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Introduction
Recession features existed provided that man and the past it may be consolidated to just one region. Today, recession has become a global matter because once a region is affected, it can easily propagate across the global economy. The earth has confronted some significant economic break downs over the past centuries many of which include, the stock market bubble in 1850, the 1929 Wall Street crash, the 1974 crash, the 1987 crash, called black Monday, the dotcom bubble of Mar 2000, the 9/11 harm in America and the most recent financial meltdown caused by the subprime mortgages in the US.
Recession provides a lot of effects on an economic climate as well as the industries engaged in operate in the economy. During a recession most companies lose benefit and this includes a lot of results on stakeholders, that is, workers and shareholders. The the latest financial crisis brought on firms to loss more than 40% with their share benefit and had tremendous effects on major economies like Japan, China plus the UK. The Oil and Gas Market has also been impacted by recession during the last decade. That kicks off in august 2005, the price tag on oil was $60 per barrel and by July 08 it had reached $147 every barrel since result of the recession as a result of the financial crisis. However , numerous theories had been developed to understand what can determine the true value of a organization. Some of these theories include the gross valuation model, capital advantage pricing version (CAPM)
Statement of Problem
Most research have suggested a strong link between the talk about prices of any company, their earnings and its particular beta. This research is geared towards investigating whether recession contains a positive or perhaps negative impact on the value of corporations in the UK together with the case staying the gas and oil industry. Although future profits and share betas are increasingly becoming popular in determining reveal prices, current earnings being used as a table mark to get share rates rise and fall or a better sign for takeover. The family member importance of all these indicators in predicting share prices or perhaps company benefit is still unknown, because sometimes investors employ different strategies at different times in calculating or estimating firm value.
Research Queries
As being a perfect information and way of getting a very good direction throughout this research, I intend to answer the next questions in this research.
” What determines the value of a business?
” How exactly does recession influence oil and gas firms?
” Do post economic downturn values in the company’s share price depend on the economic downturn?
” Precisely what are the effects of economic depression on the global economy?
” What will end up being the necessary steps taken to prevent this kind of a huge impact around the oil and gas industry in the future?
Research Objectives
The primary aim of this kind of research is to review the impact in the recent economic downturn trends for the value of oil and gas market in theUK, its effects on the economic system, as well as challenges faced by oil and gas companies to maintain their particular value. This kind of research likewise seeks to distinguish if the rates quoted by oil and gas companies in the stock market market reflect their authentic value. Therefore , my objectives are to: –
” Look into the major determinants of the benefit of a company.
” Research the effects of economic downturn on the value of a share.
” To recognize whether current earnings, upcoming earnings, and promote betas are of importance into a prospective entrepreneur.
” Analyse the effects of downturn on the global economy.
” Analyse the effects of recession about oil and gas businesses in theUK.
” Advise solutions based upon this research and other conclusions to prevent such a huge impact in future.
Contribution ” Relevance of the Targets and the Expected Outcome
From my previous encounter in the monetary sector now undertaking a financial orientation training course, this studies going to simplicity my understanding of the stock market market, just how it features and how public information affects the prices of stocks in the stock market. This research will also aid in exploring the different techniques found in company worth evaluation which will aid top rated level administration in discover the most highly effective indicators and allow them shape their discuss prices with better accuracies. During recession the beta or likelihood of a reveal is larger hence this research will even explain how relevant the beta of a share influences its value.
Brief Literature Review
Approximately this time no theory has been created to explain the movement of share prices in the stock exchange market. It has made it really hard for possible shareholders never to easily predict prices pertaining to shares for buying and providing purposes. Bodie et ‘s, (2002) argued that details that could be employed in predicting inventory price must have been reflected in share price, therefore only fresh information in to the market can influence the upward and downward activity of prices of shares. Reveal prices are characterised with the unpredictable characteristics, this is because the prices of shares usually push with respect to the info that goes in the market. In case the information can be positive, you will see an upwards movement in the prices of shares of course, if the information is definitely negative, you will see a down movement inside the prices of shares. This negative details is common during recession which is the primary focus of this analyze. The idea that reveal prices currently reflect all relevant data leads all of us to the useful market speculation.
The Efficient Industry Hypothesis
Lumby and Jones (2003) stated a stock market is said to be efficient in the event the market price of a company’s shares rapidly and correctly shows all relevant information since it becomes available. In this regard, if information turns out to be entirely reliable and, share rates could be trusted to correctly reflect the true economic worth of the stocks. In such a marketplace overvalued or perhaps undervalued stocks would not exist.
The objective of an investor dealing with stock market is to identify mispriced shares. Purchase undervalued shares before the price rises and sell overvalued securities before the price falls. There are three basic analysis investors use to identify mispriced securities, Technical analysis, fundamental analysis and insider information.
Technical analysis: Analyst study share price movements with the intention of discovering a pattern in movements. Once this pattern is identified for a particular company and if they see one of these patterns starting to develop, they believe they are then able to predict the shares future course of movements and so give either buy or sell investments advice.
The fundamental analyst: A variety of information is a analysed with the use of share valuation models to determine the value of a share. Comparing between the actual worth of the share with the market price is the objective here. If the worth is more than the market price of the share, then the share is undervalued and hence a buy advice and conversely a sell advice if the share is overvalued.
Insider information: All investors are looking for information insight and connections which they believe are not yet fully reflected in the market price.
Although this theory recognizes the importance of information in shaping share prices, it fails to indicate which among these indicators have a powerful influence over share prices.
Capital Asset Pricing Model and share betas
According to CAPM, the price of a share is related to the risk of holding the asset. At a relatively high risk, investors will be expecting higher returns and as such will bid dawn the share price. This is based on the assumptions that the investor is holding a well diversified portfolio and as such the unsystematic risk have all been diversified .Therefore, the return expected is compensation for the market risk, this means that, the expected return from an investment in share is equal to risk-free return plus risk premium ( Risk premium being the market price of systematic risk).
Formulated by Sharp in 1964, he argued that creating portfolio reduces company’s risk. He divided the risk into two categories namely the systematic or market risk or the unsystematic or diversifiable risk
Unsystematic risk: This risk is associated with specific factors affecting the company such as the quality of management, advertisement, research and development. According to Sharp, the systematic risk decrease as the number of investments in a portfolio increases. A rational investor should hold an efficient portfolio whereby all the unsystematic risk have been diversified away.
The systematic risk: This is called the market risk. It can be defined as the extent to which a company’s cash flow is affected by general economic factors such as inflation, interest rate, exchange rates. When there is a recession there is going to be a general fall in the share prices of all the companies. The rate at which company’s share price is affected depends on the risk associated with that particular company. This risk factor is called betas
Share Betas is the relationship between the systematic risk of company and the overall risk of stock market (market risk). It therefore measures the degree of responsiveness of the expected return of the share relative to the expected return of the market. For example if expected return of the market falls and rises, that of the company will fall and rise in proportion of its beta. It therefore measures the degree of variability of company’s return in relation to the expected market return.
Although this model has been criticized because of numerous unrealistic assumptions that question its predictive powers, the model can be credited for providing financial managers with a suitable project discount rate. The model concludes by saying the greater the share beta the higher the risk associated with that asset and hence investors are expecting a higher return from the share. The result is the share price will fall or better still the higher the beta the higher the discount rate and hence share price falls.
The weaknesses of CAPM let to the introduction of the Three Facto Model by Fama and French and in 1976 Stephen Ross developed the Arbitrage Pricing Theory which completely transformed the single Facto CAPM to a multi Facto Beta Model.
The Dividend Valuation Model
According to the model share prices are only determine by expected future level of dividends and the systematic risk of future dividend flows. It can be expressed as . Where, PE is price of share, D is dividend payout, and is cost of equity. The model assumes that future expected dividend flow will remain at a constant level for all future time period ( a level in perpetuity). Although some companies have been observed to have an approximated constant dividend per share over a longtime, in practice most company’s dividend per share are subject to changes over time. This has let to a more realistic version of the model which explains the growth of dividends at a constant rate. It can be expressed as . Where, PE is share price, Ke is cost of equity and g is growth rate.this model has been criticized for not providing information about share price when companies retain all or a greater proportion of earnings.
Recession and its effect on the UK Oil and Gas Industry
A recession is characterised with falling property prices, rising cost and personal debt and those mostly affected by it will those with low incomes. Standards of living will also fall as a result of recession and low income families will have no other option other than reducing the amount spent on basic goods and fundamentals. Estimates show that September’s 16 year high in the rate of inflation will add?3 billion to the UK’s welfare bill. Those who will be greatly affected will include the elderly and the disabled who live on a poor diet and inadequately heated homes (Research Summary, 2008)
At the level of the stock market, investments that demand on a buoyant stock market will become increasingly devalued, a trend that may be exuberated by rising inflation. Those at risk here will include those that rely on work place pensions to sustain them through retirement and endowment policy holders who may find themselves unable to cover the value of the loan at the end of the mortgage term. Recession also comes with a lot of social ills such as more crime, violence, and anti-social behavior.
At the educational sector, recession has neither been friendly. It has affected the willingness and ability of some students to study, for instance, in order to bail the economy out of the recent recession, the government has decided to increase the school fees of students by almost triple the previous amount causing more difficulties for parents to send children to school. However, some people think that recession comes with a blessing as people drink less, smoke less, eat healthier food, and spend less on extravagant spending. Recession also speeds up the business evolution forcing companies to reduce costs and adapt new processes.
At the level of mortgages, people tend to lose their homes and livelihoods, for instance, in 2008, mortgage repossessions rose by 50% giving an average 305 people declared bankrupt every day. Krogdahl (2010), states that the recession has called for a reduction in cost, and team size of the company while their property portfolio works harder, however they are faced with the dilemma of whether their portfolio will split when their organization begins to grow.
CIPD (2009) stated that this has been the worst recession affected by UK since the Second World War. They say that the manufacturing sector has been the sector which has and is suffering most from the recession. With respect to full time and part time workers, full time workers have been more seriously affected and they experienced a downturn of -3% during the first year of recession. There has been a generally perception that as a result of the recession more women lost their jobs than men, but this ideology was dismissed by the office of national statistics which proved that lost more jobs. Between 2008 and March 2009, men unemployment rate rose from 2.4% to 8.1% while for women it rose from 1.4% to 6.4%. According to Phillips (2009), young people between the ages of 18 and 24 suffered most from the recession when it came to layoffs while old staffs above the age of 40 years were least affected.
According to Daniel (2008), most firms experience decline in profitability during recession because of the tendency of price wars which will lead to low sales which consequently lead to low revenues. Firms producing luxurious goods with price elasticity of demand >1 will certainly experience the biggest fall in require while businesses producing fundamental necessities will become insulated through the effects of downturn.
The IMF predicted Great britain falling in to the recession last year as its growth rate outlook fell coming from 1 . seven percent to-0. 1%. David Blanch flower, a monetary policy committee affiliate in the Bank of England predicted that over two million people will likely be unemployed by the end of 2008. ITV announced a thousand job reduces, HSBC 1100, UBS one thousand and GSK 400. Mortgage lending fell by 95% as a result of insufficient bank auto financing which made it difficult intended for first time potential buyers to step into the property corporate. Pension qualified Hargreaves Lansdown estimated the fact that system has lost? two hundred fifty million and is presently really worth? 1000 million (Hopkins, 2008).
The present going green scheme has increased most energy companies costs cost since extra care has to be used so as to safeguard the environment. Inside the recent economic downturn in theUKoil demand in brief drooped by simply nearly 3mbpd (million barrels per day) about half of what took place at the beginning of the financial crisis in 2008. Redundancy and forced wage cuts have also been common unwanted side effects of the current recession (Wireline News, 2011).
According to Webb (2010), in order to efficiently overcome the recession, the industry should work collaboratively both through the sector and with Authorities at nationwide, regional and local level to formulate new systems, improve operating practices and efficiencies and drive down costs. This will help to boost the UK source chain’s comparative advantage inside the global market and ensure the industry’s critical suppliers retain a occurrence here.
Relating to Roberts (2010), most sectors in the economy virtually depend on olive oil such as transport, retail, agriculture, power generation and heat. The present recession has depressed demand in a temporary or sustained approach as was your case in 2008. They have rendered new oil discipline development more difficult especially when the reason for expansion is to preserve low prices. The collapse from the oil prices and doubt of the interesting depth and period of recession features forced experts to look the cost of existing and gradual oil creation and the effect of price and downturn on future oil require growth.
Research Methodology
Your research method is incredibly relevant since the results of any research issues on the method used. You will find two significant research methods which make clear how studies carried out, these are the positivism and interpretive methods (Colley and Hussey, 2009). Quantitative methods of analysis will involve working with some offered data plus the end result will probably be some kind of bottom line derived from working together with the data. The earth rule the following is that the investigator is self-employed and does not impact the subject of research (Remeniyi et ‘s, 1998).
Inside the research, our company is trying to set up a relationship among recession plus the value of any company (share price). Therefore , accounting variables such as profits per share (EPS), returns per discuss (DPS), and current income will be used. This kind of research shall use data from more than 30 coal and oil companies listed in theLondonstock exchange market via 2000 to 2010. The main focus will be to see if there has been any change in the as a result of the recession inside the prices of shares of the companies as well as their betas and if the values reflect their very own true benefit. This time level covers ahead of and during the recession.
Research Method
This kind of research should be based on extra data. This is certainly data which includes already been recorded for another purpose (Saunders, ainsi que al 2007). There are 3 types of secondary data, these are study, documentary and data from other sources that may not be categorized. Your data that I want to use in this kind of research will incorporate share prices of oil and gas companies in the UKand this kind of data will probably be obtained from the published monetary statements and statistical details of the Birmingham stock exchange and from the internet through reliable search engines like yahoo. Academic journals and articles will be of extreme importance especially from visible financial copy writers and consultants. A more intensive literature assessment will help in acquiring second data from popular authors. I plan to use principal data such as interviews with managers, stock brokers and analysts of some of the oil and gas companies so as to answer the research questions and present the research even more credibility and reliability. Interviews shall be organized and should be done by speaking.
Way of Analysis and Findings
In this study both quantitative and qualitative methods of research will be used to assess the collected data. Quantitative method calls for the use of record tools such as correlation research, statistical tables, charts and graphs established relationships. In the mean time the qualitative method will probably be consent with comparing the strength of the relationship that exist between current earnings, upcoming earnings, and promote beta with actual share prices of oil and gas corporations with respect to stable economic periods and times witnessing downturn. This analysis will also evaluate the changes of the interest rates of some of the oil and gas companies in the united kingdom over a five year period.
Type of presentation
The work will probably be presented in both hard and smooth copies. The hard copy will probably be presented in A4 daily news format style. Data collected will be presented with the use of dining tables and graphs.
Plan of Activities (Gantt chart).
Weeks via April to August
Activity
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Proposal
Literature Review
Info Collection
Data Analysis
Article draft
Change final draft
Final Record
Complete final Report
References
Articles or blog posts and Periodicals
Barnes, Daniel (2008) Recession Fears Causing Financial debt Depression, myfinances. co. uk accessed on 12. apr. 2010
CIPD (2009), Careers: The Impact of Recession and Prospects intended for Recovery, September. London: CharteredInstitute ofPersonnel and Development.
Johnathan Krogdahl (2010), Corporate Real estate property: A study with the effects of recession for the UK’s CRE Professionals, The Curzon Alliance.
Kathryn Hopkins (2008), Indications of Recession: The effect on Britain’s real economic system. The Mom or dad.
Malcolm Webb (2010), Coal and oil UK: 2010 Oil and Gas UK Activity Survey
Research Synopsis (2008), Effects of Recession and people Most in danger.
Simon Roberts (2010), The Oil Crunch: A wake-up call for the UK Economy, Ove Arup , Partners Limited.
Trevor Phillips (2009), Monitoring the Impact in the Recession in various Market Groups, Office of Work and Pensions
Books
Arnold, G., (2008), Corporate and business Financial Management, (4th edition) Prentice Area
Bodie, Unces., Kane, A. and Marcus, A. J., (2008), Opportunities, (7th edition) McGraw-Hill [ BKM]
Remeniyi, D., Williams, B., Money, A. and Swartz, At the. (1998), Carrying out Research in operation and supervision: An Introduction to Process and Methods, Birmingham, Sage.
Internet
http://en.wikipedia.org/wiki/2003_to_2008_world_oil_market_chronology, reached on 14. 04. 2011
http://www.domainmonster.com/editorials/dot_com_bubble, accessed on 14. 04. 2011
http://www.dailyrecord.co.uk/news/business-news, accessed on 16. 04. 2011
