Comparative Analysis of Stock and Bond Markets: UK, USA, Australia

This report provides a comparative analysis of the stock and bond markets of the United Kingdom, the United States of America, and Australia. It begins by highlighting the significance of the stock market as a key financial instrument and asset class, emphasizing the inherent risks involved. The report delves into a detailed examination of the equity and bond market returns of the three countries, aiming to offer insights into their respective stock market situations and investor interests. The main body of the report compares the equity and bond market returns of the three countries. It discusses factors influencing stock market growth, such as economic prospects, government policies, and the rate of GDP growth. The report highlights the USA as the largest stock market, followed by the UK and Australia, and compares their respective market caps and historical returns. The report also analyzes the bond markets, discussing their importance for government financing and investor security, and compares the returns offered by the bond markets of the three countries. The conclusion summarizes the findings, emphasizing the importance of various factors for a thriving stock market and the different rates of return offered by developed countries.

Comparison of Stock
Markets

Contents
Contents...........................................................................................................................................2
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Comparison of Equity and Bond market returns of UK, USA and Australia........................1
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Stock Market is a very important concept in the field of finance; it is one of the most used
financial instruments. It is regarded as a asset class which consist of risk and thus the proportion
of money that is being invested in other asset classes, the same proportion does not come into
equity markets. The current report will going to have a detailed discussion on the overall returns
that has been generated by the equity as well as bond markets of 3 countries that is Australia, UK
and USA (Fifka, 2013). This will help in getting a better view of the situation of stock markets in
these countries and the interests of investors within the stock market can be effectively laid down
through this presentation.
MAIN BODY
Comparison of Equity and Bond market returns of UK, USA and Australia
Stock Markets
Equity market of any nation is basically the mirror of economic situation of a country. If
the economic prospects as well as the policies of a country are quite good, then it will result into
a higher and effective stock market that will lead to better growth as well as development of the
whole financial instruments market like bond market as well as the insurance market that
prevails within the boundaries of a nation. Stock market is usually considered as a bit risky asset
class as compared to any other asset class like commodities or real estate, this is because the
money that is invested in equity is basically invested in businesses and thus the rate of return in
equity is like return in any other business, which fluctuates with time. Thus, what is essential is
to make sure that effective financial literacy program is conducted by developed countries like
Australia, UK and USA in their respective countries in order to increase the penetration of
domestic savings within the stock market (Yunus, Hansz and Kennedy, 2012).
The rate with which each stock market grows varies a lot on the basis of various factors
like the growth rate of the country of which the stock market represents. The rate of profits that
the businesses are making in the country and how the same is going to be reflected in their
quarterly as well as annual earrings plays a very crucial part in the overall growth and the
development of the nation as well as the stock markets of that particular country. USA is the
biggest Stock market in the world with an approximate Market cap of around 20 Trillion$, after
that it’s the Stock market of UK which is having a market cap of around 6.2 Trillion$ and thus
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these are the two important stock markets in the global stock exchanges that can shape the nature
as well as the behaviour of stock markets of different countries. Australian Stock Exchange is the
14th Largest Stock exchange in the world with the market cap of 1.4 Trillion$. Thus there is a
wide gap in terms of the size of stock exchange between UK, USA and Australia. The rate of
return that these stock markets varies a lot depending upon the earnings of business and the rate
of GDP growth that is prevailing within the country. If the rate of GDP is high, it will result in
higher earning of business which would translate in higher EPS for the firms thus greater level of
profits will be reflected in the balance sheets that eventually lead to higher stock market PE and
growth then follows in the business (Hoesli and Reka, 2013). Any Government of a nation would
want that its stock market shall prosper, because it is evident from past history that a falling stock
market or a stock market with negative return has lead to causes of downfall of various
governments in the world. Thus proper strategy with efficient regulations can lead to better
return from stock market for investors and higher savings can be channelized within the same in
a very efficient manner.
If we will go through the rate of returns that are being offered by USA, UK and
Australian Stock markets, we will came to know that most return is being generated by the stock
market of South Africa which showed a CAGR Growth rate of more than 7%, while Australian
Stock market has shown a growth rate of 7% in 117 years from 190 to 2017. USA stock Market
was on 3rd position with a rate of return of around 6.5% CAGR in 117 Years and UK stock
market has given a modest return of around 5.8% in the same period. Thus, it is quite clear that
the Australian Stock market has outperformed the other global equity markets over a longer
period of time that is more than 100 years. Thus, it can be treated as safe haven for the global
investors and the track record of this country in ensuring higher level of returns for its
shareholders is quite good (Sornette, 2017).
Hence, It can be concluded from the above analysis of the returns generated by the stock
markets that Australian stock market has outperformed the stock markets of UK and USA and
thus it is essential to mention that the return offered by Australian stock market was 7% and the
other markets has a level of return ranging from 5.5% to 6.5%.. This growth in Australian stock
market was primarily due to the changes in policy of Australian government to invest heavily in
the infrastructure of the country and promoting business growth and over all development that
has translated into business growth as well as earnings which lead to higher level of stock market
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returns over period of time. USA, despite being one of the biggest country and having all the
resources in place, it faces various issues related to debt and lower saving thus leads to
recessionary phases. These recessionary phases though impacted the global markets including
the markets of Australia. But the Australian markets have been able to give a fair return to its
investors majorly due to its stable policies of government to invest in the country’s core
infrastructure and businesses (Loh, 2013).
Bond Markets
Bond Market is one of the most important markets for a particular nation. It is the market
through which even a nation’s government raises money to meet its needs related to investment
and public expenditure. Thus a government cannot afford to have a subdued Bond market that
will not attract investors. Bond market offers security to investors as the bond that are being
issued are usually by the top rated companies or by the government and municipal commission
themselves, hence these are some of the trustworthy institutions on which a common investor
can show faith and expect a return as well as the repayment of the principal amount on time,
without any risk being there. A bond market usually going to attract more capital as compared to
equity market because general people consider it as the safe haven and big mutual funds have
their compulsion to maintain a level of return for their investors and thus they try to hedge their
risky portfolios by investing heavily into government bonds as well as bills in an effective
manner over period of time.
If a proper analysis is done about the rate of return that is being given by the bond
markets of various countries, then it is quite evitable that US Bond Market has give a growth rate
of around 2% in the period of 117 Years from 1900 to 2017. While UK Bond Market has shown
a growth rate of just short than 2% while Australian Bond market fell back to only 1.8% during
the same period. Thus, it can be categorically said that in terms of offering a higher level of
return through secured instruments, US Bond markets outperform the other Bond markets over
period of time (Min and Hwang, 2012).
This shall also be kept in mind that unlike to the earnings of businesses the growth of
Bond market is clearly dependent on the economical situation of the country and the level of
stability that is being offered by the country. The USA Bonds have been rated A+ by the top
Rated agencies like Moody’s and S&P. While the Bonds of UK and Australia has not been
considered to have this kind of qualities thus they attract less capital and leads to a lower growth
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rate. There is a inverse relationship in the prices of Bonds and rate of interest that is being
offered by the bond. Thus if the prices are higher the rate of interest will be low and if the prices
are lower that rate of interest is going to be high.
Be it Bond Markets or Stock Markets it run on three major factors, these includes
Liquidity, Fundamental and Sentiments. Liquidity refers to the funds and capital that is going to
be attracted by these markets and which will be lead to higher returns, second is Fundamentals
that means if the fundamental or the structural strength is there in the economy or financial
health of a nation then their stock or bond markets will eventually going to flourish. The third
and the important factor is sentiments (Mun and Brooks, 2012). If the sentiments of investor is
hurt either through actions of the government or through the bad economic situation of the
nation, then it can lead to a decline in the flow of funds and they will be risk averse, thus a steep
reduction in the rate of return can also take place. Thus it is quite important to take care of all
these factors in an efficient manner so that a proper as well as smooth functioning of both bond
and stock markets can take place in the longer run (Rapach, Strauss and Zhou, 2013).
CONCLUSION
Thus, from the above discussion it can be said that the ultimate aim of any nation is a
prospering and nourishing stock market, where adequate return on investment is offered. But in
order to get the same various factors have to be considered in an efficient manner. The rate of
return that is offered by developed countries like Australia, USA and UK are quite different. The
leader being Australia in equity markets growth with a growth of around 7% and in Bond
Market, The leader being USA with a return of around 2%.
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REFERENCES
Books and Journals
Fifka, M.S., 2013. Corporate responsibility reporting and its determinants in comparative
perspective–a review of the empirical literature and a meta‐analysis. Business strategy
and the environment. 22(1). pp.1-35.
Hoesli, M. and Reka, K., 2013. Volatility spillovers, comovements and contagion in securitized
real estate markets. The Journal of Real Estate Finance and Economics. 47(1). pp.1-35.
Loh, L., 2013. Co-movement of Asia-Pacific with European and US stock market returns: A
cross-time-frequency analysis. Research in International Business and Finance. 29.
pp.1-13.
Min, H.G. and Hwang, Y.S., 2012. Dynamic correlation analysis of US financial crisis and
contagion: evidence from four OECD countries. Applied Financial Economics. 22(24).
pp.2063-2074.
Mun, M. and Brooks, R., 2012. The roles of news and volatility in stock market correlations
during the global financial crisis. Emerging Markets Review. 13(1). pp.1-7.
Rapach, D.E., Strauss, J.K. and Zhou, G., 2013. International stock return predictability: what is
the role of the United States?. The Journal of Finance. 68(4). pp.1633-1662.
Sornette, D., 2017. Why stock markets crash: critical events in complex financial systems.
Princeton University Press.
Yunus, N., Hansz, J.A. and Kennedy, P.J., 2012. Dynamic interactions between private and
public real estate markets: Some international evidence. The Journal of Real Estate
Finance and Economics. 45(4). pp.1021-1040.
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