Stock markets are usually considered as the main indicators of the investor’s trust and interest in the country’s economy as well as the importance of how a country can facilitate its investors and businessmen to develop a healthy society and develop monetary fitness of the economy.
Financial markets are prone to crises as well. The global financial crisis hit the economies of different countries at different times and it is the stability of the economic structure as well as the investors’ firmness to the economy determines the level of hit or stress that an economy can sustain at times of financial crisis across the globe. In this report, we will look into the Global Financial Crisis that arose in 2007 affecting the majority of financial markets around the globe. Although the financial crisis started with the troubles in the United States markets for sub-prime mortgage and investment banks in 2007, however, the effect translated widely throughout the financial markets related to that with the U.S. Economy.
Since there were many indirect relations of many markets with the U.S. market, all faced severe problems to keep the position stable at the time of recession. We would discuss the effects of this crisis on particularly on Australian markets and how this market did dwell the stable situation through its strong financial credibility and flexible regulations to allow the investors to adopt different temporary ways of escaping the nightmare. We would look into how the Australian Stock markets did not only survive but managed to flourish compared to other markets in the times when the economies of different countries were going to decline as an effect of the financial crisis.
Background about Australian stock market
Australian stock market is currently based on the Australian Securities Exchange (ASX) which was the result of the merger of the Australian Stock Exchange and the Sydney Futures Exchange in July 2006. Australian Stock market is primarily driven by the Australian Securities Exchange play an important role in the investment sector dealing with different financial instruments including futures, warrants, real estate investments, traded funds, exchange-traded options, shares, contracts, so on and so forth. In this market, the major index of trading is ASX200 that is made up of 200 shares in the Australian Securities Exchange (ASX). Other indices include ASX 100 and ASX 50 that are traded in this market. Its functions envelop a wide range of internal and external tracings including clearing, trading, settlement, funding, etc (ASX).
Since the Australian Securities Exchange (ASX) is operating major financial markets of Australia for equities as well as derivatives, it provides listing, trading, clearing, settlements, Risk management, and depository as well as market data services for local and global customers. The operations of the Australian Stock Exchange and Sydney Futures Exchange have merged that creating one of the world’s top-10 listed exchanges with the distribution of the market such that small companies form the big proportion of the market, while few giant financial institutions represent the market capitalization.
The regularly body that makes the Australian Securities Exchange to work under certain boundaries is Australian Securities and Investment Commission (ASIC) that monitors and regulates all clearing events, trading venues, settlement facilities and other compliances. In order to facilitate the investors and promote the securities exchange business, Australian Securities and Investment Commission (ASIC) allows flexible trading options including settlement, short selling, options trading, future trading, etc.
Although Australian Securities Exchange has multiple trading indices including ASX 20, ASX 50, ASX 100, ASX 200 and ASX 300, however 200 listing 20, 50, 100, 200 and 300 listed companies respectively, however ASX 200 and ASX 50 are the main indices in the stock market. In order to make its stability and roots drive down to different sectors, Australian Stock market also goes down to schools, colleges and games funding that makes its credibility to the investors even more firm. ASIC promotes retail investments as well and plays a vital role in maintaining and improving the overall financial system in the market.
It ensures that the financial laws are prevailing and implemented by the individual investors and companies as well as there is sanctity of fairness and information to the investors in the financial market so that there are no concentrations of benefits through wrongdoings of the individuals or imbalance in crisis situations.
It builds confidence in the integrity of the financial market so that the investors are willing to put their money in the trading with a sense of gaining their money back with the profit In 2008–09 (ASX). The downturn of the market in the Australian stocks caused 680billion dollars ripped off just like other stock markets in the world that had reversed by 30% to 40% in the U.K., U.S.A., and other associated countries (IFSA).
While looking at the reports of the Australian Securities and Investment Commission, it is seen that the market capitalization of global equities markets fell by 58% from their peak in October 2007 (US$63.0 trillion) to the low level in March 2009 (US$26.5 trillion). This gives an evident picture that in Australia; market capitalization in the stock market was flushed out with over $771 billion that is nearly equal to the 65% of Australian GDP in 2008.
After the crisis, Australian markets recovered somehow as a result of the strong thought process behind the regulations and provision of flexibility to the investors and development of investors trust regaining $266 billion in market capitalization from March to June in 2009. This is the fact that despite the firmness of the market and recovery after the crisis, the impacts of the financial meltdown are still somehow prevailing on Australian companies, consumers and investors.
In times of crisis Australian Securities and Investment Commission aligned their strategy with the interest of the investors keeping in view the regulatory flexibility in financial laws in Australia and focusing on a few strategic priorities including capital market integrity, retail investments, capital flows, use of technology to increase revenues and reduce costs. As a result, the market did not crash as badly as it could have in the absence of such priorities and strategic alignment with the market dynamics in Australia (Annual Report).
Main problems to be considered
Australian Stock market deals with a variety of investment decisions and provides multiple choices of investment to the investors to seek profitability and look for new avenues in the market. However, retail investment has been a little lagging sector in the market for which the Australian Securities and Investment Commission has strived and developed strategies to support this sector in the financial market.
Also, the financial misbalance in the U.S. financial system in 2007-08 influenced the whole globe associated with the U.S. markets and this was one of the major issues that Australian Stock markets faced during this time. The main problem of the market came out to be the volatility and decline in investors’ interest as the integrity of the investments and the confidence of the investors started becoming shaky and the financial instruments lacked the confidence of the investor to get the profits after investment.
The sharp decline in equity markets triggering the fall of Australian indices below 40 (100 indexes) was a clear signal of a crisis hit. Not only Australia but Japan, the U.S., Hong Kong also suffered greatly as apparent from their monthly index volatility over this period. The impact of the crisis was severe in the credits market and over-the-counter markets while the equity valuations faced sharp declines especially for the companies having high leveraged balance sheets.
This caused the withdrawal of the investments from the market giving a negative impact on the economy of the country as well. Even though the hit to the Australian market due to the global financial crisis hitting the global economies in 2008-09 had a relatively lesser impact on the Australian market not due to its structure, but due to the dynamics of the market and strategic decision by the Austrian Securities Exchange under the monitoring of Australian Securities and Investment Commission giving a lesser stab to the investors, however, this did not result in relieving considerable pain to the economy or the financial market in Australia as well (Kazi).
Discussing the main issues before and after the crisis
The financial crisis arising in late 2007 and hitting the economies of the global market since 2008-09 gave a horrible impact on the economies of the countries. The fall in the U.S. stock markets rippled over several markets and economies in which issues inherent in many markets amplified and created greater problems to the financial markets. As far as Australian market was concerned, there is a need to look into how it was related to the markets that were directly affected or In fact created this financial distress flowing over the other economies of the world depending on in any way relating to those of U.S., Canada and other such closely bounded countries.
The integrated market concept in Australia is seen as an important concept in order to evaluate the situation of own economy when the crisis situations arise in other related markets and economies that can impact on the financial markets of Australia. The regulations, laws and market dynamic are thus set accordingly in order to avoid any major melt down resulting from financial crisis in related regions.
Generally diversification in the portfolio of the financial market helps the financial markets to grow more prosper and readily due to market dynamics, however diversification of market to foreign and external investments also impose a risk of falling down at the times when the stock markets in the other countries go down due to their local reasons. Therefore, a low correlation between the returns of national as well as overseas (or foreign) indices making the portfolio a bit diversified minimizes the overall portfolio risk.
In case of Australian market as well the co-relation between the stock prices of the Australian stock market and the returns from the overseas investment need to be carefully studied in order to grasp what level and extent of relationship exists between the two. He effect of any one stock group going onwards. However, if the ratio of stock investments and trading of Australian investors is significant and the Australian securities and stocks market is influenced by the weighing of the U.S. or other overseas investments then there would be a clear impact on the Australian economy as well as financial market.
When a local Australian invests in the foreign exchange stocks and makes its portfolio a mixture of internal and external investments, he actually intends to grab the advantages of all stocks and make sure that the risks associated with internal as well as external factors are such that one dilutes the negative impact of any other stock that may come under crisis situation. The issue with the Australian stock market before the crisis was the same of portfolio diversification by the investors in order to minimize the risk and distribute the level of significance or impact due to hit by any one type of stack market.
Although there are the thoughts by the investors in the Australian economy that there can be risks imposed by the foreign exchanges and the risks needs to be diversified effectively through using a mix of stocks and trading instruments, however the other thought that was prevailing more commonly among the investors was that the risk associated with foreign exchanges may be ignored as that can be hedged and the investors can grow their money without looking at the dark side of the risks associated with the foreign stocks and exchanges, thus in order to see the actual aspect of how much the Australians investors were having an effect of the global economy movement on their local stock markets and what financial markets were linked up with the Australian market, there is a need to find the interaction and relationship between the two.
One o the studies relating the financial markets of United States of America (USA), Unit4ed Kingdom (U.K.), Canada, France, Japan and Germany relating the market indices of Australian stock market reveals the relationship[ and extent of impact that can be seen from the market dynamics ion other mentioned countries. The study collected the data from the period 1945-2002 and analyzed the data of indices values and exchange rates in order to determine the movement of one market with respect to the other markets. Also in this study, the trading weighted index (TWI) of each country composed by the Reserve Bank of Australia is considered.
The study uses the Johansen Integration approach that reveals that the Australian Stock market and the investors are tightly related to the overseas markets as well. Although there is no strong integration of the overseas markets with the Australian investors, however the equity market shares and the exchanges are tightly related and are influential on the Australian market. It is also seen that the markets of U.K., Germany and Canada are more firmly related to the Australian investments that leads towards an impact of the market positions and financial situations of the stocks in these countries on that of Australian investments.
Although it can be said that the Australian investors try to diversify the risk of their investments portfolios through investments in U.K., Canada and Germany while the financial crisis was making its hub at the U.S. at the time of GFC, however these economies being related to each other, like U.K., Canada are closely related with the economies and market positions of the United States, thus indirectly affecting the market situation and equity markets in the Australian Stock market. Market significance of the related countries was tested at 5% significance level (ASX).
Brief overview of the crisis
Financial crisis have hit the financial histories of global economies in many eras. Since, the crisis of 187, countries have been striving to make the policies and structures of their financial markets in order to sustain any recession that can damage the entire empires of investments which is not very unusual in the financial melt downs or crisis situations. In the year 2007 the pre-start up of financial mismanagement started to be evident leading to a deep recession condition to the industrialized world in 2008-2009. There were many critical factors that actually contributed to the formation and then emergence of this crisis throughout the globe starting from the U.S. economy and markets rippling their effects to the other parts of the world as the U.S. economy is somehow bound and related with other markets as well.
This included the crisis situations in different industries that involved high oil prices, prices of food and beverages to rise up significantly and the disastrous situation developing the real estate and housing sector in the United States (U.S.) sparking the prevailing bad condition in the financial markets of the United States spreading though out the global financial markets affecting badly the economies at the international level (Stubborn Mule). Too many financial intuitions including banks, investment centers and others suffered from the crisis. Many went into deep losses and many went bankrupt at the time of recession.
Not only the customer banking, but also the commercial dealing like bank papers went highly expensive as soon as the crisis begun and touched Australian boundaries. Banks their selves were uncertain about the returns on the investment they use to make and feeling that their existing portfolios are also declining sharply. Well established commercial banks and investment centers suffered losses as a result of increased prices and investor’s disinterest in the drowning economy forecasted with the losses and nothing else. The downturn was comprehended to be due to the increasing credit availability and increasing commodity prices as a result of increasing demand of goods and increasing prices to balance the supply of the goods.
Increase in the easy availability of assets on credit that were not previously accessible by a group of people tossed them and levels resulting in increased prices and damaging the financial balance of the economies. This impacted the overall financial situation of the countries and compelled the banks and financial institutions to go into losses creating unemployment and adding adversely into the weak financial position and economies of developing and under developed countries (Edwards).
It was not too late when NBER declared that the United States has undergone severe financial crisis and recession situation in December 2008. Hitting the economy since 2007 while most of the economists and experts were of the opinion that this downturn is so severe and major having a diverse impact on the global economy that the recovery may take as much as 3 to 4 years to at least establish against the impacts of this financial crisis forecasting severe unemployment effect across the globe whose results may grow ever more disastrous. Since then this crisis threatened many U.S. and U.K. financial institutions of the bankruptcy and propagation of severe financial crisis throughout the globe. Australia was indeed victim of this crisis as well due to its interaction and close correlation with different developed countries including United Kingdom, Canada and Germany.
Financial reports show that the energy prices risen up significantly in this period and the impact of this speeded throughout on other industries as well impacting the whole economy of the world greatly. In January 2008 oil prices crossed 100 US dollars per barrel for the first time and reached to the peak of 147.30 US dollars per barrel in July, the same year, giving a clear picture of weak and volatile condition of the financial market throughout the world, where limited stakeholders play with the oil prices in order to combat the horrible financial crisis of that time.
Similarly, prices of other items including the housing schemes in the developed countries like United States and United Kingdom while the costs of the machinery and automobiles I the developing countries raised higher than peaks before weakening the countries’ economies while compelling the investors and shareholders to withdraw the capital from the investment institutions away to their pockets.
The situation of weakening financial position of the banks, financial institutions and government investments as well sustained such that the crisis that was previously seemed to be localized in the beginning, speeded across so fiercely throughout the globe that none of the countries actually claimed to be completely isolated from the adverse impacts of this crisis. The impact of this crisis also hit the Australian markets where the investors diversify their investments through the mix of internal and external capital shares and equity investments.
Black Friday in Australia
Australia faced its one of the worst declines in share holding markets termed as Black Friday when the economy faced nose down situation and the US dollar rates went down damaging the related economies all over the world. This was the second biggest one-day fall in the records propagating the fear of global recession retracting the investors away from the investment markets. It was as worse as the National Australian Bank lost 12.4% in just a single day. Although European Banks prepared to combat the silliness happening in the U.S. markets and isolate their economy from the dollar downfalls, Australians suffered from the direct impact due to the fact its markets were closely related with those of United Kingdom and Canada which in turn depends largely on the U.S. markets.
After the great depression in 1930, this was the major downfall of the economy caused by the unhealthy financial decisions by the U.S. government. Deregulations and withdrawal from the supervision of major financial giants in the U.S. caused the black Friday turning worst for the Australian markets. Australian stock markets took 8% nosedive that added a 42% drop in a year in the Australian market. Not only Australian but also Japanese stock market had also lost 53% that year. U, K., Germany, Canada and all inter-related markets crashed badly with a fall of average 30% all over the markets (Head).
Since the economy of the whole country was being threatened by the global financial crisis and no one was seemed to be able to get rid of the adverse impacts of the situation. It was necessary for the financial institutors in the Australian market to find the reasons why they have been impacted so badly with the crisis and how can there be ways to avoid the increasing effects of the crisis situation. The basic thing that was evident from the analysis of the financial situations of the individual investors was that in order to diversify the portfolio risks, there was stakes of the investors in the overseas investments resulting the impact to transfer to the Australian markets.
Also the dependency of many trade items to the different countries on their exchange rates results the impact to be translated in the local economy. Despite the fact that the Australian economy somehow managed to get the impact of the crisis at its minimum possible way comparative to other economies being influenced by the global financial crisis., however there was room for the isolation of the economy from the adverse effects of the crisis when the hub of the crisis did not directly relate to the Australian stock markets.
Investors’ inadvertence and massive sell-off
The drastic fall happened due to investors’ fear of losing interests rates and experienced the economic collapses happened to the Wall Street. The investors in the market were so scared about the situation that started ripping off their benefits that were previously prevailing in the market and went away with their investment in the fear of any forthcoming disaster that can hit their interest and gallop the benefits that they had previously made through years. This fear impact caused major issues in the stock market and the companies that were previously relying heavily on the equity financing were suffering with own financing to their investments and as a result, there were many institutions that lost their stability creating unemployment and distress in the economy.
Dramatic decline in the Dow
The decline in the world’s economy was so fierce that it resulted to crash major financial markets in the world. The crisis that had started from the developed countries like United States and Canada speeded throughout the world impacting majorly to the economies and investors to back off from the investments and taking away their shares along with the principal amounts, this left many financial markets in distress.
This can be evident from the fact that since January, 2008 the Dow Jones Industrial Average had fallen down about 37% that was remarkable and first time in its history. Many other markets suffered tremendously with this decline again adding up the rippling effect of this financial crisis. This decline in the Dow was made benchmark for other industries as the hype was created amongst the investors about the severe effects of the crisis that can go as fierce as for the Dow Jones as this crash in the Dow was the third worst in the financial history known in the world.
Situation with ASX and Standard and Poor
Australian Securities Exchange took measures in order to combat the dreadful financial crisis of the time. ASX (Australian Securities Exchange) made a decision along with Australian Securities and Investment Commission (ASIC) to ban all short selling in the Australian Securities Exchange that were revised just before the crisis had developed. The obvious tilt of the market after such actions leaned towards the secondary fund rising.
The crisis situation was very well handled by the Australian market a result of flexible and mindful financing decisions and flexibilities given through regulations in order to make the companies and investors stay on the financial platform. Despite the fact there were many sufferings as well and the investors faced hard time to get their investments fruitful while the companies hardly strived to survive in this situation where the transfer securities were not traded due to the fear of investment losses. As a result of decline in the equity markets and risk associated with debt financing, IPOs and secondary capital rising was promoted from 2007 to 2009 increasing from nearly 5000 million dollars in 2007 to over 10,000 million dollars in 2009
Solutions to be taken to eliminate the problem
The major step that was taken throughout the globe by different countries in order to support the economy to let the crisis situation pass through was the government funding to the companies and investors U.S., Europe and the U.K. authorities gave as much as 8.9 trillion US dollars to the companies to support the market and let the economy survive of this dreadful crisis. The major problem was that the governments themselves had to look after the inflation issues and the prices hypes that would be resulted in case of increased government supports to the businesses and companies. While on the other hand, if the companies do not gain the government financial support, they were likely to be shut down or bankrupt resulting again a new turmoil of increased unemployment. In order to solve the problem, Australian government made its financial regulations flexible promoting the retailer investment to the stock markets.
It was also evident from the financial figures of the year 2008 and 2009 that the public securities did not lose their integrity and provided a safer platform to the investors ensuring them their profits, though less in the market. This promoted the companies to get financing through retail investors and support the company’s financial situation while keeping the overseas stocks risk in a minimum portfolio (Head).
Fixing computer problems and technological gaps
Australian market had also suffered not just because of the core financial crisis but also due to the slackness in technological sweeps. Using social media, websites and giving the information to the investors upright could have helped in decreasing the intense of apparent crisis (Stubborn Mule). The problem could be resolved through an interesting approach as well. Since the market was intensified with the lack of investments and hence there was less financing to the companies for the businesses to run.
The resolution to many issue could be reached through improving the computer works and automation while increased use of technology so that the optimization can be acquired I different industries. This optimization was aimed to achieve low cost of production or any other business that in turn propagates the less need of financing by the companies. However this resolution needed much innovative thinking and use of technology at a much feasible approach (Poll Power).
Investigating the market cash origins
Other resolution was to investigate the source of the market cash origin. This would help to identify the main sources of financing and deplete the effect of intermediary financial losses. As a rule of thumb, as there would be more stake holders between the transfer of any asset, there would be more losses throughout the supply chain. Thus investigating about the cash origins and ensuring the sanctity of the investment individuals helped in determining the actual cash outlay and ensuring that the investment of the individual would not go in vein.
Cash flows from the capital bonds were seen evident as the retail investment was being supported by the government in order to let the companies continue their businesses. The sink was felt in the Shares market trading whose volume had shrunk down, falling from a daily average of 1,100 million in September 2008 to a very low volume of 824 million in January 2009, just before recovering back to 1,582 million in June 2009. Total trading volumes in 2008–09 were 17% higher than in 2007–08.
Increasing market flexibility for facing the changes
Increase in the market flexibility through letting the companies seek the financing options through retail inventors and giving the support to the companies indirectly to run their businesses helped to combat against the crisis situation. With flexible regulations enforcement in the financial market, the investment decisions gain a wide range of options to look into suiting their specific needs and profitability in the business. By facilitating the companies to raise their capital equity even by avoiding the increase in debt portion of the finance, they were somehow relived to continue their businesses. This reduced the debt exposure of the companies which was risky at the time of recession while shoring up the balance sheets.
Stock market situation in Australia within 2008-2009 periods
While the financial crisis were hitting the economies of the countries around the world, the Australian stock market also got impacted with this adverse situation, however with flexible approach towards financing regulations and with the promotion of retail investment, this did not become as worse as other countries getting major hits by this financial crisis. Cash markets had severely suffered in the start of the crisis, however they started to recover as the governmental measures worked and the market was seen with some cash inputs rather than being at the banks.
Assessment of valued stock
Despite the fact that the financial crisis had hit the economies of the world, Australian stock market sustained a little bit. The debt ratio and unemployment did not went as worse as expected, Debt driven demand remained under the region of 15-20% despite the fact the world’s economy was getting even worse, while the unemployment touched up to 4 to 6% that again is far better than the other economies in such situation. This gives an assessment of the value of the stocks that must have gone down but not to the extent to crash the financial market and in turn hurting the economy through unemployment and increased debt financing (ASIC).
Discussing stock market performance in 2008
Australian Securities Exchange and S&P indices fluctuated as well throughout the crisis, however analyzing the situation of Australian stock market in the times of extreme financial crisis gives a clear picture that the indices points dwelt between 3000 to 5000 as compared to 6000 to 8000 before the crisis situation, while, on the other hand S&P indices dropped in the region of 600 to 800 points compared to 12000 to 14000 points before the crisis situation that depicts a really horrible picture of the stocks market.
Analyzing 2009 Performance Report
The Australian Securities and Investment Commission had put its efforts on reversing the effect of financial crisis from 2007 and ended up with recovery in 2009. The recovery was not as healthy as it could be, however the financial distress had relieved a bit compared to other countries. This was the reason ASIC named 2009 “the year of consolidation” in its annual report for the year 2009.
The financials had suffered great crisis revealing the figures of over $771 billion that were wiped off from the stock market capitalization in 2008, but the recovery of the market was evident in 2009 performance report that states recovery of $266 billion in 2009 in market capitalization. Steps to protect retail investors also improved the performance of the market where ASIC sought the recovery of % 559.8 million for the investors.
Crush to the insider trading helped a lot in building up the market credibility and improvement in the performance of the overall market, evident from the ban of two brokers for practicing insider trading. Restriction on short selling also contributed in market performance and once the market had headed towards the recovery in May 2009, it was again allowed to contribute in an efficient manner. A recovering performance was shown by ASIC by marking the revenue of $6.5 million from the sale of services.
Providing statistics of changes and improvements
With mindful decision making and interest of Australian Securities and Investment Commission for the benefit of the economy, the things started to recover before they were anticipated. This was evident from the fact that the Australian listed companies were able to raise 88.1 billion US dollars in late 2008 and early 2009 through secondary raising that were 74% more than that of in the previous year when the crisis had hit the economy. Although total exchange growth in ASX was recorded to be 45% from 2005 to 2007 with 11.3 million contracts traded that makes an increase of 30% growth with respect to 2006, the market diminished in 2008 due to the financial crisis.
Financial statements (ASX Limited – Annual Report 2009 45;)
There was also an interest towards the mergers of the companies as well to combat this crisis situation. However, total market capitalization was not dwelling as firm as in the normal situations. Financial statements showed that there were diminishing wealth of the investors and the companies were moving towards secondary sources of the financing in order to survive the situation. However, the situation did not get much worse for big companies who found the ways to stabilize the situation and did not allow the crisis harp into the core business situation (S & P).
Income statement examination
The assessment of income statements revealed that the investor’s income health was diminishing, however due to the immediate reactions by the government driven through Australian Securities and Investment Commission made them remain in the business as the crisis situation was punishing every sector and it was comparatively better for the investors to remain in the financing structure of the market.
Balance sheet evaluation
There were increased lean towards the secondary sources of financing while the companies were moving towards the investments where they are sure to recover Government supports and securities helped the companies to rely on the available financial sources while the asset base in the balance sheets were minimized to engage lesser assets.
Cash flow statement
Assessment of cash flows of the companies and the overall market supported the fact that the companies were benefiting from the flexible options given by ASIC and moving toward retail investment as the source of financing. This resulted in frequent cash inflows while the stock market was compelling them for cash outflows at other hand.
Overall appraisal of performances in 2008 and 2009
As being discussed in the report above, due to severe financial crisis, economies of the whole globe slanted down and many markets crashed despite the fact that the volumes of those markets were huge. Australian stock market, however tried to combat the situation through different means. While Australian government was striving and making ways for the investors to invest in the less risky portfolios, it also supported the businesses and allowed different means of financing the business in short term to avoid the market crash abruptly. This caused the recovery of the Australian stock market and financial institutions little earlier than the rest of the world’s financial economies and markets.
This is evident from the fact that after the dip in economy in 2008, the GDP and market started to grip again in 2009. The debt to GDP ratio that had jumped over 90 percent in the time of recession started to come back to its normal of 50 to 60 percent. The recovery of the economy was evident from the fact that not too many companies went bankrupt in the time of financial crisis, rather they continued with the available financing along with the support of the retail investment. Strong decision making was required at that time by the Australian Securities and Investment Commission in order to ensure that no body manipulates the flexibilities provided by the Government to the financial institutions so that they can cope up with the challenges of the global financial crisis.
Financing through debt was increased in the time when there was less investor in the market to give out their money for the investment purposes. Since, the hype in the market compelled every investor to think seriously whether they should keep the money intact with an economy in a situation where experts and economists were predicting the slump in the market and losses were very evident throughout the financial markets in the world, be it low value markets or high value markets.
Big stake holders were drowning and investors were not finding any good way but to withdraw their investment from the market leaving the market dry of any equity financing or shareholdings by the companies. At this time debt financing and relaxation in terms of getting debt finances for the companies was not less than the survival pills at the time of recession. In normal conditions as well, when companies are slumping down to recession condition, they tend to find debt financing to cover the expenses of the business. Corporate bonds were allowed to be issued to retail investors that actually supported the overall market structure as well (ASIC).
Present situation at the Australian market: tracking changes (Sydney Futures Exchange n. p.)
Sydney futures exchange marked to be one of the fastest growing markets marking a growth of 45% from 2005 to 2007. With a diverse offering in interest rate products, equity products, commodity and other products, it was an attractive market to trade in by the investors and businesses. Not only financial services, but also the solutions are provided to the investors by using the technology and grasping the need of quickness in business and investment decisions. In order to sustain the economy many measures were taken by the Australian financial regulators. This brought this market into better situation that is in present in the recovery stage.
Basic earnings per share that had dripped down to 175.6 c in 2007 when the recession hit at its peak, recovered to 214 c in 2008 and 183 c in 2009. This was an indication that the financial markets went under severe trouble, however managed to raise again in terms of profitability that did not allow many investors to fly away from the market at once. However, the returns on equity that were prevailing above 40% before the time of recession dropped down below 15% at the time of financial crisis. This hit to the market was enough to let the economy shake like twister.
Conclusions and recommendations (Capital Raising in Australia: Experiences and Lessons from the Global Financial Crisis n. p.)
Severe Global Financial crisis helped the Australian markets realize the extent of hit they can face and the learning that they can imply to avoid the market to crash in future so badly. This stress testing did not only provide the markets with certain points to think on but also the confidence that the system can respond to the shocks arising externally to hurt the domestic economy. It was a great learning that the strong fiscal / monetary policy, strong dynamics of the investment system and micro-financing promotion helped the market to combat the crisis at its worst phase.
Also, flexible regulations in the financial market in order to facilitate the companies to acquire equity funding to keep the business balance sheets stable supported them. It was also felt that there is a need of strengthening the corporate bond market to face such situations effectively.
As the Global Financial Crisis hit the world’s economy, the Australian market also observed severe repercussions that made the market strive for its survival. Despite the fact that the market managed to survive and not as bad as other economies melted down, the Australian market dwelt with the situation of finding the ways to re-stabilize, there were many learning and lessons that may be employed in order to keep the economy stabilized at the times of recession emerging from any other part of the world.
Flexibilities in the system that allowed financial markets to find ways of getting investments helped the economy to sustain at much better level than others, there arose need to look into the investment portfolios of the investors to be able to gage the amount of risk posed by such crisis. It is also important that the companies build up their priorities and strategies to seek financing from the sources such that at the times of crisis, they do have alternate options available in the market.
In the time of crisis that was experienced in 2007 and 2008, it was evident that the companies did benefit from the flexible financing schemes by the government helping them to seek finances through small investors as well. An investor’s rating system has also been introduced that helps the companies to go for least risky financing options when such recession conditions are predicted.
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