Principal of Financial Management: Macquarie Group Share Analysis

This report provides a comprehensive analysis of Macquarie Group Ltd (MQG:AU) shares, examining macroeconomic and industry factors influencing share prices. It delves into firm-specific factors affecting performance, historical and expected returns, and the company's five-year trend. The report assesses share price volatility, explains diversification, explores alternative asset classes, and highlights the significance of the beta coefficient. It investigates the impact of interest rate cuts, US-China trade tensions, Brexit, and the Australian housing market on the company's shares. The analysis includes dividend trends, stability, and future payout projections. The report also addresses the company's exposure to various risks and the importance of risk management policies. This financial analysis is a detailed overview of the factors affecting the company's financial performance and share value.

Principal of Financial
Management

TABLE OF CONTENTS
TABLE OF CONTENTS................................................................................................................2
INTRODUTION..............................................................................................................................1
MAIN BODY..................................................................................................................................1
1.Macro-economic and industry factors and risk associated with shares....................................1
2. Firm specific factor and risk in relation to the performance of the shares..............................2
3. Historical and expected return from the shares of the company.............................................4
4. Past 5-year trend of the company............................................................................................7
5. Volatility of the share prices of the Macquarie Group ltd indicating the high low prices of
the share over the five year..........................................................................................................8
6. Explaining the concept of diversification to Aunty.................................................................9
7. Investment in other class of assets.........................................................................................11
8. Measuring the volatility of the shares using beta coefficient................................................13
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................15

INTRODUTION
Investing in shares refers to buying and managing the them for a while with the purpose of
making money. There are two ways of earning money form the shares of the company are- if the
company grows and becomes valuable which increases the worth of its share and investment and
if the shares pays the part of the company’s profits every year in terms of dividend.In this report,
Macquarie Group Ltd is taken as an ASX listed company with the share name of MQG:AU. It
offers banking and financial advisory services along with fund management services. This report,
presents about the macro economic factors along with the industry factors that affects the share
price and the risk associated with it. Analyzing the factors affecting the return based on the past
year data. It also covers the concept of diversification, alternative asset classes and the
significance of beta coefficient in the share market.
MAIN BODY
1.Macro-economic and industry factors and risk associated with shares
Macro-economic and industry factors
In the last few months, the Australian Stock market has experienced highs and lows
because of the global trade tensions along the variation in the Australian economy such as
decline in the property prices, interest rate cuts, miraculous win of Coalition government etc. A
detailed description about the factors affecting the country and industry are given below.
Interest rate cut by RBA
Apart from the trade war between US and China, the unfavorable outcome of the
economic indicators has taken the downturn (Kolios, 2020). In the situation of weak inflation and
the rising unemployment rates, the Reserve Bank of Australia (RBA) has announced an interest
rate cut by slashing the official rate by 25 basis points making the new record low of 1.25%. it
was taken to support employment growth and the progress towards inflation targets. This
decision ahs affected the rate of mortgage loan and other interest rate because of the current
situation faced by the Australian economy.
US-China trade battle
The war between US-China has created fluctuations in the Australian stock market. This
trade concerns stared after threats to raise the tariffs on the Chinese goods to 25 per cent because
of which Chinese government has also announced retaliation tariffs on the goods of US worth of
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US$60 billion. The conflict between the two countries have raised the concern globally from the
growth prospects.
Brexit Effect on Australia
The exit of Britain from the European Union has also raised the big problem for the
Australian companies as well, which are having a good relation and strong connection with the
UK capital market along with the European find market (Macro And Micro Factors Driving
Australian Stock Market. 2019).This has caused the concern for the growth prospects of such
companies as they are earning significant amount from the UK and Europe.
Australian Housing Market
In the past few months, the Australian Housing Market has seen a continuous fall in its
prices along with the number of dwelling approvals.The building approvals has fell to 4.7 per
cent and the house prices has dropped to 0.4 per cent in April and May 2019 respectively. Under
such situation, the Australian Prudential Regulation Authority (APRA)has presented a proposal
for removing 7% floor in mortgage serviceability assessments, giving benefits to the new home
loan buyers.
Risk associated with shares of Macquarie Group Ltd
The company is exposed to variety to risk rising out of the financial services and all these
risks is managed as per the risk management policies and procedures. The shares price of the
company is associated with the global credit and equity market especially in the US and Europe
and the operation of the business is dependent upon these markets directly or indirectly. It
includes exposure to the securities, loans and other activities and any uncertainty in the global
credit market such as increased funding cost, fall in the equity and capital market which ahs an
impact over the transaction flow of the in various industry sectors will have an adverse impact on
the financial performance of the company leading to increase the risk in the share price.
2. Firm specific factor and risk in relation to the performance of the shares
The firm specific factors that can affect the performance of the shares are stated below.
Business and financial condition
The business and financial condition of the Macquarie Group Ltd has a huge influence
over the performance of the shares of the company. The continuing adverse effect associated
with the credit and equity market conditions may affect the ability of the company to meet its
liquidity requirements which affects its international capital market and may also lead to increase
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in the cost of funding.The liquidity of the company may be impaired to access the secured and
unsecured debt market, inability to sell it assets which may arise because of the circumstances
that is not under the control of the company, for instance, market disruptionas it can occur
suddenly. Also, the ability of the company to sell its assets may be affected of the other market
participants seeks to sell out their assets similar to the company at the same time.
Insufficient sources of funding
In the situation where the current sources of funding is not sufficient, may force the
Macquarie Group Ltd to look for other alternative sources of fundingwhich may result into
selling the liquid securities of the company or any other assets (Dilshani, Praveeni and
Fernando,2019). Also, the availability of the alternative financing will depend upon the number
of factors such as existing market conditions, availability of the credit, and the credit capacity of
the business. These sources of financing can be expensive and might include the unfavorable
terms. All these factors will slow down the growth rate of the company and reducing the term
assets and increasing the cost of financing and eventually leading to reduce the profitability of
the business.
Certain restrictions on the Macquarie Group Ltd
The Macquarie Group Ltd is a holding company and has many subsidiary companies
which includes broker-dealer, bank and insurance companies including MBLand are subject to
laws that may restricts the payment of dividend or may authorize regulatory bodies to reduce the
flow of funds from the various subsidiaries of the Macquarie Group Ltd. Any such restrictive
action may impede the access of the financial resources that the company might need to make
payment of its debt obligations or the dividend payment.
Failure of third parties to honor the commitments
The Macquarie Group Ltd is exposed to the potential risk factor associated with the credit
related losses that may arise because of the counterparty or an individual failure to honor its
contractual obligations. Like every other financial service company, this company has also
assumed the risk of counterparty risk in relation to the lending, trading and other activities which
is dependent upon the third party to satisfy it obligationwithin the time frame. This credit
exposure depends upon the different factors like the financial condition of the third party, worth
of property held as security, market value of the third party instruments. The credit losses have
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resulted in significant risk of loss for the financial services companies and also in some cases
failing all together.
3. Historical and expected return from the shares of the company
The historical data about the return on shares in the form of dividend that is distributed by
the company to its shareholders in the past 5 years are stated below.
(So
urce: https://www.asx.com.au/asx/share-price-research/company/MQG/statistics/shares)
The above chart states that there has been an increase in the dividend from the year 2016
to 2019. In the year 2016, it was 4.30 which then increased to 4.85 in 2017 to 5.35 in 2018 and
6.10 in 2019. But in the year 2020, there is a significant drop in the dividend which drastically
falls to 1.80 because of the fall in the global market condition.
Dividend Yield vs market
The below graph represents the comparison between the current dividend yield with the
market and the industry as a whole.It can be seen that the Macquarie Group’s current dividend is
higher than the bottom 25% of the dividend payers in the entire Australian market which
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accounts for 2.7%. But on the other hand, it can be identified that the company’s dividend is
lower in comparison to the top 25% of the dividend payers which accounts to 7.18% in the
Australian market. Also, it is forecasted that in the next three years it will rise to 5.3%.
(Sources:https://simplywall.st/stocks/au/diversified-financials/asx-mqg/macquarie-group-
shares#dividend)
Stability and Growth of Payments
This graph depicts the dividend payment trend in with respect to past few years along
with the future expected return on investment to the shareholders. The Macquarie Group’s
dividend payments have been very volatile in the past 10 yearsbut it has shown an increasing
trend in the past 10 years. Based on the analysis, it is expected that the 2023, the dividend yield
will be 6.2%/year and the dividend per share will be AU$6.314/year.
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(Sources:https://simplywall.st/stocks/au/diversified-financials/asx-mqg/macquarie-group-
shares#dividend)
Current payout to shareholders
This chat shows that dividend coverage of the company. With the reasonable payout ratio
of 54.4%, the Macquarie Group’s dividend payment is completely covered by earnings.
(Sources:https://simplywall.st/stocks/au/diversified-financials/asx-mqg/macquarie-group-
shares#dividend)
Future payout to shareholders
It is estimated that the future dividends of the company in the next three years will be
covered by its earnings with a payout ratio of 70.9%.
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(Sources:https://simplywall.st/stocks/au/diversified-financials/asx-mqg/macquarie-group-
shares#dividend)
4. Past 5-year trend of the company
The chart below indicates that the share price of the company over the past 5 years.It can
be clearly seen that the share price has been very volatile over the period of last three months. In
terms of 7 day return, it is -2.3% in MQG, -0.3% in AU capital market and 2.4% in AU market
while in 1 year return, it is -15% in MQC, -9.6% in AU capital market and-15% in AU market.
This shows that the Macquarie Grouphas underperformed the AU capital market industry as it
has returned -9.5% over the past year. But in comparison to the market, it has matched with the
Australian market which has returned -15% over the previous year. In 5 years term, the return is
25.5%, 33.6% in Australian capital market and -7.5% in Australian market.
(Source: https://www.macquarie.com/au/en/investors.html)
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5. Volatility of the share prices of the Macquarie Group ltd indicating the high low prices of the
share over the five year.
Price volatility refers to the measure that how the market has been that is quiet or wild
relating to the history. Volatility is generally measured in terms of the price changes that are
expressed in terms of logarithmic form but could be expressed also in the percentage change in
the prices. It also refers to uncertainty or the risk related to size of the changes in security values.
When the volatility of the security is higher, it is spread over larger range of the values.
From the above chart of the share prices of the Macquarie it could is seen that the share
prices of the company are highly volatile. Over the period of 5 years it is seen that the share
prices have seen movement from 80 in 2015 June to 105 in 2019. Company price have shown
major fluctuations in the year June 2015. This requires the company to ensure that the business is
having influence if several external factors (Paradi, Sherman and Tam, 2018). The downward
slope in the year is seen due to the slow economic growth. The impact of economic factors was
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seen in most of the industries that year. However company using appropriate corporate strategies
restructures the strategies for increasing the growth of the business. After June the volatility of
the prices has shown fell to very low. The prices of the shares have shown constant growth due
to the excellent performance of the company during the year till 2018. A steep decline was seen
in the share price from the June. The asset’s prices are showing large prices swings from the year
2018.
The assets could not be said as highly risky as the volatility is not shown in the short run.
But over the years it has shown volatility in the pricing. The assets were highly volatile during
the June 20-18 to June 2019. During this period assets of the company could be seen as highly
riskier. Investments made during this phase have seen significant risks. However after this phase
it has significant growth till January 2019. Company reached its peak price in February 2020 to
146. After that constant growth it showed a very significant fall to 96 in just 2 months in April.
The volatility was highest in year 2020 as compared with the whole period of 5 years. The assets
of the considering the volatility of last year is highly risky. Companies with high risk are also
expected to give more returns. Investors tend to invest in the companies that have high returns.
Companies with high returns have risks associated with them (Macquarie Group, 2019). The
volume graph shows that volume of the shares has not fallen with same phase as that of the
prices. this shows that the company is highly volatile.
6. Explaining the concept of diversification to Aunty.
Diversification refers to the risk management strategy which mixes wide variety of
investment within the portfolio. Diversified portfolio consists of mix of the distinct assets and
types of investment vehicle in attempt for limiting the exposure to single assets or the risk.
Rationale behind technique is of constructing a portfolio of different kinds of the assets that on
average will be yielding high long term return and lower risk of the individual holdings or
security. Diversification strives to smoothen unsystematic risk events in portfolio, so positive
performance neutralizes negative performance of the others (Bansal and Chhikara, 2016).
Benefits of the diversification only holds good when the securities in the portfolio are not
correlated perfectly. This means they will be responding differently on opposing ways for
making the market influences. There are various researches that have shown the diversified
portfolio of around 20 -30 securities yield are most cost effective levels of risk reduction.
Investment in securities generate further benefits from diversification drastically at the smaller
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rate. Funds and investors managers diversify the portfolios in various classes of assets and
determining the percentage of portfolio for allocation of the each asset class. There are different
classes of assets that are included in the portfolio. Stocks in which equity or shares are traded
publicly of a company, bonds of the government or fixed rate debt instruments, real estate land
buildings, agriculture, livestock and mineral deposits, exchange traded funds, commodities that
are goods essential for production of other goods and services and cash and short term cash
equivalents like treasury bills money market vehicles, treasury bills and low risk investment.
Diversification among these classes of assets helps the investors in neutralizing the risks.
Aunty in diversification along with the company securities of Macquarie could also invest in
other classes of assets. This will help in mitigating the risks associated with the company. assets
having lower risks are selected for meeting the risks of volatile securities (Hossnofsky and
Junge, 2019). Portfolio also depends over the extent of risks Aunty is ready to accept in the
funds. Portfolio and diversification is made on that basis. This helps to hedge against the market
volatility and offers high long term returns with lower risks.
Aunty can make diversified investment portfolio using the Swensen Model.
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It is the most successful portfolio that is used by the investors for getting higher returns
over their investments and eliminating the risks to the minimum. Investors using this model are
generating annualised return of around where it is very difficult to cross the return rate of even
12 by majority of the portfolio managers. The model states the investors to invest 1 % there and
1% here. Aunty using the single security will not be able to generate the required rate of returns.
Investment in Macquarie will be generating higher returns as this is the top trending investments
securities over ASX at the same time it is highly volatile therefore Aunty is required to hedge the
risk associated with the securities by investing in other diversified assets. This portfolio will be
providing with higher return over longer time period.
7. Investment in other class of assets
Macquarie is the global financial service business that has core focus over the
international investment banking. It is the largest investment bank in Australia and is Australian
success story with strong track of the profitability over last decades. Company has continued
growing the revenues and net profits which strongly where the cost income ratio is declining
steadily over the recent year. it is one of the most preferably used stock for the income and
growth.
Aunty could invest in Real estate funds. The return over the real estate property funds has
been adequate over the past year. They show the least volatility as compared with other classes
of assets. Below chart represents gap in different assets relative to the historic trends. Below
graph represents that the bank deposits and shares have seen high fluctuation with higher risks.
The real estate investment will be providing returns over the investment at constant rate with
least fluctuation (Kiseleva and et.al., 2018). The risks are least and because of this returns are
also not high. Aunty could make 20% of the investments in real estate funds for lower risks.
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In commodities market will be giving adequate returns with more risks and higher
returns. Commodities market is highly used by the portfolio managers for generating higher
returns. Commodities market is highly influenced with the market forces. Commodity market
investments include gold, silver other securities like livestock, agriculture products. The
commodity market is highly risks averse. Therefore around 15% of the investment should be
made in commodity market. For mitigating the risks associated with the commodity market she
is required to invest further in fixed income assets.
A portion of investment should be made in government bonds and inflation protected
treasury securities. These classes of assets provide fixed rate of returns regardless of the market
influences and forces. Investment in risk free securities will be providing fixed rate of return to
Aunty and this will be mitigating the risks associated with other highly volatile securities
(Timmer, 2018). These investments are generally made for hedging the risk associated with the
securities.
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Aunty could also invest in international securities of strongly established and developed
securities. Investment in such securities is also less risky and provides fixed returns to the
investors. This will enable the Aunty to have adequate portfolio with international securities.
These are the securities that maximise the wealth of the shareholders over long term with
constant rate of return. Investment in such securities should be around 10%.
The diversified mix of the securities provides the investors with adequate rate of return
over the long term. These classes of assets will eliminate the risk associated with the volatile
securities by investing the portion of investment in lower risk assets and risk free government
bonds. Investing in risk free securities is made for hedging the risks associated with the
securities.
8. Measuring the volatility of the shares using beta coefficient.
Beta is used for measuring the systematic risks and volatility of the securities or portfolio in
the comparison of market as whole. Beta coefficient is used for measuring the volatility of
individual risks associated with the security in comparison with the unsystematic risks of entire
market. Beta in statistical term represents slope of line through regression of the data points from
individual risk return against the market.
Beta of market is always 1 where the beta of Macquarie is 1.27 that represents that change
of 1% will make 1.27% of change in the share price of company. Higher the beta higher the
influence of the market forces (Macquarie Group, 2019). Where the market return is expected to
fall by 10% in coming years this means that there will be fluctuations equivalent to 12.7. This
means the return over the securities will be falling by 12.7%. This shows that the securities are
highly volatile and market influence will have impact over the returns of securities.
CONCLUSION
The above study summarises that the securities and portfolio management is to be
planned adequately for having adequate returns. Aunty can make investments in Macquarie as it
is a trending security with significant returns in comparison with other securities. It is also
essential for the investors for getting higher returns at constant rate at lower to invest in
diversified portfolio.
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REFERENCES
Books and Journals
Paradi, J.C., Sherman, H.D. and Tam, F.K., 2018. Securities Market Applications: Stock Market
Valuation of Securities and Financial Services–Insights with DEA. In Data Envelopment
Analysis in the Financial Services Industry (pp. 233-257). Springer, Cham.
Bansal, S. and Chhikara, K.S., 2016. Investors’ Perception on Risky Nature of Indian Secondary
securities Market.
Hossnofsky, V. and Junge, S., 2019. Does the market reward digitalization efforts? Evidence
from securities analysts’ investment recommendations. Journal of Business
Economics. 89(8-9). pp.965-994.
Kiseleva, I.A. and et.al., 2018. Market for corporate securities and building the CALM portfolio
model. International Journal of Engineering and Technology (UAE). 7(3.14).pp.450-454.
Timmer, Y., 2018. Cyclical investment behavior across financial institutions. Journal of
Financial Economics.129(2).pp.268-286.
Kolios, B., 2020. Australian household debt and the macroeconomic environment. Journal of
Economic Studies.
Dilshani, A.K.D.N., Praveeni, S.M.N. and Fernando, J.A.A.N., 2019, October. FACTORS
AFFECTING ON OPERATIONAL EFFICIENCY. In VAVUNIYA CAMPUS
INTERNATIONAL RESEARCH SYMPOSIUM-2019 (VCIRS-2019) (p. 45).
Online
Macquarie Group. 2019. [Online]. Available through : <
https://www.asx.com.au/prices/charting/?
code=MQG&compareCode=&chartType=line&priceMovingAverage1=&priceMovingAverage2
=&volumeIndicator=Bar&volumeMovingAverage=&timeframe=Daily>.
Macquarie Group. 2019. [Online]. Available through : < https://www.asx.com.au/asx/share-
price-research/company/MQG>.
Macro And Micro Factors Driving Australian Stock Market. 2019. [Online]. Available Through:
<https://kalkinemedia.com/au/blog/macro-and-micro-factors-driving-australian-stock-market>.
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