November 2023

Newsletter November 2023

November 2023:

October marked the beginning of our first meetings and aperitivos. After a busy exam session, we cannot wait to be back for more workshops, meetings, and exciting opportunities for WiF!

This November Newsletter wants to share with you the valuable insights we gained last month!

October Recap

• Moody's Online Event: met with Moody's representatives to gain insights on the credit rating process and pursuing a career as a credit analyst at Moody's. 

• Welcome Aperitivo: a welcome aperitivo marked the end of a successful recruitment process (with over 100 applicants), where new and existing members were able to socialise and get to know each other. 

• Mentorship programme: mentees paired with mentors, allowing for the exchange of advice and perspectives.

• Weekly workshop: an introduction to career paths in financial services, followed by an interactive Kahoot on current market events.

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!

Market Wrap-Up

IPO market attempts to bounce back after years of limited activity

These past few months the market has seen an increasing revival of IPOs. From Arm’s IPO in September to Birkenstock’s in October, reaching valuations of 54 billion USD for Arm and 8.6 billion USD for Birkenstock. After years of drought within the market, these IPOs were a test for banks to see investors’ appetite - dramatic rises in the first days, in the case of the tech IPOs, with their stock prices now circulating around initial prices. One of the contributing factors is the lack of free float shares, which previously averaged 20%, whereas now it does not edge 10%. At the same time, too many shares may erode the pricing tension but it may impair the price discovery process as share prices may be affected significantly by small trades. Just as it seemed the IPO market was ready for a revival, several firms began once again to delay these plans. CVC Capital Partners, a private equity firm, due to list this year, announced on Wednesday its delay to next year following the turbulence within the market. Geopolitical tensions, persisting high interest rates, and further poor performance of recently listed companies may further continue to deter listings.  

After months out in the wild, AI regulation looms over nations

These past few weeks major Western powers have expressed concern over AI regulation. Last Monday Biden announced that those companies, whose AI models can affect the interests of US national security, competition, and consumer privacy, will have to share methodology to ensure safety within their businesses. This is the strongest set of regulations seen in the world regarding AI. For a combined effort the UK will be hosting a summit of world leaders and tech company executives to develop a united front. Harris too signaled after the release of the regulation that they hope the US will serve as an example to others, working together with other countries to strengthen control of AI. EU is moving quickly to draft strict restrictions on the control of AI which promises vast amounts of knowledge, but tech leaders warn about its impending dangers. 

US and China tensions persist

The US and China have had some troublesome relationships over the past years. Hardships continue to persist despite efforts to stabilize economic and financial ties through the creation of working groups. Among the focus of the tensions is chip manufacturing: the US attempting to find other Asian countries willing to produce these chips (ex. Vietnam, Japan) and reducing access of chips to China, while China is likely to hold up US chipmaker’s Broadcom’s acquisition. Increased tensions within the semiconductor industry can have wider implications for other industries and outside countries as they may have to choose to side with either of the economic powers. Vietnam has already signed deals with the US, bolstering semiconductor supply chains, whereas Colombia has agreed to a strategic partnership with China, a hit to the US, for whom Colombia was its main South American ally.

Sources: Financial Times

Dealflows & IPOs this Month

Microsoft makes history by acquiring Activision Blizzard

Microsoft has finally closed the biggest deal in the gaming industry ever: the acquisition of Activision Blizzard, a video game company best known for publishing Call of Duty, for $69 billion in hopes to gain advantage against its main competitor Sony. The closing of the deal comes after the final approval from UK’s Competition and Market Authority (CMA). The antitrust regulator raised concerns about the acquisition shortly after its announcement in January 2022, saying that it would harm the competition between cloud-gaming companies in the United Kingdom. The deal was eventually blocked in April of this year, which forced Microsoft to adjust its terms dramatically. The new agreement was cleared after successfully addressing CMA’s concerns and, even though it still faces a minor challenge from the U.S. Federal Trade Commission (FTC), the acquisition remains a big victory for Microsoft.

Exxon Mobil buying Pioneer will mean domination over the Permian Basin

Exxon Mobil is set to become the biggest oil producer in the Permian Basin following its agreement to buy Pioneer Natural Resources for $59.5 billion. The deal will not only give Exxon a 15% control of the largest oil-producing field in the U.S., but will also more than double the company’s output, lower costs, and raise production. Analysts believe that the agreement was more of a choice than a need: since Russia’s war against Ukraine has increased the oil prices significantly, Exxon has been enjoying record-high profits and searching for new acquisitions. FTC is expected to approve the deal, which will put a competitive pressure on Exxon’s rivals. Regarding the environment, Exxon Mobil CEO Darren Woods assures that, as long as the world hasn’t switched to green energy completely, his company will continue to produce oil and gas at “the lowest carbon intensity”. 

Chevron to enter Guyana after acquisition of Hess

Less than two weeks after the Exxon Mobil-Pioneer deal, one of Exxon’s main competitors, Chevron, agreed to acquire Hess for $53 billion in stock. The deal will diversify Chevron’s portfolio by bringing in the oil assets of Guyana, which has become one of the leading oil-producing countries in the past decade; hence, Chevron’s oil and gas output is expected to increase by more than 10%. Although greater U.S. energy security will be ensured, environmentalists are still worried about the risks that both Exxon’s and Chevron’s deals will pose to the 2015 Paris Climate Agreement. The situation has also enhanced the contrast between the two companies and their European competitors, such as British Petroleum (BP), which have outpaced the U.S. in their investments in the renewable energy sector. 

The unexpected debut of Birkenstock

A well-known sandal company Birkenstock has gone public by listing its shares on the New York Stock Exchange in its initial public offering (IPO) at $46 per share. The decision came about as an attempt to raise Birkenstock’s capital to repay debt and expand the company. However, the first day of trading has been described as “disappointing” by many: the share price dropped to $40.20 in the evening, making this one of the worst debuts by a company in recent history. The following days were not any more successful, as the lowest trade recorded this month reached $36.38. It is speculated that the weak investor demand comes from Birkenstock’s overvaluation of its stock and the high Federal Reserve interest rates, which have negatively affected investors’ confidence and risk-taking.

Analysis of the Markets

Rates and Bond marketIn the Eurozone, the ECB has decided to maintain its interest rate level, Lagarde said that they would keep it at this level for as long as needed. The eurozone predicted HICP for October 2023 is 2.9% which shows an evolution in the right direction of reaching the target of 2% inflation again. The inflation target is the ECB‘s main priority but member states and ECB should pay attention to growth and coordinate their fiscal policy with the current monetary policy to avoid a recession.Keeping high interest rates is also the trend in the US where the Fed also decided to maintain interest rates with respect to the last meeting. Prior to this meeting, there has been a large bond sell-off as we have seen that for instance the 10 year treasury note reach above 5% yield which led investors to sell their old bonds to invest in newly issued bonds with higher yields. This is an historic level as this is the first time since 2008 that we have seen such high yields for a 10-year note. Impact on equities and their performance As investors wanted to invest in the newly issued bonds they were less concentrated on equities. This led to equities not performing as well and more volatility in the equities market. This trend transpired in the Eurozone as well.Although the stock market has not been as favoured as the fixed-income market by investors, October meant earnings seasons and strong results led Verizon Communications, Nike and Microsoft to be top performers in the Dow Jones industrial average in the month of October, respectively gaining 8.4%, 7.4% and 7.1%. The top performer on Nasdaq 100 was Netflix this October, probably partly due to their strategy of limiting the number of users in the same household.In October, the S&P 500 index was down 2.2% compared to September. Energy was top performer this month (+12.2%) and information technology one of the worst performers (-5.6%). Gold price rally this monthIn commodities, gold prices rose and broke above 2000$/oz following the start of the conflict in the Middle East. Gold is often deemed to be a safe investment in periods of uncertainty thus explaining the sudden rally in price starting in early October.

Technicals Explained:The Capital Asset Pricing Model

The Capital Asset Pricing Model (CAPM) is a financial model that calculates the expected rate of return for an asset or investment. It does this by using the expected return on both the market and a risk-free asset, along with the asset's correlation or sensitivity to the market, known as beta.This model is commonly used in finance for pricing risky securities and determining expected returns for assets. It relies on certain assumptions, such as the efficiency and rationality of financial markets, but these assumptions have been criticized for not holding up in practice.

Understanding the formula

The CAPM formula aims to assess whether a stock is fairly valued by comparing its risk and the time value of money to its expected return. It combines the risk-free rate with the product of the stock's beta and the market risk premium to derive the required return or discount rate for the asset.The formula for calculating the expected return of an asset, given its risk, is as follows:

where:

The model uses an asset's beta to measure its risk compared to the market, since the beta of a potential investment is a measure of how much risk the investment will add to a portfolio that looks like the market. If the stock is riskier than the market, it will have a beta greater than one; if it's less risky, the beta is less than one.

A stock’s beta is then multiplied by the market risk premium, which is the return expected from the market above the risk-free rate. The risk-free rates then added to the product of the stock’s beta and the market risk premium. The result should give an investor the required return or discount rate that they can use to find the value of an asset.

What are the CAPM assumptions? 

The following are assumptions made by the CAPM model:

• All investors are risk-averse by nature.

• Investors have the same time period to evaluate information.

• There is unlimited capital to borrow at the risk-free rate of return.

• Investments can be divided into unlimited pieces and sizes.

• There are no taxes, inflation, or transaction costs.

• Risk and return are linearly related.
  

What are the CAPM limitations? 

Several assumptions behind the CAPM formula have been shown not to hold up in reality. Modern financial theory rests on two assumptions:

• Securities markets are very competitive and efficient (that is, relevant information about the companies is quickly and universally distributed and absorbed).

• These markets are dominated by rational, risk-averse investors, who seek to maximize satisfaction from returns on their investments.

As a result, it’s not entirely clear whether CAPM works. The big sticking point is beta: including beta in the formula assumes that risk can be measured by a stock’s price volatility. However, price movements in both directions are not equally risky. The look-back period to determine a stock’s volatility is not standard because stock returns (and risk) are not normally distributed.

The CAPM also assumes that the risk-free rate will remain constant over the discounting period, but an increase in the risk-free rate also increases the cost of the capital used in the investment and could make the stock look overvalued. 

However, most serious critique of the CAPM is the assumption that future cash flows can be estimated for the discounting process. If an investor could estimate the future return of a stock with a high level of accuracy, then the CAPM would not be necessary.

While the CAPM has its limitations and unrealistic assumptions, it is still widely used for its simplicity and for making comparisons among investment alternatives. It is also employed in conjunction with Modern Portfolio Theory (MPT) to understand portfolio risk and expected return.

What are the alternatives to  CAPM? 

Because of its criticisms, several alternative models to the capital asset pricing model have been developed to understand the relationship between risk and reward in investments.

One of these is Arbitrage Pricing Theory (APT), a multi-factor model that looks at multiple factors, grouped into macroeconomic or company-specific factors.5

Another is the Fama-French 3-factor model, which expands on CAPM by adding company-size risk and value risk factors to the market risk factors.

Since this section only aims to give a broad overview of the CAPM, below are some concepts to explore to further inform yourself about the topic:

The CAPM and the Efficient Frontier

Modern portfolio theory (MPT)

CAPM and the Security Market Line (SML)

Arbitrage Pricing Theory (APT)

Fama-French 3-factor model

Woman of the Month:Claudia Goldin

Claudia Goldin made history by becoming the first solo woman to win the Nobel Economics Prize for her work on women’s labour market outcomes and the gender pay gap.

Professor Goldin is an American economic historian who teaches labour market history at Harvard University and is a co-director of the National Bureau of Economic Research’s (NBER) Gender in the Economy Study Group.  

"Her research provided the first comprehensive account of women’s earnings and labour market participation through centuries", stated the prize-giving body. Goldin’s findings gave invaluable insights into women’s role in the labour market and the sources of the gender pay gap over time. For instance, her research revealed that the growth of the service economy, higher educational levels, and the contraceptive pill all played a role in increasing women’s labour participation in the 1900s. Furthermore, it was discovered that although educational and career choices were previously the cause of the earnings difference, the impact of having children has now become the main cause. Professor Hjalmarsson, a member of the prize-awarding committee, said that this research is a foundation for policy-makers in this area worldwide. 

Being the first woman to receive the prize without sharing with male colleagues, as well as the first woman to receive tenure in Harvard’s economics department, Claudia Goldin has been instrumental in paving the way for women in the field of economics. 

WiF recommends 

Myth of Money is a weekly newsletter by Tatiana Koffman, a former Forbes crypto columnist. It covers a wide range of topics: economics, crypto, and technology, highlighting different hot topics and a summary of the week.

Money Talks from The Economist is a podcast hosted by The Economist journalists. It provides a weekly talk on some of the most fascinating financial topics in today's environment from a different perspective.

A Random Walk Down Wall Street by Burton Malkiel is a book on stock markets, that developed the random walk hypothesis. The Princeton University economist examines popular investing techniques alongside their flaws.

What’s next?

As the second half of the semester commences, we look forward to networking events, weekly workshops, and, as always, honing our skills and knowledge in the financial area.

Follow us on social media so you don't miss our coming events. There you'll also find fun quizzes about the financial world and news on WiF.