Analysis of Australian Financial Market

The paper highlights the development of the Australian financial system and the Australian stock market. It covers market sectors, market regulators, types of markets, types of financial institutions, sources of financial service and financial information available for investors in Australia, and more.

ANALYSIS OF AUSTRALIAN FINANCIAL MARKET

Table of Contents
ABSTRACT....................................................................................................................................3
INTRODUCTION...........................................................................................................................4
2.1. Analysis of Australian financial market structure................................................................4
Market sectors..............................................................................................................................4
Market regulators.........................................................................................................................4
Types of markets..........................................................................................................................5
Types of Financial Institution......................................................................................................6
2.2. Identifying the sources of financial service and financial information available for investors
in Australia.......................................................................................................................................6
2.3 Analysis of popular tools of capital budgeting (investment criteria) for Australian firms........8
2.4. Analysis of the Australian Bond market...................................................................................8
2.5. Analysis of Australian Share market........................................................................................9
2.6. Identifying and recommending of a potential industry for financial investment.....................9
2.7 conclusion................................................................................................................................10
References......................................................................................................................................11
ABSTRACT
The paper highlights the development of the Australian financial system and the Australian stock
market. A range of influences in the financial sector development and the various regulation
2

policies that have been put in place, the markets that exist within the financial system that are
critical ,the stock markets reforms that have been employed and as a result of the reforms the
stock market in Australia has developed. The effect in net has been a transformation in the
Financial system in Australia from a relatively closed, the early structures were oligopolistic in
nature and were based predominantly on the bank intermediation traditionally and a more open
and system that is competitive that also offers a much wider variety of different services from
different providers. This evolution system of financial system, that is well driven largely moved
by forces that exist in the market and through assistance of prevailing regulations and
supervision arrangements
INTRODUCTION
Just like any other industrial countries in the world, Australia has for a long time experienced
major changes to its system of finance in the recent decades. The effect in net has been a
3

transformation in the Financial system in Australia from a relatively closed, the early structures
were oligopolistic in nature and were based predominantly on the bank intermediation
traditionally and a more open and system that is competitive that also offers a much wider
variety of different services from different providers. This evolution system of financial system,
that is well driven largely moved by forces that exist in the market and through assistance of
prevailing regulations and supervision arrangements.
After the global crisis of 2007 and 2008, the senate commission of Australia was formed to
instigate an inquiry to the financial system it seeked to ensure that financial solidity and
feasibility of the system in banking sector and by 2015 the regulators remained concerned
regarding misconduct problems in the banking system.
According to RBA (2017), they pursued to exhibit the obtainable information on the race in the
banking segment and various progresses have been discussed in the key market highlighted. The
banks support several many key issues including the status of customers and able to apply viable
pressure on financial organizations.
2.1. Analysis of Australian financial market structure
Market sectors
There are several existing markets sectors and players in the Australian market that is composed
of the Capital market and the Financial markets.
The Australian market has a very advanced financial service segment and is perfectly placed as
a midpoint for the Asia-Pacific services sector and is ideally positioned well. This has been
verified by profound and liquid financial market and area control in investment administration as
well as areas of funding infrastructure and organized products. The markets are highly developed
and a major center for the capital markets. The financial industry is categorized in a number of
sectors, asset-based finance, funds management, hedge funds, insurance, investment banking,
private banking , private equity amongst others.
Market regulators
Australian financial systems employ a market prudential regulation measure. The present system
of financial regulation dates bank in 1996 once the Government of Australia established the
financial system inquiry.
a. Housing market measures
This market measure is adopted by the APRA (Australian Prudential Regulation Authority) and
has since been supported by CFR (Council of Financial Regulators) in the financial year 2014
and fiscal year 2017, the two bodies suggestions were detrimental to the competition ( PC ,2018).
The banks always are supporting the measures. APRA is primarily a agency tasked with a
supervisory role and the principal aim is to guarantee that the financial possibilities made by
firms are met with efficient, steady and viable financial markets. Like all regulators there are
challenges that are faced with the regulators in keeping up the rapidly evolving and ever
increasing complex financial service sector, and to add to it incase of a corporate failure or
collapse it often involves an element of fraud and thus makes it hard to be detected prior to the
inevitable occurrence (APRA, 2018)
4

Another regulator is Australian Securities and Investment Commission (ASIC) , an Australian
commercial market regulator that is tasked with a role to regulate 1.5M establishments , 4,415
financial services firms and fifteen financial markets. The regulator pursues to certify that
Australia Capital and financial service markets are transparent, fair and always should be
supported by confident and well-informed customers and potential investors. The regulator also
assess and complies reports on how functional the authorized financial markets are including the
ASX, and ensuring that they are in compliance with their legal obligations for conduct and carry
their business fairly and in an orderly manner and ensure there is transparency in the markets,
and be able to share the same information to the relevant authorities in the finance ministry about
any possible changes in the financial markets. They issue and monitor financial services to
guarantee that they function proficiently and equally. (ASIC, 2017)
The Reserve Bank of Australia. (RBA ) is another major regulator presently has three aims,
stability financially, maintain minimum inflation and an effective payments system but two tools
work for the monetary policy and expenditures system regulations and supervision. Its fiscal
steadiness and objectives on inflation presently clash: gushes in house lending and prices of
houses have taken monetary policy captive. Ever-changing the RBA’s duty for financial
steadiness to the CFR and the CFR defining macroprudential policies and actions on a basis that
is pre-emptive allows the policies in monetary hand to focus on inflation (RBA, 2017),.
Another Australian Competition and Consumer Commission (ACCC) , this is another regulator
within the financial sector , the important role the regulator plays is ensuring there is vertical
integration of the dominant banks from riskier trading businesses , they ensure that they protect
public interest.(
Types of markets
The Australian markets cover forex market, debt and equities, together with their derivatives.
The forex market has grown over the decades as a result of a few factors that have contributed to
it, the deregulation that allowed the floating of rates of exchange was a major factor. The market
has continued to establish itself and expand.
The debt market is a market that has both the for short-range securities and the long-standing
debt markets that are dominated with the government bonds among others. Generally, the
markets are small.
The derivatives market are the markets where both the OTC and exchange traded are the active
markets traded here.
5

Types of Financial Institution
In Australia there exist several financial institutions and they are categorized in different
categories, authorized deposit taking institutions. ADI is an organisation granted with
responsibility by Australian Prudential Regulation Authority (APRA) to convey on the corporate
activities in the Australian banking system. The key types of ADIs are Commercial Banks, credit
union, Building societies etc. All this ADIs are accredited and controlled through the APRA and
controlled as businesses by the ASIC.
Banks can be further classified into major groups, key banks, local banks, overseas subsidiary
banks and overseas banks. Building societies and credit unions are ADIS regularly are possessed
by their associates that are in offer traditional retail banking services like savings. (ASIC, 2017).
Another group for ADIs that doesn’t suit within the key groupings that include payment clearing
services (APRA, 2017).
Institutional banking and commercial lending.
They offer product and facilities for big firms for instance compound financial products and
advisory responsibilities for corporates and administration clients who may need investment
products, looking at the Australian commercial borrowing made up around 33% of whole
borrowing through commercial banks, lending commercially has over time reduced to 49% of
the entire borrowing by the banks. This is a consequence of the increase in the government debt
stocks, and as a result of lending to persons the percentages also have increased.
2.2. Identifying the sources of financial service and financial information available for
investors in Australia
the investor would like to invest in shares, bonds and derivative securities in Australia:
Looking at the Australian market the stock securities exchange market has make provision for
quotes of bonds in the market mentioned on a stocks exchange, such as ASX, the investors can
recover their venture by trading that bond to one more investor at the present market price. The
availability of financial information the Australian market is critical to the investors who chose
to invest in Australia, there over the past have been rising agreement from business and politics
on the enlarged corporate transparency and disclosure on number of aspects in extra financial
concern. Investors and various analyst have different preference for where they source financial
and any additional information. In the market there are a variety of types of bonds quoted on
ASX. classified largely into the type of interest they pay They are splitted into categories based
on the issuer (government or corporate).
The return on investment on a bond replicates its interest payoffs and somewhat gains or losses
in its charge from all-purpose interest rate activities. The law, the possible for investment gains
or investment losses on bonds lean towards to be lesser equated with additional riskier venture
bonds are the most popular investment. For specific reasons, unlike equities, bonds commonly
offer superior inevitability as to their revenue brook and return of wealth. For the pensioners and
others who want a foreseeable spring of proceeds, a bond’s regular interest income and primary
refunds at prime life provide a reassuring level of safety.
6

Which financial institutions should they approach to open accounts and place their order
for buying and selling that securities?
The potential investors can approach companies like Patersons Securities, Hartleys and Ord
Minnett, they offer guaranteed complete services to the stockbroker that help the investor in
providing services and advices on what shares to buy or sell.
Is there any limitation on foreign investment in Australian securities market?
The Australian Government welcome the foreign investment, which is considered as a great
contributor the economic growth of the GDP of the country. The FDIs are encouraged as they
bring a lot of key benefits, like creation of jobs, it further encourages innovation and new launch
of new technologies. The Australian government doesn’t limit FDIs but ensures that the interests
of the nation is protected, by full compliance of the law and maintain high standards of conduct.
How do foreign investors pay tax on their income from investment on Australian securities
The foreign investment has a review framework that is established by the legislative framework
and is supported, there is a investment board that reviews the foreign investment decisions and
the body advices and examines, the FIRB is further supported by the treasury and the Australian
Tax Office that is responsible for the taxation framework.
If the investor would like to obtain information such as historical and current share, bond
and derivative prices, which websites or organizations provide that kind of information?
The ASX operates Australia’s largest share market, offering a clear and controlled atmosphere
where corporations and investors of all forms and dimensions can come together. Their website
offers the best possible insight to an investor about the 2200 listed companies that are cross listed
in the main share market.
How the investor can obtain financial statements for their analysis of a firm financial
performance
The ASX that operates the stock market ensure its public policy of full disclosure of financial
information is followed to the later and all that pertains to investors need for information is
catered for. The financial of all the listed companies is provided for and thus the investor will not
have to toil a lot to have the information needed.
What kind of financial statements are available for investors and what information they
can exploit from each kind of financial statement for evaluating firm financial investment?
Consolidated financial reports for the company are provided for by the ASX portal that will
enable the investor to exploit the information they need and more so the investors are interested
in the statement of financial position to know how profitable the firm is and be able to know if
the company that they wish to invest in has been paying dividend to the shareholders and what
are the policies of this companies on the dividend payout.
7

2.3 Analysis of popular tools of capital budgeting (investment criteria) for Australian firms
Capital budgeting is a crucial subject in corporate finance, from past eras major expansions in
theory is in the capital budgeting that have since been merged into the commercial practices.
A survey in Australia shows that the DCF method is one of the investment criteria chosen and is
well documented, it is a widespread method for the capital budgeting pronouncements in some of
the companies that are public. Also, the thumb rule is also used among also the WACC being
another investment criterion used as a rebate rate and the CAPM which are the widespread
method used in estimation of equity cost. The capital budgeting practices are approaches used to
make evaluation and selection of a venture project. According to Verbeeten (2006) this will be
used to help project managers to select projects with high profits and acceptable risks. Both NPV
and IRR are constant with the maximizing goal of wealth and firm value. While also using the
DCF method adjustments must be made to reflect the time value of money, also the cost of
capital is a key constraint in the computation. Further according to Peterson and Fabozzi (2002)
they well-known that the evaluation procedure ought reflect the future cash incremental and the
time value of money. According to (Brijlal and Quesada 2009) recommended that many
industries should avoid the use of solitary capital procedure of budgeting but also consider and
apply as numerous approaches as possible for a investment assessment.
According (Truong G., Partington & Peat M. 2006) they charted Australian companies that show
real choices procedures have added a foothold in Australian capital budgeting procedures.
investments usually are assessed by means of NPV, but the corporations are expected to use
other likely procedures like the Pay Back Period. The investment cash flow forecasts are made
from a period of 3 to 10 years into the future. The investment cash flow will be reduced at the
WACC as calculated by the corporation, and most industries use the similar discount rate across
partitions. The degree of markdown will be presumed fixed for the lifetime of the venture. The
WACC is founded on measures of target for obligation and capital. Capital Asset Pricing Model
is used in approximating the cost of capital, with the Treasury-bond used as a representation for
the risk-free rate, the beta approximation attained from communal bases, and the market risk
finest will be in the range of 6% to 8%. Other asset model for pricing other than the Capital
Asset Pricing Model is not used to estimate capital cost.
2.4. Analysis of the Australian Bond market
The bond market in Australia deals with unlike groups of financial instruments that comprise of
securities supported by mortgages, OTC bonds, and stocks that are outstanding. The
consequences of financial crisis that rocked the globe resulted in the rise of bonds issued by
corporates markets in Australia since of the credit crisis underwent by many organizations
(Black et al. 2016).
According to (Gyntelberg & Upper 2013) the markets for government bonds have occurred for a
long period as those bonds that are less risky as the prospect of defaults is fringe. The faster rise
in the commercial events lengthways and the upsurge in general risks heights led to
uncomplimentary rates of borrowing by commercial banks and organizations of finance.
Furthermore, the government of Australia required reduced significant number of lending due to
8

unimportant budget shortfall in the market for bonds issued corporations undergoing
development. Commercial establishments unplanned prospects in the market to issue bonds
straight to its stakeholders in a direction to handle the negative rates of borrowing in the banks.
According to (Gozzi, Levine & Schmukler 2012) financial mediators encompass of around 15%
of participants in the bond market. Besides, bonds issued by government the Private venture
financial institutions are the major investors since they ponder the inequalities in the interest
rates level charged in case of bonds with that of commercial borrowing rates interests and makes
revenue from the rate variances. According to (Van Luu, & Yu 2012) commonwealth securities
are stocks that possess the major bond dealings of in the Australian Markets. These set of stocks
have high investment rating and they fall in the bond market partakers due to capability to
recompense arrears over fluctuating tax rates.
According to (Sousa, R. M, 2015) commonwealth fixed coupon bonds, the refund normally
happens at the conclusion of maturity period. The holders of the bond collect coupons on a
semiannual base while the transaction is steered based on yield. The average period of maturity
of the bonds is between 11 to 13 years. The Government Bonds are dispensed by Central
Borrowing Authority (CBA) who acts on behalf of government and regional administrations
regarding gathering and settlement of government funded securities.
According to (Heath & Manning ,2012) various periods of bond maturity that resemble that of
Commonwealth Government Securities (CGS) although the risk of defaulting is more than what
is involved in a CGS.
Furthermore, according to (Shim 2012) the corporate Bonds: are the remaining sums that vary
extensively amongst the commercial dynasties due to integral industry sizes and significance of
procedure and expansionary expenses necessitated through the corporation
2.5. Analysis of Australian Share market
What is the name of listed stock market in Australia, how is it operated, how many shares
are traded in the market place at the present?
The Australian stock market is listed to operate in the Australian share market. The stock market
is owned and operated by the Australian Securities Exchange (ASX) Limited. The stock market
facilitates selling and buying of shares from Australian and international listed companies. The
Australian stock market has a market capitalization value of $1.9 trillion. The market
capitalization arises from share market values of over 2,000 listed companies operating in the
market (Roth, 2019).
What is the oldest share index in Australia, what does it measures, how many listed
stocks are there in the index at the present, and how the index is calculated?
The ASX is the oldest share index in Australia with 2,200 listed stock. The index launched 2000
as ASX 200. The index is made up of 200 largest listed companies in the Australian stock
market. The index is dominated by ten largest companies which control approximately 44
percent index. The largest companies come from the banking sector. The company stock has to
9

meet three conditions to be included in the ASX 200 index. First, the stock should be listed as
either preferred or ordinary stock in the ASX. Secondly, liquidity requirements must be met. And
thirdly, the company’s float-adjusted market capitalization should be among ASX 200 (Roth,
2019).
What is market capitalization of a listed company, how is it computed?
Market capitalization is described as the total value of a company’s share and examines a
company’s worth based on its share value in the stock market. Market cap is used by investors to
establish an entity’s size in the market. Market cap is calculated by multiplying the number of
outstanding shares by the cost per share (Roth, 2019).
Go to ASIC website and obtain three years historical movement graph of that index
Three years of historical movement graph of the ASX 200 index. Source: ASIC website.
Comment on the trend, do a research and identify the factors that may explain the trend
The movement of the Australian stock market has been fluctuating an increasing trend. The
following trend can be noted during the three year period.
a) The market values were $4.99 billion at the beginning of 2016.
b) The market values were $5.78 billion and $6.06 billion at the beginning and end of 2017,
respectively.
c) The market values were $ 6.12 billion and $5.65 billion at the beginning and end of 2018,
respectively.
d) The market values were $5.62 billion and $6.74 billion at the beginning and October of
2016, respectively.
The movement in the stock market were likely caused by market information, economic factors,
and supply and demand-supply factor. Investors rely on information to decide whether to invest
10

in a given share or not. Positive information increases investors’ confidence while negative news
makes investors withdraw their investment. Investors are speculative and irrational decision-
makers in nature. Where there is information that is likely to affect the market negatively,
investors would be forced to sell their current stock to avoid losses. As a result, the share price
would go down. On the other hand, a speculated positive news would make investors buy more
stock to take advantage of future gains. Subsequently, the price of shares would increase (Roth,
2019).
Economic factors such as a change in tax regulation and interest rates also cause positive or
negative movement of stock price. For example, an increase in tax and interest rate reduces the
amount invested in the stock market hence causing a decrease in share price. Share price
movement is caused by the difference between supply and demand. The higher the difference,
the higher the movement of the stock price. Consider a company with a 20% positive earnings
which further anticipated to increase by 4% in the next year. The number of investors who seek
to buy the company’s stock would increase leading to higher demand. An increase in demand
would cause and positive movement of the share price. On the other hand, a demand for share of
a company with a negative earnings would reduce. The supply of the shares would remain
constant with the decrease of demand leading to negative movement of share price (Market
Index, 2019).
2.6. Identifying and recommending a potential industry for financial investment
The market capitalization of the financial industry
The Australian financial sector is among the largest contributors to the economy. The industry
contributed over $ 140 billion to the national economy in 2018. The financial industry has a
market capitalization of 6,499.9 billion as of September 30 2019.
Historical data of stock market price for Australian financial industry
The graph presents the movement of the stock market price for the Australian financial sector
for a period of three years 2017- 2019. Source: ASIC (2019).
11

Financial performance analysis of the financial industry
The profit after tax of the Australian financial industry increased by 6.4% in 2018 compared to
2017. The industry realized profit amidst slow economic growth, increased capital costs and
strict regulations from the royal commission of Australia. The industry’s return on equity (ROE)
was 13.9 % which was a result of increased capital level. The capital ratio increased by 46 points
in 2018 to 10.3 %. Lastly, the industry’s net interest income increased by 1.7% in 2018
(Australian Government, 2019).
The financial analysis shows a positive performance in the industry. The Australian financial
industry is profitable and competitive. Strong regulations increase transparency in the industry.
Favorable economic factors are expected to strengthen the industry’s financial performance in
future. The industry is ranked as a better performer among the G7 economies (Capital.com,
2019). Therefore, Australian financial industry shows prospect for good financial performance in
the future.
2.7 conclusion
The developments in the financial markets have come in through financial regulation; the
policies created have helped to improve the Australian Market and further improve on the
financial services offered. The general shift is viewed as a general shift in nature of the
technological aspect of production. A separation has since been created in the production basic
lines. There is also a general improved level of development with respect to competition between
non-financial and financial firms.
12

References
AFMA ,2012. Australian Financial Markets Report. The Australian Financial Markets
Association.
AFMA, 2011. Australian Financial Markets Report. The Australian Financial Markets
Association.
Aldamen, H., & Duncan, K., 2013. Pricing of innate and discretionary accruals in Australian
debt. Accounting & Finance, 53(1), 31-53.
APRA (Australian Prudential Regulation Authority),2018, ‘Revisions to the capital framework
and the leverage ratio requirement for ADIs - February 2018’. Available at
<http://www.apra.gov.au/adi/PrudentialFramework/Pages/revisions-capital-framework-
andleverage-ratio-Feb-2018.aspx>.
Australian Government, 2019. The strength of Australia’s financial sector, Sydney: The
Treasury.
ASIC (Australian Securities and Investments Commission) ,2017, ‘Review of mortgage broker
remuneration’. Available at <http://download.asic.gov.au/media/4213629/rep516-published-163-
2017-1.pdf>.
Black, S., Kirkwood, J., Williams, T., & Rai, A., 2013. A history of Australian corporate bonds.
Australian Economic History Review, 53(3), 292-317.
Brijlal, P. & Quesada, L. ,2009. The Use of Capital Budgeting Procedures in Businesses: A
Perspective from The Western Cape, The Journal of Applied Business Research, 25(4):37-46
Capital.com, 2019. Australian stock market outlook 2019: why invest in Australia?. [Online]
Available at: https://capital.com/australian-stock-market-outlook-2019-why-invest-in-australia
[Accessed 1 October 2019].
Gozzi, J. C., Levine, R., & Schmukler, S. L.,2012. How firms use domestic and international
corporate bond markets (No. w17763). National Bureau of Economic Research.
Gyntelberg, J., & Upper, C.,2013. The OTC interest rate derivatives market in 2013. BIS
Quarterly Review, December.
Heath, A., & Manning, M.,2012. Financial regulation and Australian dollar liquid assets. RBA
Bulletin, 43-52.
Market Index, 2019. Analysis of Australian share market. [Online]
Available at: https://www.marketindex.com.au/
[Accessed 2019].
PC (Productivity Commission) ,2018, ‘Competition in the Australian Financial System Draft
Report’. Available at
<http://www.pc.gov.au/inquiries/current/financial-system/draft/financialsystem-draft.pdf>.
Peterson, P.P. & Fabozzi, F.J.,2002. Capital budgeting: theory and practice. Canada: John
Wiley and sons.
13

RBA (Reserve Bank of Australia),2017, ‘Competition in the Australian Financial System:
Submission to the Productivity Commission Inquiry’. Available at
<https://www.rba.gov.au/publications/submissions/financial-sector/competition-in-thefinancial-
system/submission-to-productivity-commission-september-2017.pdf>.
Roth, M., 2019. Top Stocks 2019: A Sharebuyer's Guide to Leading Australian Companies,
Sydney: John Wiley & Sons.
Shim, I.,2012. Development of Asia-Pacific corporate bond and securitisation markets.
Sousa, R. M.,2015. Linking wealth and labour income with stock returns and government bond
yields. The European Journal of Finance, 21(10-11), 806-825.
Truong G., Partington and Peat M.,2006, “Cost of Capital Estimation and Capital Budgeting
practice in Australia,”.
Van Luu, B., & Yu, P. ,2012. Momentum in Government-Bond Markets (Digest Summary).
Journal of Fixed Income, 22(2), 72-79.
Verbeeten, F.H.M.,2006. Do organizations adopt sophisticated capital budgeting practices to
deal with uncertainty in the investment decision? A research notes. Management Accounting
Research, 17:106-120.
Yartey, C.A. and Adjasi, CK. 2007. Stock Market Development in Sub-Saharan Africa: Critical
Issues and Challenges. IMF Working Paper 07/209. International Monetary Fund, Washington
DC.
14