Invsestment Management Aalysis

Investment Management Analysis

Both the Czech Republic and Slovakia have a unique relationship with one another. Where, they were both directly tied to each other as a part of the Austrian Hungarian Empire and when the two were one country (Czechoslovakia). Then, after World War I this would all change when the two countries would join together. During this time, the region would experience prosperity as the country would serve as boon for various exports throughout the region. However, after the rise of Adolph Hitler, the overall fortunes of both nations would change, as they would be dominated by the Nazi's then the Soviet Union. For the economy and the stock markets the rise of the Nazi's would see the disappearance of once profitable markets in Prague. At which point, the region would fall under the dark cloud of oppression and state managed economic policies that would last for 60 years. After the downfall of the Soviet Union, the Prague Stock Exchange would be reborn, while a new one was created in Slovakia. Part of this was in response to the various divisions that had taken place during the union of the Czech Republic and Slovakia from World War I onward. Where, it was intended to be a union of two equal partners working together towards the common goal of economic prosperity. However, this prosperity would mainly benefit the Czech Republic. At which point, it was only a matter of time that the Slovaks would begin to call for a separation of the two nations. Once this separation was complete is when the equity markets and the economies of both countries would undergo a rapid transformation. To fully understand the overall scope as well as effects of this transformation requires that you carefully examine the price movements of both countries stock markets over the last 15 years and provide an analysis on why such patterns were occurring during that time. Together, these two elements will provide the greatest insights as to how successful both countries have been at transforming their economies and equity markets since the downfall of the Soviet Union. (Fawn 1- 26)

The price movements of the Czech Republic equity market in the last 10-15 years

The major stock exchange for the Czech Republic is the Prague Stock Exchange. Its history dates back to 1871, when it was initially opened as a stock and commodities exchange. In the time period before the end of World War I, the exchange would continue to grow in prominence as it would become known as one to the best commodity exchanges for trading sugar throughout the Austrian Hungarian Empire. After the end of World War I, the exchange would see a decline in prominence as only stocks were to be trade on the exchange. Yet, despite this change, the market would become one the largest in the region between the end of World War I and the beginning of World War II. Where, at one point it would become larger than the Vienna Stock Exchange. However, after Hitler invaded the country everything would change, as the exchange would cease to operate again until 1993. ("History of the Exchange")

Initially after the market first began trading, is when it would see a sharp decline in prices. This would introduce an initial bear market that would last on the Prague Stock Exchange until 1995. At which point, the markets would form a double bottom at 440 and would move higher to nearly 690 by 1997. Then, a second bear market would emerge that would last until 1998 and into 1999, when the average would fall to 315. This would be followed by another double bottom pattern developing in 1998 -- 1999, where the markets would climb to an all time high of 815 in 2000. Between 2000 and 2001, the Prague Stock Exchange would lose all of it gains and would retest 315 in 2001. This sharp v shaped bottom at 315 (which is long-term support for the average) would then begin a long-term up trend that would see prices climbing as high as 1,940 in 2007. At which point, prices would decline and fall below the 690 mark by 2008. They would then reverse and continue to move higher, where the average would rise to 1,135 by April 23rd. ("PX Index") What all of this shows is how the Prague Stock Exchange went through a number of different ups and downs as the economy was transforming from a controlled economy to one that is based on the principals of the free market. This is significant because it underscores a change that is occurring in the economy, where a number of cross currents have played a major role in shaping how various economic events would unfold in the Czech Republic.

Provide some preliminary analysis on why such patterns are observed in this market in the last 10-15 years

There are a number of different reasons why the Prague Stock Exchange has went through such extreme high as well as lows over the last 15 years; the most notable would include: a shift in the economy, various reforms and acceptance into the European Union (EU). When examining why a shift was taking place in the economy; requires looking the economy of the region prior to when central planning began in 1948. At the time, the economy of the Czech Republic was largely based on a balance between agriculture and heavy industry. However, the central authorities began to focus more on manufacturing heavy industrialized goods, versus focusing on agriculture and consumer goods. It was assumed that such a switch would work well for the people who were highly educated and were known for their skilled craftsmanship. Yet, the system of oppression and state planning proved to be very wasteful, as productivity was very low and the overall quality of workmanship was unsatisfactory. As a result, a series of economic reforms would be introduced to try to bring productivity up by loosening of government controls and providing greater freedoms. The Soviet Union did not like such actions and invaded the Czech Republic in 1968, where they would again focus on central planning. At first the approach appeared to be working, yet beneath the surface the underlying problems of productivity and efficiency would continue to plague the country. During the 1980's the central authorities would attempt to invest in other industries and reform the system once again with no success. This is significant because once the Velvet Revolution (the 1989 revolution) took place; this model would require drastic economic changes that would have ripple effects in the economy well into the 1990's. Where, the International Monetary Fund (IMF) would begin what it called the big bang. This is where there was a radical shift in government policy, where price controls were eliminated, trade policy was liberalized and a market orientated economy would be imposed. These different factors would cause short to medium term challenges for the economy, as this sudden shift would result in an inevitable slowdown. As these forces of supply and demand were balancing out from the restrictions that were placed on them for to long. This would cause the economy to go into a period of economic challenges between 1994 and 1999.

The various reforms that took place played an interconnected role in shifting the economy. Where, various polices that were enacted would support the long-term stability of the country the most notable would include: fiscal discipline and currency reform. Despite the obvious weaknesses in the economy, the government remained committed to maintaining a balanced trade deficit and low levels of debt. They would then work on removing the fixed exchange rate on the koruna (the currency). This would allow it to float freely against the dollar and the euro. These two elements were important because it helped the economy to work out any excess supply and demand issues. Then, the various reforms would allow for healthy economic growth to resume once the reforms were complete. As the free floating currency, would help to bring large amounts of investment capital, to a number of different areas. This would contribute to the strong economic growth that the country would see during the early 21 century.

The different reforms would help the Czech Republic to successfully join the EU in 2004. This is because the tough policies that the government engaged in during the 1990's paid off over the long-term. As the various reforms, would allow for the country to experience unprecedented economic growth from 2000 to 2007. This would allow large amounts of foreign investment capital into the markets, which would have a tremendous impact on supporting a shift to newer, more efficient industries. An example of this can be seen in the banking sector, where during the recent financial down turn, the government has not had to engage in any kind of bailouts or recapitalization policies. This is significant, because it shows how a shift in the economy and the various reforms helped to promote the long-term stability of the country. This would play a role in helping to bring the Czech Republic into the EU in 2004. The effect that this would have on the Prague Stock Exchange is that it would cause it to rise to 1,940. At which point, it would have a severe down trend economy during 2008 and into 2009. The only difference is: that the various reforms and economic policies that the government was using at the time, helped to contribute to mitigating the effects of the slowdown (as the economy would experience a less severe economic contraction of 3.4%). ("Czech Republic")

The price movements of the Slovak equity market in the last 10-15 years

The Bratislava Stock Exchange was founded in 1991 and has been in operation since 1993. ("Basic Information") Like what occurred in the Czech Republic the Slovak stock market went through two bear markets that would last until 1998 -- 1999. Where, the index would be able to find long-term support at 68. This would invite a gradual recovery in the index that would last until 2004. At which point, Bratislava Stock Exchange would climb to an all time high of 509. It would then decline and then hold resistance of 420.08. Next, the average would change trend and would begin to go into a long-term decline, with it currently sitting at 244. ("History SAX Index") What all of this shows is that in Slovakia the economic reforms have been more challenging. Where, the overall effectiveness of these reforms have been not been fully felt in the economy, in comparison with the Czech Republic. This is significant because the union between the two countries when they were Czechoslovakia was more beneficial for the Czech's in comparison with the Slovak's. As a result, this was one of the main reasons for splitting the two countries up. Now, it appears as if the Czech Republic is continuing to enjoy larger amounts of economic prosperity in comparison to Slovakia.

Provide some preliminary analysis on why such patterns are observed in this market in the last 10-15 years

Slovakia was similar to the Czech Republic in that after the downfall of the Soviet Union their economy was based mainly on heavy industry. Where, the country was used by the Soviets throughout the Cold War, to provide Warsaw Pact countries with various armaments. Once the Soviet Union collapsed, meant that the economy would follow suit. To revive the economy, Slovakia engaged in a number of different reforms that would attempt to address the underlying issues. However, there were a number of different obstacles that would slow the overall effectiveness of the various reforms the most notable would include: corruption / nepotism and large government expenditures. The way corruption / nepotism would affect the various reforms of the country is: they would allow for a number of different under the table deals to be made with various private entities. Once this began to take place, it was similar to a cancer, where it would eat away at the underlying fabric of the economy. As the various bribes, kickbacks and payoffs would be used to fill the pockets of various government officials. Yet, this did little if anything to help improve the standard of living, as this would make the cost of various projects more expensive. Then, when funds would reach the intended projects it would be far less than what was intended. At which point, the overall effectiveness of the reforms would be mitigated. When you combine this with the overall amounts of nepotism that was taking place within the government, meant that you would have friends and family of government officials working in other areas. In many ways one could effectively argue, that this created a class of corrupt government officials that would seek to use the government for the benefit of the few. Where, this ring of corruption would become more common. This is problematic for Slovakia because these two forces will prevent any kind of significant economic growth from taking effect. Over the course of time, this will cause the reforms to be ineffective. Once this takes place, it means that the standard of living will not improve, affecting the long-term stability of the country. The overall affects of these reforms and the issues of corruption can be seen with the performance of the country's stock market between 1997 and 2002. Where, they overall severity economic contractions were much more extreme than in the Czech Republic. While, the economic recovery, was not as strong compared to the Czech Republic from 2002 onward. This is despite the fact that Slovakia entered the EU at the same time as the Czech Republic. ("Slovakia") What all of this shows, is that the overall amounts of corruption and nepotism have reduced the strength of the Slovak economy. Where, it is constantly subject to more extreme boom and bust cycles. In many ways one can infer that these are the biggest factors that are hindering the economic growth of the country.