ANALYSIS OF THE COLOMBIAN ECONOMIC ENVIRONMENT
Currently the country is in a very tight economic situation and very uncertain, with elections close and strong speculation of the dollar in recent weeks; Banco de la República is willing to defend the exchange rate band at any price and is "punishing" the liquidity of the banks to curb "speculation" and attacks on the gang, with which the Repo Rates were placed around 80 % in the last week, which marks the interest rates; generating a spread of capital from the equity market to fixed income, with which the stock indices IBB and IBOMED have experienced a great fall, reaching levels of 1994 or early 1997. Many national investors decided to assume the large losses they have had in the stock market liquidating its portfolio,some to take advantage of the current conjuncture of interest rates, others to speculate with the dollar and the rest to avoid facing a higher opportunity cost.
The following is a more detailed analysis of the different macroeconomic variables of greatest incidence and interest, as well as the behavior of the stock market:
- GDP: After an excellent first quarter in which GDP grew above 5%, economic growth, now without momentum, will decline in the rest of the year. Most likely, GDP growth in the last quarter of the year will barely exceed 1%. On average, growth in 1998 will be close to 3%. The collapse of international oil prices, as well as the effects of the child phenomenon on the coffee harvest and the fall in the external price, will be the main causes for the slowdown in GDP. INFLATION:The consumer price index (CPI) has been 12.73% so far this year, which makes it impossible to reach the Banco de la República's goal of 16% for 1998. The CPI will be at the end of 1998 around 20%. This increases the loss of purchasing power, since the workers underwent salary increases of close to 16%. MONETARY BASE: Through this variable, the Banco de la República manages monetary policy; it is located within its respective corridor, although near the lower limit. This means little liquidity and therefore pressure on interest rates.
Monetary base
- INTEREST RATES: Those who think that after knowing who the new president will be, interest rates will go down, they are wrong. While it is true that this situation will free the market from so much uncertainty, it is also true that the Board of the Banco de la República will not change, and therefore will keep its high interest policy intact instead of a possible currency crisis; In addition, the three bridges that come mean three days less, for the banks, to obtain resources and comply with the biweekly reserve requirement, which will continue to pressure the Interchange Rate. This means that as long as liquidity continues to be penalized, rates will remain high. Under this circumstance, the beneficiaries will be lenders and savers, since some entities have offered up to 50% cash for 30-day CDTs.
Interbank rate
- REPRESENTATIVE MARKET RATE: Although the value of the currency has begun to drop, the Banco de la República is not expected to modify the established limit, because its decision is to handle the situation as strictly as possible. The dollar has already taken off the band ceiling, without the Central Bank having to withdraw reserves, only with the liquidity restriction that has gone from 760,000 million to 220,000 million has it succeeded. For forex traders, the dollar began its firm process of breaking free from the band ceiling, after spending two weeks at the peak.
Representative market rate
- STOCK MARKET: As a consequence of high interest rates, the country's stock markets have suffered significant falls in their indexes in the last week. Apparently so far, the business is obviously fixed income, since there is no action that gives a 40% profitability in the short term with this political uncertainty and what is observed with interest. The truth is that the stock market will continue to be depressed and contracting, and whoever has money to invest can do in stocks in the long term, due to the extremely low prices.
In the graph we can see how the IBB has dropped vertiginously, almost 60 points in a week:
IBB Period analyzed
The following figure shows how the capital market is composed:
Most demanded papers in the Stock Market
The graph shows a large percentage of investment in fixed income (approximately 90%), which corroborates the great uncertainty and the low confidence that appears in the stock market.
To finish we can say that if we continue like this, the national economy will surely end up strangled by the end of 1998; With which there will be an urgent need for the new government to implement a serious policy of fiscal adjustment (following the trend, the fiscal deficit would stand at 8% of GDP for 2002) and probably of exchange adjustment (the current account deficit). it reached 6% in 1997, being the highest in the postwar period). We live a distorted of oil and the prices of basic products. And international investment is going in search of the great opportunities offered by emerging countries that have accelerated their structural reforms. With the change of government, the wait for risk rating agencies and international banks is also over;If the new government does not show that it understands the seriousness of the economic problem and is willing to face it seriously, the holders of capital will move swiftly and none will want to be the last to leave the country.
SUPPORT OF THE PORTFOLIO AND METHODOLOGICAL CONSIDERATIONS.
Composition of the Portfolio
Fixed rent
In fixed income $ 28,878,533.73 was invested, equivalent to 72.2% of the total of the $ 40,000,000 assigned.
This decision was made, observing the behavior of interest rates, which were high at the time of purchase, taking into account the averages recorded in previous days.
The securities were purchased based on the effective annual rate of return they offered, so the highest interest rates were purchased.
TES Treasury Securities were purchased taking into account their minimum level of risk, in addition to Public Bonds that also present minimal risk and CDT's from highly backed financial institutions. The minimum risk of these papers was taken into account to counteract the high risk of investing in shares and currency.
VARIABLE INCOME
SHARES: For the investment in shares, the behavior of the shares in the two weeks prior to the purchase was taken into account, the shares that had been increasing even though they were low were invested, since the stock market was in a period of recovery in the price of the most highly tradable stocks. The amount invested was $ 9'080.990, equivalent to 22.7% of the total amount assigned.
The drop in prices was registered mainly during the period from May 29 to June 5, caused by excess supply by investors who were infected by the uncertainty at the level of interest rates. They also decided to assume the large losses they have had in the stock market by liquidating their portfolio, to take advantage of the current situation of interest rates (explained in the analysis of the economic environment), others to speculate with the dollar and the rest to avoid facing a higher opportunity cost. The large offers coincided with a total absence of demands, which led to significant decreases in the vast majority of the shares.
CURRENCY: It was decided to invest in dollars taking into account the events that occurred in the days prior to the purchase, within which we can cite the statements of the IMF representative and the reduction of the internal debt risk rating by Standard & Poors, which scared the foreign exchange market. The great demand for foreign currency of those days led to the TRM being at the top of the exchange rate band.
In addition, the proximity of the presidential elections of May 31, which filled the market with uncertainty, was taken into account, which would put even more pressure on the TRM.
METHODOLOGICAL CONSIDERATIONS
Based on the Markowitz model, proposed in the class, and taking into account the profit prospects provided by the Bogotá Stock Exchange for the return on assets and the expected devaluation rate for the dollar of the Banco de la República; we have:
- - TES (r 1): 29.5% Annual Cash (EA) = 0.0708% daily cash (ED *) - Public Securities (Bonds) (r 2): 64% EA = 0.0934% ED - CDT's (r 3): 33.43% EA = 0.0790% ED - Shares (r 4): 32.49% EA = 0.0771% ED - Dollar: 16% (devaluation) (r 5) = 0.0406% ED
Portfolio profit
We calculate the portfolio profit taking into account the fraction (w j) for each respective investment (they are given in the portfolio composition table and the end of the year, they correspond to the percentage invested in each asset, with w 1 TES = 5%, w 2 Bonds = 35%, w 3 CDT's = 32.2%, w 4 shares = 22.7% and w 5 currency = 5.1%).
Portfolio Profit
Portfolio risk
Using statistics to calculate risk and taking into account the assumption that the more variable the possible returns on a project, the more danger it has, we use the standard deviation of the mean or the expected value of return to compare the risk related to projects of different magnitude (fixed income and variable income).
We use the expression:
Portfolio risk
to calculate the risk associated with each investment.
Again the percentage or fraction is taken into account for each investment (w j), which had been taken into account in the portfolio profit.
Then you have:
Analysis Mathematical Formulas
Now using the equation:
Equations Obtained
With this expression we came to determine portfolio risk based on the correlation coefficient.
CONCLUSIONS AND PROFITABILITY OBTAINED
- The profitability obtained was <$ 183,256.83> for the period, this was mainly due to the collapse of share prices caused by the uncertainty caused by the exaggerated climb that interest rates suffered (due to the decision adopted by the Bank of the Republic to defend through these, the exchange band) between May 29 and June 4 mainly, which led investors to liquidate their stock portfolio to move to fixed-income papers, leading to exaggerated offers and almost null demands In spite of this profitability, it seems to us that the choice of the portfolio was not wrong, since at the time of purchase the shares came in a recovery, which although slow was stable. In addition, the previous calculations of Portfolio Profit and Risk were flattering,since in such a short time a good level of profitability was obtained with a minimum of risk. We do not take the easy side of simply investing in fixed income, but rather explore other alternatives that allow us to apply income and risk analysis. Within the risk there is non-diversifiable risk, which is given by exogenous conditions such as inflation, tax burden, etc. In this exercise we found an exaggerated variation in interest rates in terms of days, we could not have predicted this, we knew that the rates were high and would continue to be so, but no one was in a position to forecast something like this.Rather, we explored other alternatives that would allow us to apply income and risk analysis. Within the risk there is non-diversifiable risk, which is given by exogenous conditions such as inflation, tax burden, etc. In this exercise we found an exaggerated variation in interest rates in terms of days, we could not have predicted this, we knew that the rates were high and would continue to be so, but no one was in a position to forecast something like this.Rather, we explored other alternatives that would allow us to apply income and risk analysis. Within the risk there is non-diversifiable risk, which is given by exogenous conditions such as inflation, tax burden, etc. In this exercise we found an exaggerated variation in interest rates in terms of days, we could not have predicted this, we knew that the rates were high and would continue to be so, but no one was in a position to forecast something like this.but no one was in a position to forecast such a thing.but no one was in a position to forecast such a thing.
* This daily effective rate is multiplied by the 21 days that the exercise lasted and we obtain r i
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