The World Economic Situation

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First of all, this report is based on the world economic situation of the last few years and development prospects of the next five years, then according to the Kaplan capital’s charitable fund to make the analysis of investment area.

Global economic situation analysis:

Since 2008 a serious financial crisis broke out, and then European sovereign debt crisis, Global economy in late 2011 highlighted the downward trend. According to the latest International Monetary Fund (IMF) forecast, the 2012 global economic growth rate is 4.0%, the value reduced by 0.5% than its previous forecast. Released by the United Nations in 2012, the World Economic Situation and Prospects Report predict that the global growth rate of GDP will grow by 2.6% in 2012, lower than that 2.8% in 2011. The IMF has also expected the growth rate of GDP of advanced economics would be 2.6% while emerging and developing economics would be 6.5%. Once the debt crisis in Europe is deepened or spreads to the United States and Japan or other developed economics which will also be involved. United States and other developed economics which have close relations with Europe, on one hand, vulnerable to the involvement of debt crisis; on the other hand faced with internal challenges. They need to overcome political obstacles.

Investment environment:

As the portfolio of Kaplan capital includes UK and international securities, we need analysis the investment environment in selected markets.

In the paragraph we can predict that the UK GDP annual growth rate would range from 1.2%-2.5% in the next five years. The UK taxes corporations 28% on profit over 1.5 million GBP. Small companies are taxed at 21% for profits up to 300,000 GBP and margin tax relief is granted on profits from 300,001-1,500,000 GBP, A special rate of 20 percent is given to unit trusts and open-ended investment companies. (R)However, due to the sovereign debt crisis, the UK market is volatile. The problems include weak consumer and business confidence, tight credit conditions, rising unemployment and high cost of living. In addition, the Euro area countries generally strictly enforced fiscal austerity caused by debt crisis which resulting in increased risk of overall economic recession. The IMF expects the GDP of Euro zone will fall about 1% to1.5% in this quarter. Nevertheless, Germany’s GDP is relatively stable, and also has good development prospect. The US expects GDP growth rate ranging from 1.9% to 3%. US budget speculated that the fiscal deficit will drop from 8.7% of last year’ GDP to 7.1% of this year’s. And also continued to decline over the next five years. But the employment pressure would be a continuous problem. Finally, the GDP growth rate of emerging and development is much higher than the developed economies. In these continued growth countries such as China and India, the market is relatively stable.

The goal of Kaplan Captial fund is to achieve a stable return from the series investment areas. As of 1st January 2012, we holds £30.5 million of assets. In consideration of the global macroeconomic analysis and risks in next five years, we assume our goal is to achieve 8% growth rate of our total assets. So our total assets will increased to £41.50 million by the end of 2016.

Strategy: Passive or Active?

In my opinion, as our fund is a fund which provides an investment vehicle for educational purposes and therefore our fund is a charitable fund. Our fund currently invest in UK and international securities. What's more, short-term instruments as well. We hold a weel diversified portfolio with the intention of achieving stable returns rather than more risky profits. So generally speaking, we need use passive investing strategy. And each asset classes need different strategy which will be defined in the analysis of TAA.

Analysis: 'Top-Down' Approach:

Assets classes:

Firstly, our mainly return is from UK equities, overseas equities, UK corporate bonds,UK government bonds and short-term instruments. These formed the investment portfolio of our fund.

Strategic asset allocation(SAA):

As we can see , as of 1st January 2012, we holds £30.5 million assets. It currently includes 30% in UK equities, 15% in overseas equities, 20% in UK corporate bonds, 25% in UK government bonds and 10% in cash and short-term instruments. From June 2012, it forecasts that fund withdrawals will exceed fund inflows by 6% annual for next five years. So the proportions of asset classes we suggest as follows:

First, in order to ensure assets liquidity, we need to increase the reserve requirement. So it should be appropriate to increase the investment proportion in cash and short-term instruments. A reasonable allocation in my view is 15%.

Second, . As the global economic relatively weak, the equities prices are at low level and in the view of the recent world stock market outlook is optimism. We can increase the proportion in the equity market from 45% previous investment to 50% in order to obtain a little more profits. Based on the analysis of FTSE 100, S&P 500, Chinese Shanghai Composite Index and so on. The equity return of local currency :UK is 9.15%, and US is 14.93%, China is 12.29% and Germany is 28.8%, but other countries of the Euro area and Japan is relatively lower. Although the risk of equity is relatively high than bonds, it's also accompanied with higher income. It can be seen in the above data, on one hand,the domestic stock market performance is relatively poor. On the other hand, the oversea equities market, particularly emerging market and developing countries. The development prospects of oversea equities market is considerable. So our investment in domestic stock market should reduced to about 15% and about 35% growth in the overseas stock markets.

Third, as investment-grade bond may face more unfavorable factors, on one hand, because of the spread narrowed; on the other hand, the performance of such bonds by the influence of bond yields. So we reduce the investment in bonds market to 35%. Generally speaking ,the structure of the bond market, mainly consist of government bond(Gilts) and financial institution bonds, mainly the smaller proportion of corporate bond. UK government bonds relative risk is still relatively small.Corporate bonds are traded on the stock market, just like shares. This means the price of a corporate bond fluctuates between the issue date and the redemption date .The UK government bonds return is about 15%.The British central bank governor said inflation is likely to have fallen sharply in the next six months. And because the European debt crisis and the Bank of England further quantitative easing policy, government bonds are more attractive. So the proportion of UK government bonds would be increased to 25% while the investment in UK corporate bond will be decreased to 10%.


As the fund may face 5% net outflows.Our goal is 8% growth rate. So the fund may need about 12% annual returns to achieve our goal.

Tactical asset allocation(TAA):

First, UK equites market:

Invest in stocks market have certain risks, along with higher risk and higher return. That means the investment need higher costs and necessary to achieve outstanding. London is the world-class financial center, so for the domestic market, the fast and accuracy of the information is a great advantage. So in this assets class we need 'active' strategy.

And in stock selection pick mispriced stocks that do better in return terms than the stocks in the benchmark portfolio. We also need buy and sell stocks at the right time so that they are bought at a lower than average price and sold at a higher price. We can use CAPM to analysis the relationship between price and return.

In the UK equities market, the investment prospects of the emerging energy like oil and gas are very optimal. The top winner in the British equity market is Falkland oil& gas. Our portfolio also can be integrated into general retail , such as Tesco PLC or Vodafone which growth rate is 2.29%.

Second, oversea equities market:

As mentioned, we invest 35% of total assets into oversea equities which means we will invest £10.675million. So we must manage it carefully. This is the biggest part of our fund. So it can't be face high risk. And because of different currency and different areas, the information delate and the exchange rate risk make it difficult for beating market. So 'passive' strategy might be adopted.

Due to sovereign debt crisis euro zone market is very weak. So we focus on emerging market. What's more, the Asia-Europe trade was a major position in the global economic system.

As government bonds have lower risk, so 'passive' strategy should be used. The bonds can ignore the price change or market uncertain until the duration date. The Bank of England interest rate stay at 0.5%. government bonds of our portfolio should include 1-Year government bonds,TSY I/L 8MO 2.5 Inflation-Linked 16 Aug 2013 5-Year government bonds,8-Year government bondsTSY I/L 8MO 2.5 Inflation-Linked 16 Apr 2020 Rg, 15-Year government bonds and 20-Year government bonds.

Choosing a corporate bond fund is relatively tricky. Your choice of actively-managed funds is limited to open-ended funds, although a change in the Budget allowing investment trusts to invest tax-efficiently in bonds has paved the way for the development of corporate bond investment trusts from September 2009(R). Based on the market date, we choose four corporate bonds into our portfolio.Ge 5.25 10 Dec 2013 MTN, Centrica 5.875 02 Nov 2012, Entinn 6.5 06 Dec 2018, Llydtsb 6.5 17 Sep 2040 MTN.


Due to the investment environment and global economic changes, the proportion of our asset portfolio should make a corresponding change to make our fund have a stable return for our committees. By the influence of Euro sovereign debt crisis, the economic situation of Euro-zone highlight a downward trend. So we have to transfer funds to emerging markets and developing countries. And considering the weak performance of UK economic my result in weak corporate performance, we mainly invest in UK government bonds (Gilts). Our goal is to make stable return for our committees, and this portfolio is well desertification. So it has lower risk and stable return.

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