13.4.1 INVESTMENT AND PORTFOLIO MANAGEMENT

13.4 ELECTIVES:13.4.1 INVESTMENT AND PORTFOLIO MANAGEMENT[100]Read the following discussion by Ernst & Young (April 2009) and answer the required questions.Africa has not escaped the impact of the sub-prime crisis entirely. Although the crisis origins lie in the USA, it has spread rapidly across the globe, hurting European and then Asian companies along the way. Whilst few African financial service companies have had direct exposure to the crisis, the secondary impacts are all too clear. First, and most crucially, GDP growth is declining (South Africa’s GDP in fact contracted in the last quarter of 2008).Secondly, the major currencies of southern, eastern and western major African countries (South Africa, Kenya and Nigeria) experienced rapid depreciation, as foreigners sought to repatriate funds to their home countries, and collapsing demand for the continent’s mining and manufacturing goods followed. The South African rand depreciated 40% against the US $ in 2008.In addition, the effect of the global liquidity crunch was also felt across the continent through reduced credit availability. Many infrastructure projects were placed on hold, given the unavailability of finance, and the cost of raising that finance. Again, foreign banks became far more risk averse than they were in the recent past, and were not keenly providing funds for (perceived) riskier emerging market countries. Infrastructure projects which were viable with high and rising commodity prices were no longer attractive, and hence many have been shelved, either for lack of funding, or due to the reduced economic rationale.For all the above reasons, the impact of the crisis was by no means over in 2009. South African financial services companies reported record low confidence levels in the first quarter of 2009, with expectations that profits and revenue will continue slowing through 2009.Whilst interest rate cuts may provide some relief, there is no strong evidence that corporates or individuals are taking up credit again. In South Africa, for example, credit growth between January 2008 and 2009 slowed from 28% to 13.2%. Bad debts continued to grow in the 1st quarter, and growing unemployment may yet prove to keep the trend of impaired debts to total advances growing for the foreseeable future.Having said that, South African banks were by no means as bad as their peer global banks. Most major global banks have reported hefty losses since the middle of July 2008. South African banks, by contrast, were reporting lower profits than they were prior to the beginning of the sub-prime crisis, but profits remained positive.1. With reference to the above discussion, discuss the effects of the US sub-prime mortgage crisis on the financial risk management practice of banks in the first world economies, and the impact of the crisis on the operations of South African financial institutions specifically. Your discussion should explain causes of the sub-prime crisis, describe various financial risks observed during the crisis and explain how these risks were affected to affect South African banks (1200 words maximum for this section). (25)2. Gather the financial statements of one bank of your choice (from the big four banks in South Africa namely, ABSA group, FirstRand bank, Nedbank and Standard bank) and use ratios to analyse the liquidity, profitability, financial leverage and market value of your selected bank for the period of 2007 to 2011. (16)3. Gather daily or monthly closing prices of your selected bank and the JSE All Share Index for the period of January 2007 to December 2011. Using technical analysis describe the movement of share prices for your selected bank against the JSE All Share Index, providing well-reasoned explanations for your findings. You may use a spreadsheet to assist in constructing tables, graphs and generating descriptive statistics. (14)4. Based on your analysis of the historical performance (ratios and technical analyses) explain how the sub-prime crisis affected the South African banking system. (10)5. Examine the fundamental factors of your selected bank. On the basis of this fundamental analysis and other methods of share valuation, determine if your selected bank is overvalued or undervalued. You should conduct a top-down analysis of global economic indicators, domestic economic indicators, industry factors and company’s specific factors. You should use this analysis to calculate the intrinsic value of your selected bank. Refer to the relevant chapters of Macroeconomic and Industry Analysis and Equity Valuationof the prescribed text book by Bodie, Kane and Marcus (2010). (25)