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Investment Analysis And Portfolio Management

Good Essays

MA930 Investment Analysis and Portfolio Management
December 2014 Assessment

a) Summary of assumptions on the outlook for the UK economy and government policy.

• GDP is forecasted to be between 3.0%-4.0% in 2015. This is supported by the revision of the GDP in 2014 from 2.5% to 3.0% by Office for Budget Responsibility(OBR) in the Autumn Statement. (Office for Budget Responsibility, 2014). This is also supported by the reduction in unemployment rate by 7.2% in the fourth quarter which would increase consumption. (Office for Budget Responsibility, 2014).
Inflation is expected to rise to between 2.0%-3.0% in 2015. This is supported by the outlook made by PWC in which it assumes increase in domestic demand for goods and services as well as …show more content…

The nominal interest rate is expected to rise higher than 0.5%.
• The other factor that needs to be considered is the global environment. UK is the fastest growing country in terms of economy in the G7. (BBC News, 2014). Therefore, many investors will be attracted to invest in the UK and demand for bonds would increase.

Graph 1

Source: Bloomberg Terminal Computer
• Based on Graph 1, the yield curve is expected to rise faster than the current yield curve. This is supported by the answer in a) where interest rate will rise in June 2015. The economy is expected to grow which will spur the interest rate up and there will be an upward shift in 2015 and to steepen somewhere at the end of 2017.
• In times of rising interest rates, short term yield is expected to be higher. In order to be protected against rise in interest rates, it is preferred to invest in short term duration bonds. This is to avoid the interest rate risk that will affect the price of the bond.
• If the fund is invested in a long term bond, the bond will have a risk of the price being discounted deeply (Investopedia, n.d.).

c) Credit Spreads and whether corporate bonds or government bonds will generate higher returns. Graph 2

Source: Bloomberg Terminal Computer

• Based on the answer in a), UK’s economy is forecasted to grow in 2015 onwards. During growth in an economy, the credit spread between gilts and corporate bonds will tighten because companies will perform better in a

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