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Aabyaz Mustafa
Mahnoor Sadaqat
Samir bin Aamir
Shifa Ahmed Rana

Introduction to Capital Markets

Ms Sumbul Waqas
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Contents
Introduction...............................................................................................................................................3

Analysis of economy..................................................................................................................................3

Analysis of product....................................................................................................................................8

Views........................................................................................................................................................13

Recommendations...................................................................................................................................14

References.................................................................................................................................................14
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Introduction
For the project analysis, we will be using the economy of United States of America. The
organization chosen is Walmart Inc. which is a part of the retail industry. Walmart issues shares
of its common stock which will be our focus with reference to the capital market product.

Analysis of economy
Economic growth

GDP is defined as the annual growth rate at market price based on local currency of a particular
country. The aggregates are based on constant 2010 US dollar. Moreover, GDP is the monetary
value of all final goods and services that are made within a country over a specific time period.

The formula of GDP= C+I+G+S+(X-M).

C is the consumer private consumption; I is the gross investment; G is the government

investment; S is the government spending and X-M denotes for exports minus imports.

The graph shows annual GDP growth of United States from 2014 to 2018.
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It was 2.452% in 2014. Similarly there was a sharp decline in GDP growth in 2016 as it
decreased from 2.881% in 2015 to 1.567% in 2016. After that there was a constant increase in
the GDP as it steadily increased to 2.857% in 2018. [ CITATION The18 \l 1033 ]

Inflation’s past history and forward expectations

Inflation is measures by the consumer price index which shows the annual percentage change in
prices of a basket of goods and services consumed by households.

Furthermore, there are two types of inflation; Demand pull inflation and Cost push inflation.

Demand pull inflation arises when aggregate demand exceeds the aggregate supply of any
economy. Cost push inflation is caused by an increase in prices of any factors of production for
example, labor.

There has been a lot of variation in the inflation rates of US since 1960’s. Looking at the past
history of US the highest inflation rates were during the recession period from 1973 to 1975 and
from 1981 to 1982. Similarly, the graph below shows the increase and decrease in inflation rates
of US since 2014. According the graph the inflation rate was 1.622% in 2014. After that there
was a sharp decline in 2015 to 0.119%. Moreover, from 2015 to 2018 there has been a constant
increase in percentage increase in inflation of US with inflation rate of 2.443 in 2018.
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Given the increase in trend of inflation rates in US, according to different

agencies, US CPI inflation will be within the range from 2 to 2.4 percent in 2019 and average at
around 2.5 percent in 2020 to foster price stability as inflation rate depends on the balance
between aggregate demand and supply of an economy. [ CITATION Inf18 \l 1033 ]

Years Inflation

2019 2.4%

2020 2.5%

2022 2.2%

Inflation is also measured by the annual growth rate of the GDP which shows the rate of price
change in the economy as a whole. The GDP deflator is the ratio of GDP in current local
currency to GDP in constant to GDP in constant local currency.

The graph below shows inflation as GDP deflator.

The inflation was at 1.892% in 2014 but there was a sharp decline in 2015 as it decreased to
1.069% in 2015. Whereas, from 2015 to 2016 inflation increased at a decreasing rate. Similarly,
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from 2016 to 2018 inflation in US as GDP deflator increased at an increasing rate with a value of
2.255% in 2018. [ CITATION Inf181 \l 1033 ]

Central banks expected monetary policy

Monetary policy in the United States comprises the Federal Reserve's actions and
communications to promote maximum employment, stable prices, and moderate long-term
interest rates. The monetary policy is decided by the Federal Open Market Committee. A dual
mandate system is followed in order to have interest rates be stable.

Monetary policy directly affects short-term interest rates; it indirectly affects longer-term
interest rates, currency exchange rates, and prices of equities and other assets and thus wealth.
Through these channels, monetary policy influences household spending, business investment,
production, employment, and inflation in the United States.

United States has lowered its interest rates by 0.25 percentage points, from 1.75% to an annual
rate of 1.5%. A reduction in interest rates counters a weakening of prices, or a possible
deflationary situation. It also revitalizes the economy and helps to increase exports. [ CITATION
Mon19 \l 1033 ]

Interest rates past history and forward expectations

Real interest rate is the interest rate adjusted for inflation as measured by the GDP deflator.

There has been a lot of variations in US interest rates over the years. Looking at the past history
of US interest rates lowest recorded interest rate was in 1975 with a value of -1.281% during its
first recession period. Whereas, the highest interest rate recorded in US’s history was 8.595%
and that too during its second period of recession
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The graph below shows the interest rates of US from 2014 to 2017.

At the start of 2014 the interest was at 1.333% and it rose to 2.167% in 2015. Similarly, there
was slow but constant increase in US interest rates as it increased to 2.392% in 2016, but a
decrease was seen next year as the interest rates in US decreased to 1.959% in 2017.

Interest rates for future are expected to rise by 0.4%. The reasons for this are the risk associated
with the economic growth and the lack of trust in inflation warnings for the future. (Represented
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graphically below)

The forward expectations of interest rates of US is likely to go up as looking at the inflation trend
of US which is steadily increasing. Also, the GDP of US is steadily increasing as well, so the
inflation may increase accordingly. [ CITATION Rea17 \l 1033 ]

Forward view on the stocks market of the economy

Some companies in the US expect the stock price to decline in 2020 as a result of lower profits.
But on the other hand some experts believe that the stocks will rise up in the near future due to
expansions of companies and the stocks which the companies will buyback. This can also be
supported by the technological advancements that take place and the updates on the
communication system with 5G technology seemingly around the corner which lead to high
returns. Although there may be drawbacks for large companies who dominate the S&P 500
because strategists tend to focus on stocks which are undervalued but do have the ability to grow
as compared to the highly developed companies. [ CITATION Tho19 \l 1033 ]
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The sectors which are likely to perform in the stock market in the future are the financial sector
and the communications sector.

Analysis of product
Financial market

Amongst the two types of markets; capital markets and money markets, stocks belong to the
capital market. Stocks have high risk and high return, and lower liquidity as compared to
products belonging to the money market. Stocks do not have a maturity date to determine which
market it belongs to however issuance of shares to people is generally for a long duration unless
someone trades the share in the secondary market. Walmart Inc. stocks also belong to the equity
market as a company issues shares in order to finance the company and its operations through
equity.

Regulatory authority of the industry

The regulatory authority for the retail industry is the Federal Trade Commission. [ CITATION
Abo \l 1033 ]. It works in a way to protect consumer rights by ensuring that the retail sector
complies with the rules and regulations and does not indulge in taking advantage of the
consumer or being a part of deceptive activities. The example of this would be charging
inaccurate prices or giving false information to the consumer.

In this case, FTC would then convey this information to the law enforcement in USA who would
take action accordingly. Walmart Inc. also operates in a manner following the guidelines set out
by FTC. Walmart submits company information to FTC for evaluation. Recently, FTC did not
approve of Walmart stating details of country of origin on products and as a result Walmart took
immediate action and removed that information. [ CITATION Jul15 \l 1033 ].

Issuer of product

Walmart Inc. issues its shares in the primary market to the public. The company itself is the
issuer of stocks initially with the aid of an investment bank, which is a financial institution. It is
not a Depository Institution as it does not accept deposits from consumers. It is also not
classified as a Non-Bank Financial Institution as Walmart Inc. does not offer services and it
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issues its shares only to raise capital. However, these shares may be traded in the secondary
market between buyers and sellers.

IPO methodology

Walmart Inc. went from private to public on October 1st 1970 with the Initial Public Offering
(IPO) methodology. The company issued 0.3 million shares as a part of its IPO with each share
costing $16.50 at that time. This process involved the public, Walmart Inc itself and Stephens
Inc. Stephens Inc. was the investment bank which aided Walmart in the IPO process by helping
determine their share price and helping them advertise about the company going public.
[ CITATION Sta06 \l 1033 ]. According to CNBC, the current share price of Walmart is at $119.85.

Financial Asset Characteristics

Stocks have the highest risk level and are of numerous types such as common stock or preferred
stock. Shares are issued to provide the needed capital for the company which assists in bringing
investment in the market and also contributes to overall condition of the economy. With the
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increase in popularity of the stock market, risk sharing is encouraged by market players which
supports resource allocation. An attractive feature of stocks is the dividend payments which the
company pays out. Otherwise the company can choose to invest further in the company in the
form of retained earnings or take profits.

As a result of paying dividends a few years after its IPO and only increasing the dividends they
pay out from that point onward from the preceding year, Walmart is a part of S&P 500 Dividend
Aristocrats. This gives a lot of credibility to the Walmart Inc. stock.

Product Valuation Methodology

The stock price reflects the value of the company. There are numerous ways according to which
shares are valued. These include the CAPM method, DCF Analysis, P/E ratio, Arbitrage Pricing
Theory (APT), Dividend Discount Model and corporate valuation method amongst numerous
other acceptable measures to calculate share price.

The CAPM method keeps in check the time value of money along with the risk associated and
the returns to judge if the value given to a certain share is accurate. It can be calculated using:

The DCF analysis is used commonly to accurately determine the price of the shares of a
company. It takes a look at future cash flows of a company and determines its present value
based on a discount rate.

Using the price to earnings ratio is also a valuable method to get an idea of the share price. The
investment bank would give greater value to the share of the company if its P/E ratio is high as it
indicates future growth. But similarly, the high P/E ratio can also indicate risk of failure.

APT determines share price based on expected returns of the company along with
macroeconomic factors impacting the price and different betas are assigned for each factor.

Dividend Discount Model values the price of a stock by using a theory that the stock is worth a
sum of future dividend payments discounted to the present value.
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Risk and Return

Stocks are the most risky financial product due to numerous internal and external factors. The
internal factors arise due to the poor performance of the company or a change in management of
the company that leads to the public viewing the company differently. Moreover, external factors
making shares risky are economic factors, disasters, change in government policies, market risk
due to the interest rate and the business cycle the company is in. Beta is the risk associated with
shares and it includes both market risk and systematic risk. The market risk can be due to the
interest rate risk, foreign exchange risk and the equity risk.

If the beta is equal to 1 that means the company works equal to market return of risk. Greater or
less than 1 betas would denote aggressive and passive stocks respectively. The high risk
associated with shares also ensures high return. In the case of Walmart, the risk associated is due
to debt it has on due to the high amount of total liabilities. [ CITATION Ann19 \l 1033 ]

The return of stocks are determined by if the firm pays a dividend or if the share price increases
in value. This is directly proportional the risk. It can be calculated through Return on Investment.
The returns of Walmart stocks are high as since a consecutive of at least 25 years the dividend
has increased from the previous year. It paid the first dividend of $0.05 on 1974 and dividend
paid for 2019 has been $2.12. The dividend payout ratio of Walmart is about 44%. The increase
in the dividends paid out by Walmart can be shown in graphical form on the next page.

Ratings
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Common stocks are not rated so ratings of the product cannot be determined. Global rating
agencies who rate products and entities are Moody’s, S&P and Fitch. The rating tells the credit
worthiness of the entity and the risk of default (credit risk) is determined based on the ratings.
The scale of ratings starts from AAA (lowest risk) to D (highest risk). The ratings are for one
year and are futuristic. A rating of BBB+ and more is classified as an investment cycle but if it’s
less than BBB+ then it is classified as a speculative grade or a junk bond.

According to Moody’s website, Moody’s affirmed Walmart’s rating of Aa2 in 2018. It is the
third highest rating Moody’s can give and this high rating implies that the risk of default for
Walmart is low and the company will meet its financial dues. [ CITATION Cha18 \l 1033 ]

While S&P affirmed Walmart’s AA rating but changed its outlook from stable to negative. The
AA rating of Walmart ensures that it will meet its financial obligations. However, the change in
the outlook from stable to negative reflects that the previously consistent rating might change in
the near future. [ CITATION Ama19 \l 1033 ]

Lastly, Fitch affirms Walmart’s AA rating as well and maintains that the outlook is stable that
means the rating will not change soon. [ CITATION Kir18 \l 1033 ]

Size of financial product in the economy

United States has the largest stock exchange compared to countries around the world. It holds
$34 trillion in value. Every day about 1.40 billion shares are traded of about 2800 companies.
[ CITATION New18 \l 1033 ] New York Stock Exchange and NASDAQ take the top two positions
in terms of market capitalization. NASDAQ has a market cap of $10 trillion while NYSE has a
market cap of $16 trillion.

Walmart’s shares outstanding in 2019 are 2.861 billion in the US economy.

Contribution of product towards GDP

Stocks contribute to the GDP by changing the financial scenario of the country and by bringing
variations in consumer preferences. Low stock prices have a negative impact on GDP.
Expenditure of consumers also decreases with low stock prices further affecting the GDP. The
percentage contributed to the GDP by the stocks is 161.15.
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Views
Forward expectation on the economy

The economy is expected to flourish in the future with tremendous amounts of investments in
technological companies and other giants. The relationship of the US with China can cause a
strain as it would hamper the trading and reduce ease of investments in Chinese companies such
as Alibaba International. Moreover, with 5G along the way and talks of 6G underway, the
dimensions of the economy will change bringing about new advancements and thus other
initiatives which will show chances of profits in future and reflect their worthiness of being
invested in. The US economy is expected to be stable otherwise despite the situation with China.

Forward expectation of the financial market

The upcoming elections in the US are expected to bring changes in the patterns of stock markets.
As firms will buy back their shares. Otherwise, the financial market is expected to be steady and
investments in large giants will continue to be but investors and strategists also have their focus
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on small firms who show a lot of potential. The stock market is also being called ‘forward-
looking’ as it react according to the conditions of the economy and reacts accordingly as well.

However, the trade war with might have an impact on the stock market as well as it did in 2019.
The issue with China is volatile and thus makes forecasting the expectations of the stock market
difficult as well. The bond market has also been alarmed as there had been a drop in the 10-year
treasury yield. The interest rates in the future depend highly on how the inflation goes. The S&P
500 companies are expected to get the same level of investment and sales in the future as well
despite the slowing economy and the stress of companies due to imposition of tariffs.

Recommendations
For the existing investors and the potential investors, as the interest rates will increase in the
future by a few points they should not sell the shares as to avail the higher interest rates in the
future. The bonds they have purchased will provide them with interest payments which are
higher than before. The risk of the shares increases in the near future due to the volatility of the
environment but so does the return then.

The potential investors are advised to purchase shares not in large companies who belong to the
S&P 500 but also the newly emerging companies who have a lot of potential for growth and will
likely to give them healthy dividends with time.

References
About the FTC. (n.d.). Retrieved from Federal Trade Commision: https://www.ftc.gov/about-ftc/what-
we-do

(2019). Annual Report. Walmart Inc.

Bank, T. W. (2018). GDP growth (annual %) - United States. Retrieved from The World Bank:
https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?
end=2018&locations=US&start=2013&view=chart

Brunn, S. D. (2006). Wal-Mart World: The World's Biggest Corporation in the Global Econom. USA: Taylor
& Francis.

Ensor, J. S. (2015, October 20). Closing Letters. Retrieved from Federal Trade Commission:
https://www.ftc.gov/system/files/documents/closing_letters/nid/151020walmartletter.pdf
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Frank, T. (2019, November 23). CNBC. Retrieved from Wall Street’s stock forecasters see just a 5% gain
in 2020: https://www.cnbc.com/2019/11/23/wall-streets-stock-forecasters-see-just-a-5percent-
gain-in-2020.html

Inflation, consumer prices (annual %) - United States. (2018). Retrieved from The World Bank:
https://data.worldbank.org/indicator/FP.CPI.TOTL.ZG?
end=2018&locations=US&start=2013&view=chart

Inflation, GDP deflator (annual %) - United States. (2018). Retrieved from The World Bank:
https://data.worldbank.org/indicator/NY.GDP.DEFL.KD.ZG?locations=US

Jantzen, R. (2009). Wal-Mart and the US Economy. New York: Eastern Economic Journal.

Jean, A. (2019). S&P revises Walmart outlook to stable from negative. New York: S&P Global.

Monetary Policy. (2019, November 20). Retrieved from The Federal Reserve:
https://www.federalreserve.gov/monetarypolicy.htm

Murali, K. (2018). Fitch assigns AA rating to Walmart's bond offering. New York: S&P Global.

New York Stock Exchange : Company Listings. (2018). Retrieved from ADVFN:
https://www.advfn.com/nyse/newyorkstockexchange.asp

O'Shea, C. (2018). Moody's affirms Walmart's Aa2 long-term and Prime-1 short-term ratings following
Flipkart announcement. New York: Moody's Investor Service.

Real interest rate (%) - United States. (2017). Retrieved from The World Bank:
https://data.worldbank.org/indicator/FR.INR.RINR?
end=2017&locations=US&most_recent_year_desc=false&start=2013&view=chart