GSBS 6140 Investment Analysis | Assignment Help
Abstract
The report has the two objectives. First, to analyses the risk-return features of the Australian stock market under normal market conditions and after an extraordinary occurrence (such as COVID-19 outbreak). Third, to examine the impact of COVID-19 outbreak and the resulting government policy responses on the share prices of the Australian firms. So, returns and risks are calculated along with some finance regression model in order to fulfill the objectives. The event studies is also used to predict the positive and negative impact of stock market.
Introduction
In this report, we analyzed the two industries in which we transportation industry has been taken as that sector which had been adversely affected by the COVID 19 pandemic. While health care and services are the sectors which has been resilient in this pandemic. The best indicators to analyze these sectors is the trend of share prices of the companies which are lying in both sectors.
The ongoing COVID 19 pandemic is still visible globally and in Australia and it is significantly affecting number of industries. While there are some industries which are resilient prospering. Supply chains have been broken, the unemployment levels have increased, and in many nations the public health crisis has worsened. Despite unprecedented government stimulus packages being implemented, and interest rates falling to near zero, the pandemic still affects many industries.
Figure 1: Industries which is most impacted by COVID 19 (Kumar & Haydon, 2020)
According to the chart, the most impacted industry is the Airline sector. The Y-axis in the chart shows the probability of default which uses both the risk or price movement in the stock prices and asset volatility (Kumar & Haydon, 2020). The reasons for the decline in the airline industry are the closure of borders by the Australian government along with lack of demand for travelling during COVID 19 pandemic.
Figure 2: Chart also showing industries which are least impacted by COVID 19 (Kumar & Haydon, 2020)
From the above chart, it is shown that health care or services and industries were the least impacted sector during the COVID 19 pandemic. The probability of default was almost 0.4% for the health care and services which tells it has been more resilient.
The objective of this study is to analyze the returns and risks of the stock prices of the most impacted (Transportation) and least impacted (health care and services) industry in Australia. The two periods had been selected one which is pre-COVID 19 periods (21 November 2018 to 15 November 2019) and second is the extreme period of COVOD 19 (20 January 2020 to 30 May 2020). During this extreme period, there had been two events where the stock market had been impacted one is when the World health organization announced COVID 19 as a health emergency on 30th January 2020, and second is when World health organization announced COVID 19 as the pandemic and this event crashed the stock market badly (Anon., 2020).
From 21st March 2020, the stock market shows the positive signs of improvements where the prices of most of the company were showing the increasing trend because it was the time when Australian government announced the AUD66.4 billion stimulus package and on 30th March 2020 the government also announced the AUD130 billion job keeper package which covers the 6 months’ salary of the workers (Anon., 2020).
Methodology
The five companies which our group has selected from the most impacted industry (Transportation) are Qantas Airways (QAN), Virgin Australia (VAH), A2B Australia (A2B), Air New Zealand (AIZ) and Alliance aviation service limited (AQZ). For these companies, we calculated returns and risks for the two-period. Moreover, two regression models have calculated individual firms and as well as for the weighted portfolio of these five companies. The five companies which our group has selected for the least impacted industry during COVID 19 period are Nanosonics Limited (NAN), Sonic healthcare limited (SHL), Ansell Limited (ANN), Resmed Inc (RMD) and EBOS group limited (EBO). For the least impacted industry, we took an extreme period under consideration which is the only indicator to tell us whether the industry is resilient or has overall positive average returns.
For both industries, we calculated daily returns for each of the company for two different periods and then we calculated the average return for two particular periods. We also calculated the average portfolio return for the combined 5 companies in the most impacted sector.
Furthermore, the risk is also calculated for each of the firms in both the sector by calculating the standard deviation of the stock prices for each company in both sectors.
For the single index and fama-french 3 factor model we first collect the data of the market return which is in excess of risk-free return, we also collected data of the self-financing equity returns of small minus big and high minus low factors. We also collected the data of risk-free return which is the US treasury bill rate. Moreover, we also calculate how individual daily stock return is in excess of the risk-free rate for example Qantas airways daily return minus risk-free rate. The single index model is the single regression model so in this model the dependent variable y is the (Rj-Rf) which is the individual stock return in excess of the risk-free rate and the independent variable is (Rm-Rf) which is the market return in excess of the risk-free rate. Fama French 3 factor model is the multiple regression model, so we added 2 other independent variables of Small minus Big (SMB) and High minus Low (HML) along with Rm-Rf which was included in the single-index model.
In this report we estimated the main events where the stock market has both positive and negative impact during the extreme period in both the industry. The stock market has the adverse impact when WHO announced COVID 19 as the pandemic on 12th March 2020 as the following table which shows stock prices suggest that the transportation industry have the worse impact.
While health care industry was resilient during this event.
Empirical results
Descriptive statistics
Most impacted industry
The above table shows the average return, risk and weighted average industry portfolio return during the normal period which was pre-COVID 19 from 21st November 2018 to 15th November 2019.
The above table shows the average return, risk and weighted average industry portfolio return during the extreme period which is the COVID 19 period from 20th January 2020 to 30th May 2020.
It is shown from the tables that the transportation industry had been impacted badly during COVID 19 period as the weighted average industry portfolio return was negative 0.35% in extreme period while it was positive 0.01% during normal period. The risks were also high which suggest that prices where more volatile during extreme period.
Least impacted industry
The above table shows the average return, risk and weighted average industry portfolio return during the extreme period which is the COVID 19 period from 20th January 2020 to 30th May 2020. The results illustrate positive 0.1% return of weighted average industry portfolio which tells it was resilient, but it was more volatile as compare to most impacted industry.
