Introduction to Investments

Learning Outcomes Real assets Vs Financial assets Global levels of financial assets Players, Banks, mutual funds, hedge funds…. Role of Financial Analysts Retail Investors Recent Market History (US).

Real Assets Vs Financial Assets Real assets are tangible assets which are used to create value Examples: Land, buildings, equipments, human capital, art, antiques etc Their value fluctuates depending on demand and supply – Value increases if growing population increases the demand for the scarce resources Financial assets are legal claims on future financial benefits created by underlying real assets Examples: Shares, Bonds, Derivatives etc A share in a stock derives its value from its claim on the uncertain financial benefits created by some real asset Bond certificates are a piece of paper which are used by Government/corporates to raise money and they assure the holder of periodic payment / discount at the time of issue or both

Stock of Global Financial Assets Source: Deutsche Bank Research- The Random Walk: Mapping the World’s Financial Market 2015 dated 11 February 2015

Equity Market Capitalisation by Region and Exchanges (USD billion) Source: World Federation of Exchanges

Banks, Commercial and Investment Players Banks, Commercial and Investment Mutual funds and Hedge Funds Insurance Companies Sovereign Wealth Funds Venture Capital and Private Equity

Global Pool of Funds- 2013 Estimates Source: Deutsche Bank Research- The Random Walk: Mapping the World’s Financial Market 2015 dated 11 February 2015

Financial Analysts Individuals typically knowledgeable about areas such as retail, pharmaceutical, airlines, defence Mostly sell side, their efforts are geared towards making individual investors purchase stocks Issues research reports and make recommendations Analyses are a complex amalgam of financial reports, press releases, an assessment of the strength of the company’s relationships with supplier, with product markets They tend to have some expertise (work experience, technical knowhow, access) in the industries of their specialization Their rankings range for strong-buy, buy, hold, sell, strong-sell although other gradation is now common place They generate orders for the sales force in the investment banking companies who employ them, guide institutional clients, listen to pitches from investor relations (hence sell-side)

Financial Analysts – How good are they? Every major institutional firm has retail analysts, entertainment analyst and such In the US, a magazine called Institutional Investor rates the quality of each sector analyst on the strength of their past recommendations, with the successful ones being rated “star” analysts’ who are essentially the go-to people for that sector Still there are conflict of interest issues, since the sell-siders work for the same people who have other interests –investment bankers, brokerage division etc In the late 1990’s, Regulation Fair Disclosure was mandated by the SEC requiring financial analysts to disclose all information simultaneously to all investors

Retail Investors Trading in developed (and even emerging) markets has become institutional Implies large research/technology resources and a fiduciary responsibility In emerging markets, both regulators and exchange heads bemoan lack of retail participation Is there room for retail investors to play Individuals care about absolute performance Institutional money tends to be fully invested, but individuals can choose to sit out periods of market turmoil. This begs the question of whether attempting to ”time” markets is even a worthwhile exercise. Mutual fund performance around the globe has been less than stellar, with most being unable to “beat the market” consistently over periods of time. Therefore, why not become the market? Much of financial analyst research focuses on a subset of stocks. Even in the US, over 50% of publicly listed don’t have national analyst coverage. Are these hidden gems or the devil’s playground!