering taxes, spending on social programs and ignoring current account deficits.

The New York City headquarters of Lehman Brothers.

Economist Dean Baker explained the reduction in the availability of credit this way:

"Yes, consumers and businesses can't get credit as easily as they could a year ago. There is a really good reason for tighter credit. Tens of millions of homeowners who had substantial equity in their homes two years ago have little or nothing today. Businesses are facing the worst downturn since the Great Depression. This matters for credit decisions. A homeowner with equity in her home is very unlikely to default on a car loan or credit card debt. They will draw on this equity rather than lose their car and/or have a default placed on their credit record. On the other hand, a homeowner who has no equity is a serious default risk. In the case of businesses, their creditworthiness depends on their future profits. Profit prospects look much worse in November 2008 than they did in November 2007 (of course, to clear-eyed analysts, they didn't look too good a year ago either). While many banks are obviously at the brink, consumers and businesses would be facing a much harder time getting credit right now even if the financial system were rock solid. The problem with the economy is the loss of close to $6 trillion in housing wealth and an even larger amount of stock wealth. Economists, economic policy makers and economic reporters virtually all missed the housing bubble on the way up. If they still can't notice its impact as the collapse of the bubble throws into the worst recession in the post-war era, then they are in the wrong profession."

At the heart of the portfolios of many of these institutions were investments whose assets had been derived from bundled home mortgages. Exposure to these mortgage-backed securities, or to the credit derivatives used to insure them against failure, caused the collapse or takeover of several key firms such as Lehman Brothers, AIG, Merrill Lynch, and HBOS.

Official Economic Projections

On November 3, 2008, the EU-commission at Brussels predicted for 2009 an extremely weak growth of GDP, by 0.1 percent, for the countries of the Euro zone (France, Germany, Italy, etc.) and even negative number for the UK (-1.0 percent), Ireland and Spain. On November 6, the IMF at Washington, D.C., launched numbers predicting a worldwide recession by -0.3 percent for 2009, averaged over the developed economies. On the same day, the Bank of England and the Central Bank for the Euro zone, respectively, reduced their interest rates from 4.5 percent down to three percent, and from 3.75 percent down to 3.25 percent. Economically, mainly the car industry seems to be involved. As a consequence, starting from November 2008, several countries launched large "help packages" for their economies.

The U.S. Federal Reserve Open Market Committee release in June 2009 stated: "...the pace of economic contraction is slowing. Conditions in financial markets have generally improved in recent months. Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability." Economic projections from the Federal Reserve and Reserve Bank Presidents include a return to typical growth levels (GDP) of 2-3% in 2010; an unemployment plateau in 2009 and 2010 around 10% with moderation in 2011; and inflation that remains at typical levels around 1-2%.

Review of literature

Global Impact of the Crisis

Global Effects

In this article person talk about liquidity crisis if these crises continues the would be worse , there could be an extended recession or worse. The continuing development of the crisis prompted fears of a global economic collapse. The financial crisis is likely to yield the biggest banking shakeout since the savings-and-loan meltdown. Investment bank UBS stated on October 6 that 2008 would see a clear global recession, with recovery unlikely for at least two years. Three days later UBS economists announced that the "beginning of the end" of the crisis had begun, with the world starting to make the necessary actions to fix the crisis: capital injection by governments; injection made systemically; interest rate cuts to help borrowers. The United Kingdom had started systemic addition, and the world's central banks were now cutting interest rates. UBS emphasized the United States needed to implement systemic injection. UBS further emphasized that this fixes only the financial crisis, but that in economic terms "the worst is still to come".

UBS quantified their expected recession durations on October 16: the Euro zones would last two quarters, the United States' would last three quarters, and the United Kingdom's would last four quarters. The economic crisis in Iceland involved all three of the country's major banks. Relative to the size of its economy, Iceland's banking collapse is the largest suffered by any country in economic history.

The Brookings Institution reported in June 2009 that U.S. consumption accounted for more than a third of the growth in global consumption between 2000 and 2007. "The US economy has been spending too much and borrowing too much for years and the rest of the world depended on the U.S. consumer as a source of global demand." With a recession in the U.S. and the increased savings rate of U.S. consumers, declines in growth elsewhere have been dramatic. For the first quarter of 2009, the annualized rate of decline in GDP was 14.4% in Germany, 15.2% in Japan, 7.4% in the UK, 18% in Latvia, 9.8% in the Euro area and 21.5% for Mexico.

No full recovery yet, low base triggered auto sales

In this article person compare the sales of this year with last year which show that due the financial crisis sales of auto mobile decreased but in this year sales increased as compare to last year but yet there is need to recover the loss of last year. For instance, sales of Tata Motors (went up 65% in November compared to the same month last year. Bajaj Auto saw a jump of 83% and commercial vehicle manufacturer Ashok Leyland saw a two-fold sales jump. The analysts said we should not forget that in last year's during same days sales were decreased drastically He has a point. According to Society of Indian Automobile Manufacturers (Siam) figures, Tata Motors, Ashok Leyland and Bajaj Auto had registered a decline of 23.9%, 66.7% and 51.3%, respectively in domestic sales in November 2008 vis-a-vis November 2007. "The credit crisis started in September 2008 and the Indian economy felt the impact from November onwards due to decreased in sales"

Responses to Financial Crisis

Emergency and short-term responses

Subprime Mortgage Crisis Responses

In this article person talk about how the U.S. Federal Reserve and central banks around the world have taken steps to expand money supplies to avoid the risk of a deflationary spiral, in which lower wages and higher unemployment lead to a self-reinforcing decline in global consumption. In addition, governments have enacted large fiscal stimulus packages, by borrowing and spending to offset the reduction in private sector demand caused by the crisis. The U.S. executed two stimulus packages, totaling nearly $1 trillion during 2008 and 2009.

This credit freeze brought the global financial system to the brink of collapse. The response of the USA Federal Reserve, the European Central Bank, and other central banks was immediate and dramatic. During the last quarter of 2008, these central banks purchased US$2.5 trillion of government debt and troubled private assets from banks. This was the largest liquidity injection into the credit market, and the largest monetary policy action, in world history. The governments of European nations and the USA also raised the capital of their national banking systems by $1.5 trillion, by purchasing newly issued preferred stock in their major banks.

Governments have also bailed-out a variety of firms as discussed above, incurring large financial obligations. To date, various U.S. government agencies have committed or spent trillions of dollars in loans, asset purchases, guarantees, and direct spending. For a summary of U.S. government financial commitments and investments related to the crisis, see CNN - Bailout Scorecard.

Crisis grips German auto industry

In this article person talk about impact of financial crisis on German auto industry and how it effect whole auto industry Gloomy new figures and forecasts about the fate of the German auto industry are emerging on virtually a daily basis. German industry is backbone of auto industry. The jobs of one-seventh of the workforce depend on auto production, which has been especially hard hit by the international financial crisis. The German Automobile Industry Federation (VDA) issued its grim prognosis for the coming period. VDA president Matthias Wissmann said, "Auto markets have taken a nosedive with an unprecedented speed and development."

Daimler sales suffered a 30 percent decline in November over the previous year, with sales of its Mercedes Benz brand falling by 38.2 percent. According to media reports, massive cuts and rationalization are being planned at Daimler. In this article he talks about how companies take steps to overcome the problem. The company intends to produce 150,000 fewer Mercedes cars in 2009 and is drawing up a program of cost savings. Short-time working is in the cards for the main Mercedes car production plant in Sindelfingen as of January. The core section of the Mercedes Car Group, i.e., Mercedes Benz, Smart and Marybeth, has been especially hard hit. A number of management consultancy firms have been given the task of developing ideas for reducing costs and increasing efficiency. The last savings program in the "core" section was implemented between 2005 and 2007. This program increased the company's turnover by a total of 7.1 billion euro. At the same time 10,000 jobs were wiped out.

Indian Telecom Sector Unaffected By Global Crisis: TRAI

The contribution of the Indian telecom sector to the nation's GDP is expected to increase from 2 per cent in 2006 to an estimated 3.6 per cent in 2010.

In this article it is stated that telecom sector. Mr. Nripendra Misra, chairman, Telecom Authority of India said The process of spectrum management must capture the three cardinal features of good governance -- predictability, stability and transparency. The entire decision making mechanism in the telecom sector should be in the public domain."

He said but due to the global crisis can face some problem to increase it proportions because 90% revenue of telecom sector come from the top 10% . Sardana, chairman, CII National Committee on Telecom and Broadband and managing director, Tata Teleservices Ltd, stated that to enhance the sales and to attract the customers there main focus will be on 2G and 3G to increase the GDP

Telecom sector may be hit as recession bites

As in this article it is stated that telecom sector has so far remained untouched by the slump in global economy. But now it can face the problem due the decrease in the sales of telecom sector as compare to the last year. According to Prashant Singhal, telecom industry leader at Ernstand Young, the handset sales growth in 2009 is expected to be in the region of 13-15 per cent, down from 26 per cent last year. As in future the handsets become need not the desire of the customer. Though the industry is not losing sleep yet, they are undertaking cost-cutting measures such as infrastructure sharing and internal restructuring.


Malaysia not insulated from global economic crisis.. Labor market has been cushioned by foreign workers and large number of Vacancies. Poverty incidence rose from 3.6% in 2007 to 3.8% in 2008: The survey revealed that various factors affect their demand other than the current crisis First, Malaysian is the competition from ASEAN producers since March 2006 to meet the ASEAN Free Trade Area (AFTA) requirements. Second, some first tier vendors had over-expanded and are facing excess capacity when Proton did not make good its expansion plan. Third, there are seasonal fluctuations in the industry, dipping toward the end of the year.

Four factors account for the problems faced by the auto parts enterprises. Revenue, domestic and export orders dipped in 2008 and recovered in 2009. Cutting back production and reduce working time are the main coping. Mechanisms for the enterprises. A majority of respondents were involved in the labor adjustment schemes. Reduction in average weekly work hours and earnings after 30 June 2008. The economic crisis and labor adjustment caused changes in their level of Anxiety. Reduced income of the workers resulted in adjustments in expenditure for their Households Malaysia is fortunate that the auto parts industry and its value chain up to the Workers' households and the supporting informal sector are not badly affected by the Crisis.

What is the Impact of Global Financial Crisis in Indian Banking Industry

India has faced bank stress because foreign investors have pulled out of the economy. When money leaves the country, it creates a money vacuum. There is suddenly less money available to use, borrow or lend. Foreign demand for currency drops and the rupee depreciates. Banks are forced to come up with money to meet demands.

The Indian Central Bank has relaxed some of its rules in order to help banks. Last month they cut the reserve requirements (the percentage of deposits a bank must hold with the Central Bank) to 7.5% from the previous 9%. By cutting reserve requirements, banks suddenly have an increase of funds available to lend. It is estimated that this will increase money supply in the economy by 600 billion rupees ($12.2 billion US).

Another attempt to free banks was a cut to short-term lending rates. These rates are the cost for banks to borrow from the Central Bank when they face runs on deposits. We believe India is much safer than other emerging markets because of its solid growth and ability to fight future financial problems with more rate cuts.

High credit growth as a result of a fast growing economy will slow. Less money will be available to borrow so corporate growth will rely on foreign funds. Consumers will face higher interest rates and growth will cool.

All of these factors show India is in great shape. Large debt will be paid down as a result of higher interest rates and lower demand for risk. We believe the situation is perfect for the country to adapt to its recent changes and prepare for the next economic cycle.

Impact on Indian Real Estate Sector

The crisis in the US financial market will hit the Indian real estate sector hard. The financial crisis in the global market will affect the availability of fund for the domestic realty sector. As RBI has already put restriction on Indian banks to finance real estate companies in the country, they are depended on foreign funds through

The source said that many of these private equity funds were launched by investment banks. But, now as the fate of these investment banks is uncertain, their capability to raise funds in their country is doubtful. This will put severe constraint on availability of funds in India.

A large player in the sector said that as the availability of funds from banking sector is restricted for the realty sector, they are forced to borrow from the high net worth individuals at high interest rates at around 20%.

At the same time, the crisis in the global market has affected the demand for the real estate space in India. The development in US has affected the global economy, which has forced many of the global majors to either postpone or cut the expansion plan. According to a source in the industry, Google has cut its expansion plan substantially in the NCR region. But now, it is learnt, it has cut its requirement to only 3 lakh sq feet. Similarly, German major SAP, which had shown interest to open its operation in Gurgaon, has now postponed the plan.

This has affected the demand of the real estate space. Global consultancy firm now predict with the cancellation and postponement of the expansion plan of companies, many of the regions like NCR, Bangalore and Pune will face the situation of oversupply in the office space. The rentals in these areas are projected to fall by 25 to 30% in the next 12 months. The worsening condition in the demand for office space indicates the slowing down in the economic activities in the country. This will affect the demand for the residential space also.

Impact of global crisis on GENERL MOTORS

GM cut 10000 salaried jobs or14% of its work force. GM have received $9.4 billion loan from bank and expecting another $ 4 billion from government. They cut down the salary and hourly position so that company could become viable for long term. GM submitted a plan to describe how GM would return to profitability and more aid from the government would based on the plan

BMW sales down, Honda quits Formula One

3 major car makers, GM, Ford and Chrysler are in the verge of bankruptcy due to extremely low sales and diminishing margins.

World'top premium car maker BMW' sales plunged in Nov by 25.4 % to 96,570 units

Japan's number two car maker Honda announced its withdrawal from popular formula one car race The desperate attempt by Honda to cut costs shocked the motor racing world

Impact of global crisis on ICICI


On the basis of study it can be stated that Banking sector and Automobile sector are more affected by the global financial crisis. Because these sector more touched with global market and invested in global market. And Telecom sector and Real Estate sector are unaffected by global crisis because these sectors not invested in global market these are concern with national market. But the telecom sector at time of recession was not as much affected but know at present sales of the telecom sector are going to decrease. Central bank provide loans on easy term to the other bank to recover from the financial crisis.


  • Chandra. Parsanna, "Investment Analysis and Portfolio management" by Tata McGraw-Hill, Third Edition
  • Avadhani.V.A "Security Analysis and Portfolio Management"

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