Investment Portfolio Project - Term Paper Example

Investment Portfolio Project Investment Portfolio Project Top down Approximation Analysis The use of financial performanceof different companies is very important in understanding the economy of a country. This paper looks into the status of Qatar economy and how it relates to the general global economy. Companies such as Qatar National Bank (QNB), National Leasing Holding, Qatar Oman Investment Company, and Islamic Holding Group have been analyzed and their annual security performance described to understand their influence on the performance of Qatar economy. Policies employed by central bank in regulation money supply and circulation have significant effects on the global economic performance. In 2012, the deficit in global budget narrowed down to approximately $2.7 trillion (a representation of 3.80% of the global GDP-Gross Domestic Product). However, the global economic growth shifted (dropped) to 3.10% in 2012 from 3.70% in 2011 and 5.10% in 2010 fiscal years. The global unemployment rate increased to 9.20% in 2012. Countries that used expansionary monetary and fiscal policies attained significantly increased growth rates, lower rates of unemployment, increased growth in tax revenues, and success in cutting down public debts. Countries that employment contractionary policies failed to achieve what the former countries realized. In 2012, over 85 countries with pro-growth strategy realized median Gross Domestic Product growth rates of 4.90%, compared to 0.80% realized 37 nations with restrictive monetary and fiscal policies. This represented a difference of 4%. Among the listed 85 countries with pro-growth strategy, Canada grew by 1.90%, 2.20% for the United States, 3.0% for Turkey, 3.40% for Russia, 4.0% for Mexico,, 6.0% for the Indonesia, and 7.80% for China. Among 37 countries that restricted their monetary and fiscal policies, Italy grew by -2.30%, -1.40% for Spain, -0.5% Netherlands, -0.20% Belgium, 0.10% France, 0.70% Germany, and 2.30% Brazil. These 37 countries reported unemployment rates of 11.50%. Overview of the Global Economy The global financial crunch of 2008-2009 caused the first recession in international output similar to what was experienced in 1946. Thus, the globe was faced with a new challenge mainly defined by finding out what combination (mix) of monetary and fiscal policies to apply in restoring jobs and growth, while keeping debt and inflation under control. Monetary stimulus and stabilization programs initiated in 2009-2011 to lower revenues in taxes in 2009-2010; required a number of countries to employ large budget debits. New public debts were issued by treasuries – amounting to $7.6 trillion. These amounts, issued in 2008, were meant to cater for additional expenditures by the treasuries. To maintain interests at the lowest possible rates, several central banks used the debt as a monetary component, pumping large sums of finances into their respective economies between 2008 and 2012 (December); thus, the global supply of money increased by over 31%. Currently, governments face the daunting task of stimulating employment and economic growth without injecting more debt on their economies. The growth process should not paralyze the financial stability and long-term growth. In 2012 financial year, fiscal policy moved towards greater stance for several global nations. In the effort to combat their debt and deficit problems, approximately 5 of 6 six countries cut on their government spending growth, and 1 of 3 countries lowered their expenditures. The rate of global government expenditures decreased from 2010 with 5.9% and 2011 with 10.1%, to a mere 1.40% in 2010 global financial year. Approximately, 1 in every 3 central banks restructured their monetary policies, reducing money supply growth rate. In addition, one in every 7 of the central banks withdrew their monetary supply from circulation. Money supply growth, measured by M1, dropped to 4.10% in 2012 and 5.20% in 2011 from 1.40% in 2010 and 8.70% in 2009. Overview of the Middle East, Pakistan, Afghanistan, and North Africa Economies Growth in economy in the Middle East is expected to fall in 2013. Disruptions in domestic supply and weak international demand have played a part in the significant reduction of oil production. Moreover, uncertainties emerging from unceasing transitions in politics in addition to a weaker external environment put much weight on the confidence level of oil importers. Growth projection in 2014 is high due to the expected oil production recovery and global conditions. However, equitable and sustainable growth over medium duration (term) relies heavily on better sociopolitical setting and a stable macroeconomic environment, accelerated creation of jobs, and increased diversification in the economy. Source: Internal Monetary Fund. (2013). Middle East, North Africa, Afghanistan, and Pakistan: Growth Hinges on Improvements in oil production and confidence. Oil exporters reported a decline in growth in the second quarter of 2013 because of the declining oil production. Economies including Iraq, Libya, and Iran, high geographic and political tensions, unscheduled maintenance, deteriorating security, and economic sanctions have affected the supply of oil. Overall, hydrocarbon output in the region is expected to decline because of the situations in Iran and Libya. The amount of oil produced by Saudi Arabia is also expected to fall following the role it currently plays in stabilization the global oil market. Contrary to the GDP from oil, non-oil Gross Domestic Product is performing well in several nations, supported by increased spending by the respective governments and recovery in the growth of credit. Following the recent rise in fiscal market volatility, corporate and sovereign bond yields for oil exporters in the Middle East, Pakistan, Afghanistan and North Africa increased, but insignificantly and with low levels, an indication of the generally compromised financial connections with world markets and too many external buffers. For the entire year (2012), growth projection was expected to reach 2% (a downward reflection to the beginning of 2013’s second quarter with 1.24% growth projections). This is accounted for by the fall in oil production level. Growth will probably increase rise to 4% at the end of financial year 2014. This is because the global demand is expected to recover in addition to the definite increased oil production by Libya, Iraq and Saudi Arabia (the information is available in table 1). Non-oil Gross Domestic Product is also forecasted to rise to 4.5% in 2014 from 3.75% in 2013 financial year. Economies in the MENAP involved in oil imports are experiencing difficult economic conditions. As much as there are good indications of better performance in FDI (Foreign Direct Investment), exports, and tourism, there are factors that are vital in understanding the economic situation in these countries. Owing majorly to the rising demand from continued economic and political policy and GCC economies, uncertainty presents itself on the economic activity and confidence level. The expanding developments in Egypt and conflicts in Syria have sparked new concerns about a larger destabilization that further makes it complicated for economic management. Additionally, in several countries, fiscal and external buffers are at their lowest levels. Growth in the economy is expected to remain stagnant at approximately 3% between 20113 and 2014 financial years. This constant economic situation is expected to affect the economies of several countries. The overall result will be a continued rate of unemployment coupled with stagnant living standards, a possible contribution to ceaseless social discontent. Source: Source: Internal Monetary Fund. (2013). Middle East, North Africa, Afghanistan, and Pakistan: Growth Hinges on Improvements in oil production and confidence. In most countries of MENAP, inflation is elevated, even though it has lessened recently because of the decreasing global energy and food prices. In Qatar, past reduced energy and depreciation subsidies will probably cause an increased level of inflation. Regional and domestic factors are the major causes of risks. The risks sources remain elevated towards their lowest levels. Continued security and social tensions and political transitions in countries such as Pakistan are the delay factors on the return of reforms and confidence. Qatar Economy For quite a long period, Qatar’s economic growth has succeeded with a continued growth in real Gross Domestic Product. Throughout the global financial crunch, authorities in Qatar decided to provide security to the local banking industry by using direct investment in the local banks. GDP increased sharply in the financial year 2010 due to the significant increases in oil prices and production. In the financial year 2011, economic growth was driven by expanded investment in its gas industry. The Gross Domestic Product slowed down to 6.60% n financial year 2012 as the countries gas industry enlargement inclined towards the completion phase. Qatar’s economic policy aims at developing the non-associated gas reserves and expanding foreign and private investments in industries that not connected to energy. However, gas and oil still cater for over 50% of gross domestic product, approximately 85% of earnings from export, and 70% of revenues from the government. Gas and oil have enabled Qatar emerge the country with the lowest levels of unemployment and the country with the highest value of per-capita income. The countries scores over the period beginning from 2010 to 2014 is described in the chart below. Source: Heritage. (2013). 2014 Index of Economic Freedom: Qatar The country’s population stands at 1.8 million, the GDP (PPP) is $187.9 billion with a growth of 6.6%, and 13.1% when the annual growth is compounded for 5 years. The Gross Domestic Product per capita stands at $102,211 (heritage, 2013). Qatar’s unemployment rate stands at 0.5%, inflation (CPI) is 1.9%, and the inflow of FDI is $326.9 million (Heritage, 2013). The economic freedom performance is 71.2, ranking it at the 30th position in the current (2014) free economy index. From the last year, the free economy score has not changed as much as there were notable improvements in the economic freedom of over 10 freedom in economies. The 10 freedoms include monetary freedom, labor freedom, business freedom, trade freedom, and controls in the government spending. Qatar ranks 3rd among the 15 nations forming the Middle East and North African region. In addition, its overall performance is above the global average. A summary of the regulatory efficiency is described in the diagram below: Source: Source: Heritage. (2013). 2014 Index of Economic Freedom: Qatar In the industrial sector, Qatari government considers industrial as an integral part of the entire plan in economic diversification and maximization of the vast natural gas reserves. The gas reserves serve as the fundamental sector feedstock. Accordingly, keen eye has been placed in the development of exports, clustering around port Mesaieed and Ras Laffan, which are the core energy centers. One of the regional industrial powerhouses (Industries Qatar-IQ), a manufacturer of steel, fertilizer, and petrochemicals, is surpassed in size by just one company SABIC (Saudi Basic Industries Corporation), the largest producer of chemicals in the Middle East. The performance of the country’s manufacturing sector in 2007 was a contribution of 7.50% in GDP, in the 4th quarter of financial year 2008, the net profits of Industries Qatar was dropped with over 90%. Table: Summary of Qatar’s Economy (Fiscal Year 2013) Component 2008 2009 2010 2011 2012 GDP (Purchasing power parity) $158.6 billion 179.2 billion $191 billion GDP (official exchange rate) $183.4 billion GDP-actual growth rate 16.7% 13% 6.6% GDP PPP $93,000 $101,400 $103,900 Gross national saving (% of GDP) 52.8% 59.9% 63% GDP-composition by end use 13.1% (household consumption) 12.1% (government consumption) 30.6% (fixed capital investment) -8.9% (inventories investments) 78.6% (exports of services and goods) -25.5% (imports of services and goods). GDP Composition by sector Services-26.3% Industry-73.6% Agriculture-0.1% Labor force 1.43 million Unemployment rate 0.4% 0.5% Consumption % (household income) 10% lowest-1.3% 10% highest – 35.9% Investment – gross fixed of GDP 30.6% Budget $49.32 billion-expenditures $69.76 billion Revenues and taxes 38% Budget surplus (% of GDP) 11.1% Public debt (%of GDP) 34.4% 32.8% Inflation rate 1.9% 1.9% Discount rate of central bank 4.5% 4.5% Lending rate of commercial bank 5.49% 5.38% Narrow money stock $22.49 billion $24.98 billion Broad money stock $85.16 $97.97 billion Domestic credit stock $121.5 billion $149.1 billion Market value $87.86 billion $123.6 billion $125.4 billion Agriculture Products Fruits, fish, beef, dairy products, poultry, and vegetables Industries Repair of commercial ship, cement, steel reinforcing bars, petrochemicals, fertilizers, ammonia, crude oil production and refining, natural gas (liquefied) Growth rate of Industrial promo 4.6% Account balance (current) $53.57 billion $58.57 billion Exports $114.3 billion $133.7 billion Export commodities Steel, fertilizer, petroleum, products, LNG (liquefied natural gas) Export partners China 5.4%, Singapore 5.7%, India 12%, South Korea 19%, Japan 26.6% Imports $26.93 billion $30.79 billion Imports – commodities Transport and machinery chemicals, and equipment, as we as food Important partners France 4.4%, Italy 4.4%, Germany 4.7%, China 4.8%, Japan 6%, UK 6.4%, Saudi Arabia 8.3%, UAE 11%, US 14.2% Gold and foreign exchange reserves $16.82 billion $33.19 billion Debt-external $128 billion $134.8 billion Home stock of FDI $31.84 billion $32.17 billion Exchange Rates $25.02 billion $26.86 billion Company Ratios and CAPM (Security Analysis) Qatar National Bank In the security analysis of QNB, the performance, pattern or trend of the stockholder’s equity will be analyzed. The Common Stock of the company reported a significant growth. In 2013 fiscal year, stock equity is 2,148 and 2,121 in 2012 (Yahoo! Finance, 2014). This illustrates an increase of 27 (1.27%). In this case, stockholder’s equity of 2012 has been used as the base performance. Between 2012 and 2011 (with 2011 performance as the base year), the increase in stock equity is 34 (1.77%). Stockholder’s equity in fiscal year 2011 was 2,087. The company also reported a positive growth in retained earnings that is 65,618 in 2013, 60,735 in 2012, and 54,886 in 2011. Increase in retained earning between 2013 and 2011 is 10,732-a reflection of 19.6%. The increase is also evident in the values reported between 2013 and 2012-retaind earnings increased by 8%. There was no increase or decrease in QNB’s treasury stock between 2012 and 2011, and 2012 and 2013. The value of treasury stock was maintained at 2,476. Capital surplus performed positively in all the 3 years. 11,679 was reported in 2011, 12,787 in 2012 and 13,747 in 2013. This reflected to 9.5% increase in 2012 from the figures in 2011 and 7.5% in 2013 compared to 2012 capital surplus reports. Other stockholder’s equities declined in performance from 4,665 in 2011 to 4,456 in 2012 and eventually a low of 3,412 in 2013. Generally, total stockholders’ equity declined between 2012 (77,623) and 2013 (75,625), contrary to the increase of 6,782 (9.6%) between 2012 (77,623) and 2011 (79,841). The beta stands at 2.1-an indication of the stocks aggressive nature. It is moving in the same direction as the market, but it is faster. National Leasing Holding Common stock performance reported a negative trend. Common stock equity in 2013 was 1,918 in 2013 compared to 2,087 in 2012. This represents 8.1% decline between these two fiscal years. Between 2011 and 2012, common stock increased by 3.5%. Treasury stock increased from 2,265 in 2012 to 2,763 in 2013 (an increase of 22%). Between 2011 and 2012, the increase in treasury stock was 115 (2,265 in 2012 compared to 2,150 in 2011). Overall, the total stockholder’s equity increased to 69,865 in 2013 from 65,523 in 2011 (6.6%). Beta is estimated to be 0.8. This means that the degree of the stocks movement is less than markets, but it is in the same direction. The investment in this stock is referred to as conservative. Qatar Omani Investment Company Omani Investment Company’s stock performance was not different from the other major players in the industry. The performance was positive based on the stock value indicators available in online the financial market analysis. The company’s retained earnings increased between 2012 and 2013, while it reported a decrease between 2012 and 2011. Retained earnings in 2013 were 76,023 and 68,364 in 2012. This represented an increase of 7,659 (11.2%). Treasury stock also performed well in relation to the industries average considering that it reported approximately 3,219 in 2013 compared to 2,774 in 2012. Overall, the stockholder’s equity rose by 5.1% between the current and previous financial years. The company’s beta is valued at 1.1. Islamic Holding Group Islamic Holdings Group indicated a unique performance pattern when compared to the other companies previously analyzed. Its stock performance in 2012 was the lowest considering the different stock components in the shareholder’s equity. Its retained earnings in 2012 were the lowest with 57,082. Performances of the retained earnings in 2013 and 2011 were 64,263 and 59,287 respectively. Common stock equity and treasury stock also displayed similar trends to the retained earnings. Common stock fell between 2012 and 2011 fiscal years, while it rose in 2013 fiscal year. The rise in common stock is attributed to the decision of the company management to initiate an IPO allowing new investors to buy stocks while increasing the capita and market cap. Generally, stockholder’s equity grew by 6.7% in 2013 compared to 2012 and 2011 period. Dlala Holding The value of earnings per share of the company (leaving out extraordinary items) was 0.24 and the reported revenue per stock was 4.25. Common equity (book value) per share was 10.74. Performance of cash per stock of Dlala Holding was also better than the industries since it reported over 9.64 as the value of its cash per stock. Return on equity stood at 2.36. Price to sale and price to book were 9.5 and 3.76 respectively. With a beta of 2.0, investing in the shares of Dlala Holding is referred to as aggressive. It is also a good stock to invest in. Investment decision using the stock performance Using the stock performance and financial ratios of the listed companies, an investment can be easily made. The best investment strategy would be buying stocks with a higher return expectation. In this approach, the requirement is to identify the stock rating, the certificates and deposits offered in line with the current industry performance in the financial market. These rates also need yield evaluation from mutual funds and stock for the provided income. Investment decisions made upon interest rates are not applicable for all financial institutions in Qatar since most of the financial institutions follow a strict Sharia law. Looking at the stock performance rating, Islamic Holdings Group has the lowest stock performance rating compared to QNB, National Leasing Holdings and Qatari Omani Investment Company. The current stock price of 19.8 is the lowest, followed closely by QNB with 26.0. National Leasing Holding has the best stock performance valued at 185.0. However, considering the need to go for a stock that is undervalued it is important to pick Islamic Holdings Group because there is a high possibility of its improved performance in the next 5 years. There are many risks connected to the purchase of the stock, but there is a high possibility that the share value will increase due to the expected increase in oil production sand leveraging of the pitfalls in the economy caused by countries experiencing political and social instability such as Iran, Pakistan, Russia and Egypt. Since the risks associated with the poor performance in Islam Holdings Group are on the process of successful mitigation, the stock price will increase significantly by over 40%. This will position the stock above the industry average, hence a sign of profits for the portfolio. Qatari government has also considered diversifying its non-oil and gas GDP. Therefore, investing in the undervalued stocks of Islamic Holdings Group will eventually yield significant profits. Using the buy and hold strategy, the stock that indicates high chances of realizing high returns is QNB. The stock performance and price trend has been positive, but with little difference. Stock price in 2012 was 21.87 and 26.00 in 2013. This is clear indication that performance over the next few years will be better considering the decision of the government to diversify its economy to non-oil GDP and the expected increase in the production of oil. Industry Analysis The industry covered in this section is the banking and finance sector. Majority of the banking and financial services are provided by private organizations. In the banking industry, there are over 314 (63.3%) private companies while the publicly listed companies are 182 (36.7%). The general financial services division are also characterized by a large number of private companies compared to the publicly listed companies. There a total of 86 private companies (representing 66.2% of the total general finance services companies. On the other hand, publicly listed companies providing basic financial services account for 33.8% (about 44 out of the 130 companies) of the total number of companies in the finance sector. Source: Zawya. (2014). Global Islamic Finance. Retrieved May 19, 2014, from http://www.zawya.com/islamic-finance/#companies2 There is high competition between the major players in the financial services provision. Competition also emerges between the public and private sectors considering the fact that this industry is highly concentrated in providing services majorly to the Islam complying clients. Competition lies on the pricing models since and not interests since all financial institutions are expected to comply with the Sharia Law. Entering the industry is not easy for new investors due to too many regulations and policies in Islamic banking sector. Banking and finance industry is also not easy to enter because of the huge amounts amount of startup capital, sophisticated equipment, and labor. In addition, the suppliers of and consumers are also many, making it difficult for the new entrants to establish their clientele, suppliers, and distributors of the products and services. Company Analysis The companies that will be analyzed in this section include QNB (Qatar national Bank), National Leasing Holding, Qatar Oman Investment Company, and Islamic Holding Group. QNB In the analysis of stock price performance of QNB, there are ratios that will be helpful in coming up with an investment decision. As at May 16, 2014, the beta stands at 0.26 with a 6.37% as the 52-Week Change. 52-Week Low in S&P500 is 12.70% and 28.0 as the 52-Week high. The 3-month average share volume is 1,246, the 10-day volume is 275, and the total shares outstanding are 3.28M. This left the company with a float of 2.85M. Insiders held a total of 14.18% of the shares while the institutions accounted for 4.8% of the stocks held. The dividend date was set at June 26, 2012 and the extended dividend date was December 12, 2012. The Forwards Annual Dividend Rate stood at 1.04, Forward Annual Dividend Yield was 4.40%, and the Trailing Annual Dividend Yield was valued at 1.09 (4.20%). Finally, on the dividends and splits, the 5-year Average Dividend Yield was valued at 4.8%. The Last date of split was October 15, 2003 with the Last Split Factor as 2:1. The Price per Earnings (P/E ttm) ratio is 10.30, and the EPS (ttm) stands at 2.53. Other valuation measures used in the pricing of securities are the Enterprise Value/revenue (ttm) and enterprise value/EBITDA (ttm). The company reported the EV/Revenue of 3.97. Its price to book (mrp) was 1.08 and price to sales (ttm) ratio was valued at 2.75. The intraday Market Capitalization was valued at 85.53M at the close of the trading day May 16, 2014. Enterprise value was estimated to be 123.31M on May 19, 2014. The intraday Trailing P/E ratio (ttm) stands at 10.30. The basic stock performance chart of QNB (5-year range) Source: Yahoo Finance (2013). Qatar National Bank National Leasing Holding Stock performance of National Leasing Housing can be analyzed using the company’s ratio reports of May 2014. The ratio of earnings per share (ignoring extraordinary items) is 1.76, the revenues per share is valued at 5.74 (Arabian Business, 2014). The company’s Common Equity (book value) per share is valued at 26.21, and cash per share is 14.06. 52-Week Low performance of National Leasing Holding is 27.6, 52-Week high is 40, price to earnings ratio stands at 17.74, price to sales as 5.44, and price to book ratio as 1.19. The basic stock performance chart of National Leasing Holding (5-year range) Source: Arabian Business (2014). Qatar Oman Investment Company From the annual reports of the company in addition to data collected from online sources, the revenue (ttm) of QOIC is 23.43 million and its market cap stands at 456.75 million. The company’s PEG ration is valued at 0.81, a value that is below the financial industry average of 3.52. In other words, the stock value or price has been undervalued. This is with respect to the expected performance of stock. The PEG ratio projection is expected to hit 0.56 in its 5-year stock performance projection. It is evident that this value is still below the average stock performance of the entire finance industry. Book to price ratio is also underpriced compare to the expected average of the market. 52-Week low value of 87.21 and 52-Week high of 100.9 proves that the changes in stock performance is a high indication of the elevated risks in the stock. Islamic Holdings Group The company reported a stock price of 16.6 at the close of May 20, 2014 trading day. Compared to the industries performance, the stock was categorized under industry losers. IHG’s 52-Week high of 17.04 and 52-Week Low of 11.54 indicates that there are high chances of improved stock performance in the next few years. The net profit between 2013 and 2012 is 32% compared to the period between 2012 and 2011 with 15%. Market cap of the company is 75.76M. This value falls within the industries average, thus an indication of a good stock choice to invest. Dlala Holding Dlala Holding’s stock price at the close of May 20, 2014 was 15.8. The stock performance was good considering that the industry performance was below Dlala’s reports. The company’s 52-Week high was 21.09 and the low was 13.4. This report implies that the stock performance will be maintained because oil prices and exchange rates have already picked up. Between 2012 and 2013, net profits increased by 12%. Dlala’s market cap was 101.8M. This value is more than the industry average. Dlala Holdings: Daily changes of stock price Source: Arabian Business-Dlala Brokerage and Investment Holding References Internal Monetary Fund. (2013). Middle East, North Africa, Afghanistan, and Pakistan: Growth Hinges on Improvements in oil production and confidence. Retrieved May 19, 2014 from https://www.imf.org/external/pubs/ft/weo/2013/02/pdf/c2.pdf Index Mandi. (2013). World economy: Overview. Retrieved May 19, 2014 from http://www.indexmundi.com/world/economy_overview.html Yahoo! Finance. (2014). QNB Corp. (QNBC): Balance sheet. Retrieved May 19, 2014, from https://ca.finance.yahoo.com/q/bs?s=QNBC&annual Zawya. (2014). Global Islamic Finance. Retrieved May 19, 2014, from http://www.zawya.com/islamic-finance/#companies2 Heritage. (2013). 2014 Index of Economic Freedom: Qatar. Retrieved May 20, 2014 from http://www.heritage.org/index/pdf/2014/countries/qatar.pdf Read More