Current Global Financial Market - Essay Example

?Introduction; Global financial market is currently facing ripple effects because of the austerity measures being witnessed in European countries The capital market has witnessed the prices of shares going down and the risk of holding a bond rising2. This has prompted a need to consider a careful portfolio management that is able to curtail radical loss on the investment an investor has invested on both the stock and bond holding3. An investor will thus, take care of the rate of return to expect and the risk level exposed in the capital market in making a decision on stock and bond allocation. Equity and bond portfolio investment in U.S capital market: Equity investment; An equity investment is supposed to provide long term value growth and the possibility of dividend income. The value of shares can at some time become volatile by being either declining or a rising trend in the overall market period. The stock market index in U.S has being declining in the recent past due to the financial wrangles being witnessed in Europe. The future economic growth of the country is promising to be positive which is a clear picture that in future the prices of the stock will raise. Thus, as a fund manager the current stock prices are in the best lowest prices when I should consider buying for future profit making from sale of the shares in the future. Also, with an economic growth prospects the shares are likely to generate dividends which will be of benefit to the investor’s economic potential. Bond investment; A bond investment represents a fixed income investment because it attracts a fixed rate of interest and a known maturity time4. The value of a bond investment is determined by the movement of the market interest rates. If the interest rates are high, the price of the bond is low and at the time when the rates of interest are low, the bond price will be high. The interest level of a bond represents the risk level of a bond. The bond market in U.S assessment shows a challenge to fixed income investors because of the way it is associated to the European market which is facing a debt crisis5. This is because the performance of the bond in U.S capital market in the time to approach is likely to be determined by how the events will unfold in Europe6. There has being development of discouraging news from the European market of possible government default in paying back loans, bank crisis and the possibility of euro break up. This has lead to investors demanding a flight to quality on U.S treasury bonds and a poor performance on high yield bonds and emerging debt markets. The flight to quality response by the investors has resulted to the fall of 10- year note to record lows of 2011 with its price rising. This mean of seeking safety has outweighed prospects of earning meaningful long term returns7. Investing in U.S treasury is thus, pegged on a deteriorating of the European market. The expected economic growth in 2012 poses a risk to treasury bonds due to the inflation uptick that may rise which has a negative effect on bond prices. Investing in high yield bonds currently has an unknown future interest earning due to the debt crisis in Europe which can only get better if the crisis are solved to the fullest. Asset allocation; As an investor deciding to invest in the equity and bond market in the American market, the return level and risks associated with two assets due to the global economic events needs to be allocated with care. From the assessment of the two assets investment opportunities, investing in the stock market is more favorable to an investor than in the bond market for future returns of the investment8. Market performance of any asset has usually being uncertain towards how in future the returns from the assets investment will perform9. This means that an investor has to come up with a portfolio arrangement that will try to caution massive losses from investing in only one asset that seem to have positive future returns. The portfolio investment need to allocate much percentage to an asset that has favorable future returns. Thus, under our case investing in the stock assets should take a higher percentage than bond investment in the portfolio investment. The percentage under which the two assets should be allocated depends on the expected future rate of return and risk level of losing the cash invested in each asset. The rate of return expected from the two assets depends on the future financial crisis solution in the European market, but, the stock asset will as well perform better with a growth of U.S economy. The risk of losing the amount of investment invested in each asset also depends on how the European financial crisis is to be solved. A solution of European financial has potential to impact positively on the prices of shares than it will take on high yield bonds10. This is because the prices of the shares are influenced by future prospects of company performance. A company performance is determined by the productivity of the company and consumption11. Thus, a solution will reflect future performance of the company that will pay good dividends. Thus, the asset allocation in the portfolio should be done on 2:1 allocation ratio of stock and bond respectively. The capital market trend from S&P 500 historical prices index; Date Open High Low Close Volume Adj Close 5/1/2012 1397.86 1415.32 1343.13 1354.58 4.57E+09 1354.58 4/2/2012 1408.47 1422.38 1357.38 1397.91 3.92E+09 1397.91 3/1/2012 1365.9 1419.15 1340.03 1408.47 3.98E+09 1408.47 2/1/2012 1312.45 1378.04 1312.45 1365.68 4.14E+09 1365.68 1/3/2012 1258.86 1333.47 1258.86 1312.41 4.18E+09 1312.41 12/1/2011 1246.91 1269.37 1202.37 1257.6 3.67E+09 1257.6 11/1/2011 1251 1277.55 1158.66 1246.96 4.29E+09 1246.96 10/3/2011 1131.21 1292.66 1074.77 1253.3 4.87E+09 1253.3 9/6/2011 1173.97 1220.39 1114.22 1131.42 5.16E+09 1131.42 Basic chart of U.S capita l market trend; Reference Elton, E, Gruber, M and Brown, S 2009. Modern portfolio theory and investment analysis. McGraw publishers. New York. Fabozzi, F 2009. Institutional investment management: equity and bond portfolio. Telso publishers. California. Graham, J and Smart, S 2011. Introduction to corporate finance and economic coursemate: stock and bond portfolio investment. Oxford press. New York. Hagin, R 2004. Investment management: portfolio diversification, risk and return. Telso publishers. California. IBR report: global economy, 2012, viewed on May 9, 2012. Available from. . Jones, C 2009. Investment: analysis and management. McGraw Hill publishers. New York. Megginson, W 2008. Introduction to corporate finance. Oxford press. Oxford. Monks, R, Lajoux, R and Lajoux, A 2010. Corporate valuation for portfolio investment: analyzing asset allocation. Oxford press. London. Read More