Investment Analysis Using Reuters Financial Database Finance Essay - Free Essay Example

Standard Chartered PLC is the merging of The Standard Bank of British South Africa and the Chartered Bank of India, Australia and China at 1969. The company headquarter is in London, England and the branches are operating all over the world (Standard Chartered Bank, 2010). They main business strategy is focus on Consumer banking, Wholesale banking, SME banking, Islamic banking and Private banking. Other than that, Standard Chartered is approaching 3 main principal in their business model that are participate in growing market, positioning as a global leader and effective costs and risks control (Standard Chartered Bank, 2010). Standard Chartered also listed on London, Hong Kong and Mumbai stock exchanges market and it also part of FTSE 100 Index. Standard Chartered tends to come out with large capital for the further expansion to Europe, Asia and Africa. At 2000, Standard Chartered is successful to acquire ANZ Grindlays and it help to enter the market in India and Pakistan. As a result, it brings the huge profit for the companies and strengthens their market position (Yahoo Finance, 2010). Technical Analysis Dow Theory is a type of technical analysis that assumes the stock market movements are rise or fall together and economic trend can be predicted (Copsey, 1999). Dow and Hamilton stated that there are three types of price movements for the Dow Theory: primary movements, secondary movements and daily fluctuations. Primary moves can be indentifying from a few months to several years and it can determine the trend of the market. The primary upward trend market is representing the bull market and downward trend is representing the bear market. Secondary movements are move in opposite direction of the primary trend from a few weeks to a few months. Therefore, the secondary trend movement are regularly more volatile than those of the primary move. Daily fluctuations always go with or against the primary trend and within a few hours to a few days, but not exceed a week (Stock Charts, 2010). Figure 1: Bull Trend from 2003 to 2007 In figure 1, Standard Chartered is on the upward trend during 2003 to 2007. The upward trend price can form a series of rising peaks and rising troughs. Therefore, STAN.L is in bull trend because the price is moves according to the support line. It doesnt move straight upward but has some corrections along the way. Figure 2: Bear Trend from 2008 to 2009 In figure 2, Standard Chartered is on the downward trend during 2008 to 2009 when a bear trend starts at the end of a bull trend. The downward trend price can form a series of declining peaks and declining troughs. Hence, STAN.L is in bear trend because the price is moves according to the resistant line. In a bear market, it is not moving straight downward because secondary movement create rallies in that period. When a rally ends with a bottom low, it shows the end of the bear trend and the rise of the bull trend. In 2010, the red support line is showing the bull trend after 2009 and it might continue for at least few years before the bear trend start. Elliott Wave Theory Elliott Wave theory is a type of technical analysis that uses to predict the market trends and the price patterns. Elliott believed that stock markets follow repetitive cycles because it reflected the investor psychology (Beckman, 1976). Therefore, market cycles are dividing to two separate type of wave: impulsive wave and corrective wave. An impulse wave will contain 5 elements while corrective wave contain 3 elements. The impulse waves are following the direction of the trend for example up in a bull market and down in a bear market, the corrective waves are always move against the trend (Arotec, 2010). Figure 3: Elliot Wave on STAN.L C A B 5 4 3 2 1 In figure 3, the impulse wave for Standard Chartered is follows a bull trend. The graph show that the three waves in the direction of the upward trend (1, 3, and 5) and wave 5 is the end of the bull market because it already achieves the new highest price. After that, the share price fall drastically during 2008 and corrective wave is begin to show the bear trend (A and B). But the wave A seems to be the bottom of the bear trend and wave B continued to rise after 2009 and achieve the new peak compare to wave 5. So, the wave C will fall that predict STAN.L price will drop in the future. Support and Resistance Support and Resistance is a form of technical analysis that driven by the greed and fear forces. In other words, it represents the demand and supply theory. The price of the stocks will move down when the supply increase and the price will move up when the demand increase. In trending market, bull cycle occurs when demand increase and bear cycle occurs when supply increase. Therefore, non-trending market occurs when supply and demand are the same. A support level act as a floor to support the price to going further down and a resistance level act as a ceiling to support the price to going further up (Martinez, 2007). Figure 4: Support and Resistance Line from 2006 to 2008 In figure 4, the trend channel had been draw from 2005 to 2008 to show the Standard Chartered share price is oscillates between the support and resistance lines. The support line has been tested 5 times without being broken but at 2008 the breakout occurred and the share price fell below the support level. So, the bull trend end and the bear trend start. At the end of 2008, the share price drops to the bottom and oscillates between the second support and resistance lines. The share price had moved sideways during 2008 to 2009 and the resistance line has been tested 3 times without broken but at middle of 2009 the breakout occurred. Therefore, the share price rises against the resistance line and achieves the new peak. Chart Patterns Investment analysts always look for the patterns to indicate the direction of the market. There are two major types of patterns that are reversal patterns and continuation patterns. Reversal patterns provide an indication that the market is turning in its primary trend and continuation patterns provide an indication that the market is going continue in the same direction (Dawson and Steeley, 2003). Head and Shoulders (Reversal Patterns) The head and shoulders pattern is a most famous reversal patterns in technical analysis. It is always happened from uptrends to downtrends (bullish to bearish). This pattern includes three successive peaks with the left shoulder, a head, and a right shoulder and a line drawn as the neckline (Osier and Chang, 1995). Figure 5: Head and Shoulders Pattern from 2007 to 2008 Neckline Left Shoulder Right Shoulder Head In figure 5, the left shoulder form at middle of 2007 and marks the high point of the Standard Chartered price of the bull trend. Investors who bought the shares fear that the price has risen too high and might fall. So, they sell STAN.L shares to prevent the profit turn to loss. Bargain hunters soon return to the market and eventually push the price through to new highs that form a head patterns. However, the new highs are quickly turned back and price falling again to the neckline. The advance from the low of the forms the right shoulder because bargain hunters will buy the shares and the market rallies once more, but fails to achieve the previous peak because of the fear. STAN.L shares price fall after it breakout from the neckline at 1290p at middle of 2008. Figure 6: Volume for Head and Shoulders Pattern In figure 6, volume has a greater significance in the head and shoulders pattern. The higher price on the left shoulder will reflect the high volume as it shows on figure 6. However, the volume during the head is less than the volume during the left shoulder. The decreases in volume along with new highs that form the head serve as a warning sign. Bargain hunters are not aggressive then before that can be show on the volume. On the last rallying, volume on right shoulder increase and signalling that the buyers may have exhausted themselves. Standard Chartered share price break the neckline and the pattern is complete. STAN.L share price is falling and the bear market start. Head and Shoulder Bottom or Head and Shoulder Top? Neckline Right Shoulder Head Left Shoulder Neckline Right Shoulder Head Left ShoulderFor the year 2011, the graphs show us that there are 2 possibilities of the head and shoulder top or bottom trend will occur in this graph. Therefore, it depend on the bargain hunters whether they will enter the market to take advantage of profit taking or investors will sell the shares because it reach another peak for Standard Chartered share price. Flag and Pennant (Continuation Patterns) The flag and pennant pattern is a most familiar continuation patterns in technical analysis. There are consolidation patterns and happen after some sharp movement in the price. It only acts in short-term period during the bull or bear markets (Kirkpatrick and Dahlquist, 2007). Figure 7: Flag and Pennant Pattern at Q2 2009 FlagpolegpoleIn figure 7, Standard Chartered share price had a sharp increase and the volume increase drastically in 2009. Then, a pennant appears within 12 weeks after a sharp increase in price and volume. Bargain hunters are not willing to bid up the stock and shareholder enter the market to sell their shares to earn the profit. The flagpole occurs from the sharp advance break a trend line. The form of flags and pennants require a sharp advance or decline on heavy volume. According to figure 7, the volume of STAN.L shares decline after the heavy volume. When the share price break above resistance signals, the pennant is finished and the bull trend continues. MA (Moving Average) MA is type of technical analysis to indicate the trend of the market and help to predict the market turning point. The share price will use as an indicator to form a trend and it do not predict the price direction. A short MA will respond more quickly than a longer period MA (Greene, 2008). Golden Cross Death Cross Golden CrossFigure 8: Moving Average Triple from 2005 to 2010 Death Cross In figure 8, there are 3 moving average line that the red colour represents the 50 period, green colour represent the 100 period and purple colour represent the 200 period of MA. The interaction between 50 day and 200 day of MA can use as an indicator of a switching between a Bull and a Bear market. The golden cross is usually show the start of bull market and death cross is show the start of bear market. In figure 8, the 50 day and 200 day had cross around end of 2006 and Standard Chartered share price is moving up and signifying the start of bull market. It creates the buy signal for the investor to enter the market. Next, the line cross again at end of 2008 and the 200 day MA is moving above the 50 day MA. It shows the death cross and the STAN.L share is falling and start of bear market. It creates a sell signal for the investor to quit the market. At 2009, the 50 day MA is cross against the 200 day MA and the golden cross occur. As STAN.L is on bull trend during 2009-2010, it cre ates the buy signal again and the share price is achieving a new peak. MACD (Moving Average Convergence and Divergence) MACD is a type of oscillator that can measure market momentum as well as follow or indicate the trend. MACD consists of two lines, the MACD Line and the Signal Line. The MACD Line measures the difference between a short moving average and a long moving average. It generates the buy and sell signal. When the MACD Line and the Signal Line cross signals are generated (Stock Charts, 2010). Figure 9: MACD from 2008 to 2010 Buy Bullish Divergence In figure 9, the red colour line is a MACD Line and the green colour is a Signal Line. A buy signal is generated when the MACD Line crosses from below to above the Signal Line, the further below the zero line that this occurs the stronger the signal. The Standard Chartered share is generating a buy signal during 2008 to 2009 when the share price drop to the bottom of the bear market. So, it create the bullish divergence is when prices are making lower lows but the MACD is making higher lows. This is a sign that the down move is weakening and ensuring the buy signal. Figure 10: MACD from Aug 2010 to Dec 2010 Sell Bearish Divergence In figure 10, Standard Chartered PLC share is generating a sell signal during August 2010 to November 2010. A sell signal is generated when the MACD Line crosses from above to below the Signal Line, the further above the zero line that this occurs the stronger the signal. So, the sign of up move is weakening due to bearish divergence occur when prices are making higher highs but the MACD is making lower highs. Consequently, it strengthens the sell signal for STAN.L share. Average Direction Index The Average Directional Index is an indicator for the market whether is trending or moving sideways. The analysis of Average Direction Index is a process of assessing market trend and determines whether investors to decide which is the strongest trends and gain good profits during the strong trend (Option Trading Guide, 2010). Figure 11: Average Direction Index from Aug 2010 to Dec 2010 Sell Buy In figure 11, the red colour line is Positive Direction Indicator (+DI) and the green colour line is Negative Direction Indicator (-DI). If the +DI line is above the -DI line then the trend is up, and if the -DI line is above the +DI line the trend is down. Buy and sell signals are generated by the +DI and -DI lines. If the +DI crosses above the -DI line, this is a buy signal. A sell signal is generated when the -DI line crosses above the +DI line. Standard Chartered share is on the uptrend during early of September 2010 when the +DI line is cross over -DI line and it creates the buy signal. On middle of December 2010, the -DI line is cross over +DI and it show the market is overbought. As a result, investor should leave the market and sell the share due to the sell signal is been create. Fundamental Analysis Ratio Analysis: Value Investing In fundamental analysis, I choose value investing as my stock picking strategy. According to Chan and Lakonishok (2004), value stocks have made higher returns compare to growth stocks. The analyst had done the experiments over the small-cap stocks and large-cap stocks and the result show that value investing is more suitable. It was because value stocks had less effect compare to growth stocks when the stock market in the downturn. There are several studies prove that extrapolative biases in investor behaviour might affect the investment decision. Investors are overbid the prices of growth stocks as the prices of value stocks dropped far below their value based on fundamentals. Therefore, value investing is the best choice for long-term investment strategy. Figure 12: Overview of Standard Chartered Fundamental Analysis as at 14/12/2010 Earning Yield Earning Yield is the ratio of earning per share over the current market price per share. The earnings yield is the opposite of the P/E ratio. It is measure the percentage of each dollar invested in the stock that was earned by the company. According to Graham (1949), he suggests that if the earning yield was double the yield on a low risk corporate bond (AAA rated) the stock represents good value. Standard Chartered earning yield is 6.34% and the 5 years AAA bond yield is 3.35%. So, the earning yield should be 6.68% to meet the criteria. Figure 13: STAN.L PE Ratio as at 14/12/2010 P/E Ratio P/E ratio is the ratio of current share price over the annual earning by the company per share. A high P/E ratio company is expecting higher earnings growth in the future compared to company with a lower P/E. P/E ratio usually do not reflect the real value of the share but it is helpful to compare the P/E ratios of one firm to other firms in the same sector. According to Graham (1949), the stocks with a PE of less than 40% of the market average over the last 5 years will have the large room to growth. Standard Chartered P/E ratio is 15.78% and the overall sector PE ratio is 13.02%. Therefore, Standard Chartered does not fulfil the 40% criteria. Figure 14: 10 year UK bond and STAN.L Fundamental Ratio as at 14/12/2010 Dividend Yield Dividend Yield is the ratio of annual dividends that paid by the company over the current share price. In other word, dividend yield is use to determine the amount of cash flow that the company earn to be invested in its own share. Therefore, for those risks adverse investors that prefer a steady income from their investment portfolio should invest in stocks that paying relatively high and stable dividend yields. According to Graham (1949), a value stock should have a yield at least 2/3 that of AAA rated bonds. Standard Chartered dividend yield is 2.65% and 10 year UK government bond yield is 4.18%. Therefore, the dividend yield should be 2.79% to meet the criteria. Price to Book Value DDM is a share valuation method on the cash flow that receives in the future to find the intrinsic value. In real life, many investors do not believe on DDM because it always produces a negative bias to valuation estimates. Hence, we will use constant growth rate of the dividend or 3-stage model to solve the biasness (Fuller and Hsia, 1984). First, we need to assume the risk free interest rate, expected dividend growth rate, risk premium and periods of dividend growth. For Standard Chartered DDM, we will use the default risk free rate that same as the yield on 10 year UK gilts. According to Goedhart, Koller, and Williams (2002), the risk premium for UK equity market is 3.5% to 4%. The result of DDM is show at figure 18, constant growth rate model has show if the expected dividend growth rate is 7% then the share price is more than the current value. But for the estimate growth rate at 5% or 6%, it show the current share price is overvalue and investors should sell the share. Therefore, a constant growth rate of 7% p.a. might not be realistic in this current economic situation. For 3-stage model, we will assume that the first stage is high stable growth and will last for 5 years, second stage is declining growth that last for 10 years and the last is infinite stable growth. Standard Chartered is on the maturity stage in the business life cycle and the potential to grow is limited because the competition is very high in UK. As a result, for case 1 and case 2 the value of the stock is under the current share price but case 3 is 13.88% more than the current share price. But 15% for the first 5 years is unrealistic and it shows the share is overvalued. From the aspect from technical analysis, Standard Chartered share price is on bull trend according to Dow Theory and Elliot Wave Theory. From the chart patterns, it shows the STAN.L is on head and shoulder top or bottom but we need to determine the volume for the share price in the future to confirm the patterns. Moving average and MACD are produce the sell signal for STAN.L because the share is on the peak compares to historical data. At last, the average direction index also giving the same signal that STAN.L is overbought and it advise the investors to sell the share in the future. From the aspect from fundamental analysis, Standard Chartered share price is testing by the ratio analysis to determine whether the share is undervalued. Standard Chartered is fail on earning yield, PE ratio, dividend yield, P/B ratio, and debt to equity ratio, therefore, the share price is not undervalue. Next, we use target price model to calculate the intrinsic value of the share. So, Standard Chartered share price in target pricing is higher than current price but after our justification the share price is not undervalue because the estimate EPS is too high for current market. The DDM also show that the Standard Chartered share price is overvalue by our estimation for constant growth and 3-stage model. In the nutshell, investors need to decide whether to follow technical analysis or fundamental analysis. Therefore, we need to determine whether the FTSE 100 markets are efficient. If FTSE 100 is weak form efficient market hypothesis, all the historical information will reflect on the share price and analyst cant use technical analysis to do the prediction. Analyst stating that FTSE 100 might be semi-strong form efficient market hypothesis that reveal all publicly available information on the share price and fundamental analysis cant produce any unusual return. Some of the researchers claim that stock market is like random walk that analyst cant predict the share price by historical data. Therefore, Malkiel (1999) is claim that there is no point to do technical analysis and fundamental analysis because the stock prices reflect all the available information that is relevant to the price. But some of the analysts claim that there are some fund managers able to beat the market consistent ly by their stock picking technique. At last, there are many different opinion between practitioners and academics as to how efficient markets and how useful stock picking and the market timing. For my opinion, whether we choose technical analysis or fundamental analysis, we need to determine the result by ourselves. There is no right or wrong answer on which analysis we approach. In this project, the result for technical analysis and fundamental analysis on Standard Chartered share is showing the sell signal, so the investors who have the share should hold the share or sell it in the future.