HA1022 Principles of Financial Markets Trimester 1 / 2012 ASSESSMENT CASE STUDY Work must be carried out in groups of 4 people. The objective of this assignment is to assess the investment conditions...

Introduction
Australian economy is one of the largest economies of the world. By nominal GDP, it was
ranked as the 13
th
largest economy in the world. It is the 17
th
largest economy as measured by
PPP adjusted GDP. It is one of the market economies with high growth rate and low inflation. It
also has a large service sector and its share is about 70% of the GDP. IMF itself predicted last
month this year that in next 20 years Australia will be the best performing economy outshining
other advanced nations. One of the major reasons for this country to be counted amongst the
advanced nations such as U.S., U.K., and Japan is that Australian economy has abundant
reserves of natural resources such as coal, iron ore, natural gas, and renewable energy resources
etc. This sector has attracted a high level of foreign investment. In order to expand the resource
sector, significant investment has been made into Gorgon Liquid Natural Gas project. This
project is aimed to improve the production capacity of Liquefied natural Gas undertaken to meet
the needs of clean burning fuels by Asia. Major trading partners of Australia are Japan, U.S. ,
China, Korea. It depends highly on imports of petroleum products and crude oil from Asia. Its
major items of export are wool, iron ore, agricultural products, LNG. Along with petroleum
products it also imports manufactured goods and machines.
Australian Securities Exchange
Australian Securities exchange (ASX) was created as the merger of Australian Stock Exchange
and the Sydney Futures exchange in July 2006. It offers products such as shares, futures, options.
Futures and options give the buyer and seller of financial asset the opportunity to protect
themselves from the risks of movements of prices in future. This is known as Hedging. It is a
vertically integrated and one of the world’s largest financial markets. Its activities include raising
of funds, allocation and hedging of funds. Prices of financial assets are also determined in
exchange market. It also provides education services to investors so that they can make their
investment decisions. The major stocks which are traded in Australian Stock market are of Rio
Tinto, which is engaged in coal mining operations; Commonwealth Bank of Australia; Westpac
which is the first bank of Australia; National Australia Bank. The major indices in the market are
S&P/ASX 200, S&P/ASX 100, S&P/ ASX 50. They stand for index made up of top 200 shares,
top 100 shares, and top 50 shares in the ASX respectively.
Impact of Financial Crisis 2008 on Australian Securities Exchange
The Australian financial market was able to handle the Global Financial Crisis of 2008 in a better
way as compared to other financial markets of the world. The Global financial crisis began in
U.S. with the collapse of subprime mortgage markets and spread in financial markets of other
economies soon. The stock market prices fell across economies, financial institutions across the
world collapsed. There were severe impacts on credit markets. The impacts were greater on
banking institutions of U.S. and Europe.
The Australian financial markets did better as compared to others because of better capital
raising techniques of the companies. In the economies such as U.S. and Europe, the situation got
so worse that Government had to intervene to inject capital into financial markets so as to bring
the economies out of the financial crisis. This situation did not arise in Australia. The strength of
Australia’s markets are reflected by the fact that 15% of capital raisings in 2008-09 globally
were here in Australia.
As can be seen by the figure above, the fall in the share price index of the world as a whole is
greater than the fall in share price index of Australia in mid of 2008. Therefore, during the crisis
the financial strength of investors in Australia went down but not as much as the world economy
as whole as well as other advanced economies such as U.S. and U.K. Data shows that in
Australia, the All Ordinance Index fell by 55% from 2007 to 2009 while the fall in U.S. and
Japan stock price indices were greater than in Australia.
Australian Economy
In Australia, money supply is controlled by Reserve Bank of Australia. The main purpose of
monetary policy in any economy is to control inflation. Rising...