BUSINESS AND FINANCIAL ENVIRONMENT

Business and Financial Environment



Business and Financial Environment

Part 1

Key Trends Affecting Investment

Investment activity is cyclical in nature. Over the past five years, the highs for the industry have indeed been high, while the lows have imperilled the investment banking industry. After a stellar period of revenue growth from 2004 to mid-2007, the Global Investment industry was battered over 2008 by the subprime crisis and the stampede of capital and confidence from the global banking system. In 2009, revenue rebounded on the back of strong trading activity. Overall, the Global Investment industry is expected to experience an average decline in revenue of 9.8% per year in the five years through 2011(www.oecd.org/document). We will talk about the key trends affecting investment in the United Kingdom. The key sensitivities affecting the performance of the UK Investment industry include:

Economic Indicators - Investor Confidence

Improved investor confidence in the global economic and financial market conditions will generally result in increased demand for the industry's products and services.Growth (GDP) & Inflation

Economic activity affects the industry through its impact on financial market activity. In periods of increased economic activity, financial market conditions tend to improve, lifting trading activity, share prices, corporate securities issues, initial public offerings, and merger and acquisition activity.

Interest Rates - 10 Year Bond Rate

The level of interest rates is fundamental to the rate of growth of this industry. Low interest rates reduce the cost of borrowing and generally increase the level of activity in financial markets. Interest levels impact on the amount of merger and acquisition activity, corporate earnings, stock market performance, corporate financing, hedge fund activity and the degree of leveraging by investment banks.Stock Market Performance

Rising share prices tend to increase the level of initial public offerings and issue of new securities. Trading volumes tend to rise. This increases underwriting revenue and broker-dealer revenue. It may encourage merger and acquisition activity. The value of assets under management may increase.

Key Success Factors

The key success factors in the UK Investment industry are:

Market research and understandingSuccessful firms have the ability to provide quality research.

Well-developed internal processesEfficient and cost-effective clearing and settlement systems reinforce bottom lines.

Having a high profile in the marketFor institutional brokers and investment banks, a significant presence such as panel memberships and strong dealings is important.

Having a loyal customer base:For private client advisors, a strong referral client base is how they expand their customer base.

Provision of a related range of goods/services ("one stop shop"):The provision of related range of investment products and services assists revenue streams while satisfying client needs.

Production of premium goods/services:Quality client service helps attract and maintain customers.

Having a good reputation:Strong brand name, company research and customer services reputation is important for success.

Investment activities comprises of trading activities both on behalf of clients and on the banks own account (principal trading). Trading occurs in fixed interest, currencies and commodities (FICCs), and equity products.

The trading side consists of the execution of trades on behalf of clients (broking), principal dealing (market-making) and proprietary trading on the firm's own ...