December 2023

Newsletter December 2023

December 2023:

November flew by in a whirl of lively meetings. With exam season just around the corner, we really buckled down in our workshops and meetings, making every moment count! It wasn't just about preparation though – it was a chance for all of us in WiF to connect and grow together.

In this edition of our December Newsletter, we can't wait to share the insights and experiences that made last month truly special for us!

November Recap

• PAI Partners Event: We had an engaging session with representatives from PAI Partners, exploring the nuances of Private Equity. This event provided us with valuable insights into the company and the personal experiences of the representatives.

• Brunch with Alumnae: We celebrated the achievements of our vibrant community with a delightful brunch. This gathering was a fantastic opportunity for both current members and alumnae to mingle and build relations.

• Christmas dinner: Marking the onset of the exam session and bidding farewell to members visiting their families abroad, our Christmas dinner was a joyous occasion to the end of the semester.

• Investment Competition: This internal event offered an in-depth look into asset management, including practical tips on analyzing equity and fixed income factsheets. The competition involved team-based research, fund selection, and pitching, encouraging collaborative learning.

• Weekly workshops: this month, our senior members shared their personal stories about Summer Internships in London, covering various divisions (IB, AM, S&T, PE). As usual, our sessions were enhanced with interactive Kahoot quizzes on current market trends, blending education with an element of fun and engagement.

Don’t miss out on our social media where we post our weekly tips, market news and market quizzes as well as stories of women that keep inspiring us!

News Recap

Argentina’s shocking election: what does this mean for its economy?

In the early 20th century, Argentina was among the world’s wealthiest countries per capita. Now, the country is plagued with sky-high inflation and rising poverty. In 2022, the inflation rate was a staggering 94.8%, with a poverty rate of 40.1% in the first half of 2023. 

The country wanted change, and this came in the form of the shocking election of Javier Milei as their next president. Labelled as a far-right libertarian, Milei is the first Argentinian presidential candidate in over 70 years to run on cutting government spending. Specifically, Milei aims to move the country to as much of a free market as possible, cutting subsidies and welfare, privatising state-owned assets, and opening the economy up to competition. Milei is also keen on dollarisation, which, for countries that have implemented it in the past, has been far from successful. 

With its economy in turmoil, it is clear that Argentina needed a change. Whether Milei’s brash policies are the answer, only time will tell, though many are sceptical. What can be said, however, is that the pain, at least in the short run, is likely to remain for the country, with inflation and poverty showing no signs of falling. 

The OpenAI chaos reflects a larger issue

The drama surrounding OpenAI’s management has been the centre of attention this month, with everyone’s eyes on the unfolding story. Having revolutionised the online chatbot space with ChatGPT, the sky seemed to be the limit for OpenAI. 

This was until Friday, November 11th, when OpenAI’s board of directors announced the firing of the company’s founder and CEO, Sam Altman. Despite being reappointed just five days later (after a stint at Microsoft) in light of the mass outrage the firing caused, this entire ordeal exemplifies an ongoing divide in the AI industry. 

A former OpenAI board member suggested that the launch of ChatGPT created an industry that revolves around “urgency”, “a race to the bottom”, and “muddled messaging”. This has caused a deep-rooted divide: a split between those focused on accelerating advancements and those concerned with the risks of doing so. Although the actual reason for firing Altman remains uncertain, it is fair to say that this difference in attitude caused rising tensions, with the board citing a “breakdown in communication”.  

China's credit outlook cut to negative

Questions over China’s economy were looming, and Moody’s cutting its outlook on China’s sovereign credit rating to negative may have given us some answers. 

The country’s property crisis is not new, though its lingering impacts, compounded with debt troubles, stagnating economic growth, high youth unemployment, and a contracting manufacturing industry, do not provide a promising outlook for the future. Struggling regions seem to need financial support, but the country’s budget constraints have caused a struggle to even fund local governments. 

These issues may sound troubling (Moody’s certainly thinks so), but the Chinese ministry insists there is no need to be alarmed. Despite the aforementioned challenges, China is assured it will “remain an important engine for global economic growth in the future”, claiming the budget issues are “controllable and structural”. However, The OECD forecasting China’s growth to fall from 5.2% to 4.7% next year does not help the ministry’s case.

Sources: Financial Times, CNBC, Medium, The Post

Dealflows & IPOs this Month

Mars buys Hotel Chocolat for £534m

Mars, a pet food and confectionery giant, will be acquiring UK chocolate manufacturer Hotel Chocolat. A sizable premium of 169.8% to the share price will be paid despite the target's decreasing demand and botched international expansion plans. £21.7m pre-tax profits and a loss of £800,000 were recorded by Hotel Chocolat and 1/3 of its stock value has been lost from its listing in 2016. A part can be attributed to the failed ventures abroad and the closure of US stores. Using Mars’ expertise, skills, and capabilities, the company expects to stabilize the expansion plans abroad and provide the targe sufficient funds for these investments as it observes long-term potential from arising synergies. For Mars too this is an opportunity to expand its ventures and move into the premium chocolate market. 

Saudi PIF and Ardian set to acquire 25% stake in Heathrow Airport for £2.4b

Ferrovial will be offloading its shares to Saudi’s PIF (Saudi Arabaia’s sovereign wealth fund) for £1b, representing a 10% stake, while the rest will go to Ardian (infrastructure investor) for £2.4b, a 15% stake. Ferrovial’s withdrawal comes after its hostile takeover in 2006 of BAA, the UK airport operator. The share sell-off took place after Ferrovial became upset with forced cuts in landing charges at Heathrow Airport, allowing its loss in profits to persist. Furthermore, Heathrow has faced an increasing debt burden, as higher interest rates push up debt servicing costs, contributing to its loss-making. Saudi PIF and Ardian will be joining other shareholders, including Qatar Investment Authority (20%), Singapore’s GIC sovereign (11.2%), and Australian Retirement Trust (11.2%).

Glencore acquires coal division of Canada’s Teck Resources for $9b

Glencore, a Swiss mining and trading house, has agreed to purchase Teck Resources' coal division. The acquirer will be merging Teck’s steelmaking coal business with its coal assets and spinning it off as a separate entity in the future. The demerger will separate Glencore coal and its metals companies, creating greater shareholder value and permitting greater strategy focus within management. The demerger is expected to be complete 24 months post-deal closure, with planned listings primarily in New York, and secondarily in Toronto and Johannesburg, strategically important cities for production and capital flows. Specifically, the deal will be carried out all in cash, raising Glencore's stake to 77% in Teck Resources' coal business. Glencore still believes coal will have an important role in the near future, as suggested by record-high profits caused by the resurgence in coal prices in recent years. Selling the coal division permits Teck Resources to focus and specialize on its copper projects in Chile, Canada, and Peru, pay back its debt, expand base metal production, and generate return for shareholders, using the $8.6b cash received.

Analysis of the Markets

Affordability crisis in the housing market

The US and UK housing markets have been experiencing an affordability crisis: as mortgage prices soar, home sales are declining, and the US Housing Affordability Index remains at its record low. According to figures from October-November, the median house price in the US has increased by 3.4%, while home sales dropped to a 13-year-low of 3.8 million units, a 4.1% decrease compared to last month. The mortgage rates, which have now reached their highest point in two decades, are significantly affecting consumers: lower confidence has driven many first-time buyers out of the market and has forced them to choose renting over buying. High interest rates and rising inflation are thought to be the biggest culprits of the crisis. In Britain, the Bank of England is facing the highest rate of inflation among advanced economies and the country has been experiencing similar housing market trends as the US. However, the impact of supply shortage is argued to be equally as important: the reluctance of current homeowners to sell their houses has caused a 5.7% decline in housing inventory on a year-on-year basis and has resulted in yet another boost to the price level. Fortunately, many analysts expect the market to improve in the upcoming future. In the UK, November has marked a significant fall of about 4% in house prices. In the US, bond yields, which directly impact mortgage rates, are thought to have reached their highest level and are heading down. The only concern remaining is that the recovery may be prolonged by some years due to the tight supply.

High interest rates pose challenges to private equity

The Fed is maintaining elevated interest rates at 5.5%, 1.5% more than last year, and their effect on private equity (PE) firms is often overlooked. High interest rates mean drastic shifts in investment strategies (as employing exit strategies from investments becomes difficult, less interest-rate-sensitive sectors are preferred) and revaluations of the firm’s assets, potentially lowering the present value of future cash flows. However, the biggest threat from high interest rates to PE firms comes from the rise in the cost of borrowing, which affects the financing of transactions. To fund their acquisitions, PE firms rely heavily on debt financing; their rising costs cut down profits, reducing the potential ROI. A slowdown in deal activity follows, as PE firms tend to become more selective and cautious in their decision-making process and delay pursuing deals until economic conditions improve. Therefore, the golden age of private equity, which has been experiencing cheap debt and a significant power in the financial sector since the Global Financial Crisis in 2008, has ended. One of the most outstanding examples of weakening PE influence has been the unsuccessful deal of Carlyle Group. Earlier this year, Carlyle Group, one of the largest PE companies in the world, attempted to acquire a portion of healthcare technology firm Cotiviti for $15 billion. However, the deal, which would have been possible just a few years ago, was swiftly ended when Carlyle failed to reach its equity commitment. Nonetheless, some PE executives are suggesting that the status quo will not persist in the long term: in the prospect of falling interest rates next year, this optimistic prognosis may be very plausible. 

Options, the greeks and pricing models

In finance, options are financial instruments that give the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price, known as the strike price, before or at the option's expiration date. The underlying asset can be stocks, bonds, commodities, currencies, or other financial instruments.Some vocabulary:

• Strike Price (Exercise Price): The price at which the underlying asset can be bought or sold if the option is exercised.

• Expiration Date: The date on which the option expires and becomes invalid. After this date, the option holder loses the right to exercise the option.

• Premium: The price paid by the option buyer to the option seller for the right to buy or sell the underlying asset. It represents the cost of the option.

• American options can be exercised at any time before or at expiration.

• European options can only be exercised at expiration.

• In-the-money (ITM): The option has intrinsic value.

• At-the-money (ATM): The option's strike price is equal to the current market price of the underlying asset.

• Out-of-the-money (OTM): The option has no intrinsic value.

  CallPutBuyerThe buyer of a call option pays a premium to acquire the right (but not the obligation) to buy the underlying asset at the specified strike price.The buyer of a put option pays a premium to acquire the right (but not the obligation) to sell the underlying asset at the specified strike price.

 WriterThe seller (writer) of a call option receives the premium and, in return, may be obligated to sell the underlying asset if the buyer decides to exercise the option.The seller (writer) of a put option receives the premium and, in return, may be obligated to buy the underlying asset if the buyer decides to exercise the option.

 ExampleIf an investor buys a call option on Company XYZ with a strike price of $50, they have the right to buy shares of XYZ at $50 before or at the expiration date.If an investor buys a put option on Company ABC with a strike price of $30, they have the right to sell shares of ABC at $30 before or at the expiration date.

In the context of options trading, the "Greeks" are a set of risk measures that help traders and investors understand the sensitivity of the option price to changes in different factors. The Greeks are crucial for managing risk and making informed decisions about options positions. Here are the main Greeks and their meanings:

  DefinitionValueInterpretationDelta (Δ)Delta measures the sensitivity of the option price to changes in the price of the underlying asset.ranges from 0 to 1 for call options and -1 to 0 for put options. It indicates the expected change in the option price for a one-unit change in the underlying asset's price.For example, if a call option has a delta of 0.50, it suggests that for every $1 increase in the underlying stock price, the option price would increase by $0.50.

 Gamma (Γ)Gamma measures the rate of change of delta concerning changes in the price of the underlying asset.

 Gamma is always positive and represents the curvature of the option price curve.A high gamma indicates that delta is more sensitive to changes in the underlying asset's price, especially when the stock price is near the strike price.

 Theta (Θ)Theta measures the sensitivity of the option price to the passage of time.Theta is always negative, indicating that options lose value as time passes.

 For example, if a call option has a theta of -0.02, it suggests that the option's value will decrease by $0.02 per day, all else being equal.

 Vega (ν)Vega measures the sensitivity of the option price to changes in implied volatility.

 Vega is typically positive, indicating that options increase in value as implied volatility rises.

 A vega of 0.10 suggests that the option price would increase by $0.10 if implied volatility increases by 1%.

 Rho (ρ)Rho measures the sensitivity of the option price to changes in the risk-freeRho measures the sensitivity of the option price to changes in the risk-free interest rate.

 A rho of 0.05 indicates that the option price would increase by $0.05 for a 1% increase in the risk-free interest rate.

There exist different ways to price an option, here is a table regrouping the most common models used to price them along with a description.

  ModelAssumptionApplicationBlack-Scholes ModelThe Black-Scholes model is used for European-style options.

 Constant volatility, no dividends, risk-free interest rate, and efficient markets.

 Widely used for equity options but may not accurately capture certain market behaviors, such as volatility smiles and skewnessBinomial ModelBinomial models can be used for both European and American-style options.

 The model assumes a discrete-time framework and allows for multiple periods, making it versatile.

 Particularly useful for American-style options and situations where the underlying asset may pay dividends.Trinomial ModelSimilar to the binomial model, the trinomial model allows for three possible price movements.

 It extends the binomial model to account for more complex scenarios.

 Provides a more accurate representation of certain market conditions compared to the binomial model.

 SABR ModelStochastic Alpha, Beta, Rho model used for European-style options.Introduces stochastic volatility and correlation parameters.

 Widely used for interest rate derivatives and certain equity options, especially in capturing the volatility smile.

 Monte Carlo SimulationA numerical method that simulates the random movements of the underlying asset's price.

 Flexibility to incorporate various factors and complexities.Useful for a wide range of options and derivatives but computationally intensive.

Woman of the Month:Janet Yellen

Janet Yellen is the Former Chair of the Federal Reserve and Former U.S. Secretary of the Treasury, and she has played a significant role in shaping monetary and fiscal policies in the United States.

In 1994, Janet became a member of the Federal Reserve Board of Governors and later served as the President and CEO of the Federal Reserve Bank of San Francisco from 2004 to 2010.

In 2014, she made history by becoming the first woman to be appointed as the Chair of the Federal Reserve of the Federal Reserve. During her term, she navigated the central bank through a complex economic landscape, thanks to the implementation of policies aiming at supporting economic growth and stability. 

Beyond her roles at the Federal Reserve, Yellen’s commitment to public service led her to swerve as the 78th United States Secretary of the Treasury. In January 2021, she was confirmed by the Senate, becoming the first woman to hold this position. 

“The strength of the economy lies in its ability to adapt and recover, fostering a resilient foundation for a brighter future”

WiF recommends 

"Why economists are at war over inequality" is a column from The Economist. The article focuses on the evolution of inequality over the last few years and the difficulties that arise from the methodology of measuring inequality.

Unhedged from Financial Times is a podcast hosted by the Financial Times journalists Ethan Wu, Katie Martin, and others. It provides two weekly episodes on global outlook, industry insights, and the latest markets and finance news.

The Value of Everything by Mariana Mazzucato is a book on modern-day capitalism, in which value-extraction is more rewarded than value-creation; for capitalism to reform, the focus must turn to origins of wealth.

What’s next?

As we dive into the exam period of our first semester, we're pressing pause on our weekly workshops. But don't worry, we're still on top of our game, eagerly absorbing financial news and buzzing on our social platforms!

Follow us on Instagram to catch all the action, including some really cool financial quizzes and the latest news on WiF. We're super excited about this season and can't wait to celebrate another Christmas with you all!