Virtual portfolio update week 3

Since the last update my virtual portfolio has greatly improved , from a 0.90% profit last week, to a 1.43% this week, my positions in companies such as Bet-fair and Vodafone continue to increase in value. The graph below shows how portfolio has changed in value over the previous week.

The graph shows that my portfolio has recovered from the lows that it experienced in the month of June. As there was a lot of poor financial news in June it sent my portfolio down  but as the financial markets are starting to settle my portfolio has started to grow again. In the coming weeks I will look to purchase large stakes in under valued companies to hopefully reap the returns.


Daniel Butler

UK Manufacturing sector growth at two year high

The BBC reported on June 1st that the UK Manufacturing sector growth is at a  two year high. This is very promising news for the UK economy , this is because the UK used to have huge manufacturing power but with the rise of globalisation many other countries across the world such as Japan and China are now the main powers in manufacturing.

The UK has predominantly become a services based economy and this makes up most of the national output (see graph). what can also be seen from this graph is that the manufacturing sector of the UK has slumped massively since the 1970s.

BBC

The graph above tells a massive story of how the UK's economy has transformed from a manufacturing based economy to a services and finance economy. In the 1970's manufacturing accounted for more than 30% of the UK's national output and the services sector only accounted for just over 15%. Fast forward 30 years and the two sectors have flipped as manufacturing only accounts for just over 10% where as services has increased up to nearly 40%.

The UK Manufacturing sector has declined so much in recent years because many of the companies have moved their operations to other countries in pursuit of higher profits from lower production costs. This is because in many other countries the minimum wage is a lot lower so companies can pay their workers less, also premises are a lot cheaper in other countries. Many big companies have moved out of the UK for cheaper production costs elsewhere as they will ensure higher profits in the future for shareholders.

With many companies pulling out of the UK this caused employment in the manufacturing sector to plummet. This is because all of the companies had to lay-off workers before they transferred their operations to countries such as Japan and China. This left many skilled people out of work , this is one of the reasons why there is higher unemployment in the north of England. This is because many of the factories where in the north and after the workers got laid off there was no where they could go.

In order to solve this problems in the manufacturing sector, there needs to be massive investment from the government or easier credit from the banks. This is because the investment will allow more manufacturing companies to grow and employ more people thus lower the unemployment rate. The investment will also help many manufacturing companies to produce more which will equal more exports for the UK. I believe that the increase in investment to this sector will help to grow the entire UK economy and put many people back into work.

The UK's trade deficit now stands at £2.5 Billion this means that the UK is importing much more goods than we are exporting. The UK has also been running a trade deficit for more than 20 years in fact the last trade surplus where the country actually exported more than it imported was in March 1981. The graph below shows the balance of Trade of the UK from 1970 to 2013.

In order to improve the UK Economy the manufacturing sector will need much more investment. It has already started to grow but there is still more work to be done and if there is more investment it will greatly help to improve growth prospects in the future.


Daniel Butler

Sources : Trading Economics , BBC

Financial History: Zimbabwe Economic Collapse 2000-2008

For political motives in 2000 the Zimbabwean government started the destruction of the commercial farming sector. In a country where most of its exports came from farming and agriculture this caused a disastrous impact to the Zimbabwean economy.

After the destruction of the farming sector the GDP of Zimbabwe quickly began to tumble from 6.86B USD in 2000 to 4.42B USD in 2008. Exports massively declined and Zimbabwe recorded a trade deficit for ever year after the destruction of the commercial farming sector. This happened because Zimbabwe's exports where mostly agricultural or farming based in fact its biggest before the destruction was Tobacco. The graphs below show the balance of trade for Zimbabwe between 2000 to 2008 and also the GDP from the year 2000 to 2008.

These problems with trade also started to impact the people of Zimbabwe. As the GDP started to decline also did the GDP per capita, in 2004 the GDP per capita was 406 USD and in 2008 it had fallen to just 280 USD. As I stated previously exports also started to massively decline and Zimbabwe reported a trade deficit for every year between 2001 and 2008.

However the worst problem was the Hyperinflation. In order to fund this massive deficit the Zimbabwean government had to borrow massive amounts of money from the bond markets. In fact the Zimbabwe government borrowed so much that in 2008 the country's debt was equal to 131% of its GDP. The graph below shows how much the country's debt to GDP increase from 2000 to 2008.

After all of this borrowing Zimbabwe's creditors eventually started to come calling. However Zimbabwe didn’t have the necessary capital to pay back this huge amount of money they borrowed. They couldn’t borrow more money as it would only add to the pool of debt and they also couldn’t raise the money from tax revenues as their economy was contracting. The only thing they could do is print the money and that’s what they did.

However what they might not have realised is that with every note they print their currency was worth less as the currency began to depreciate. This had disastrous effects to Zimbabwean economy has it eroded the little savings which its citizens had and also it caused prices of basic goods such as bread to go sky high.

This excessive increase in the money supply caused massive Hyper inflation. In 2008 the inflation rate spiked hitting a high of 66,212 percent. The prices of basic goods increased daily, in 2004 the price of a loaf of bread was Z$35,000 and by 2006 the price had risen to Z$80,000. The graph below shows the inflation rate of Zimbabwe from 2000 to present day.

  

Due to the devaluing currency the Zimbabwe government also had to print larger and larger notes to accommodate for the devaluation.  The biggest note they printed was the bearer cheque which was Z$ 50,000 which wasn’t even enough to purchase a loaf of bread. In fact the bearer check was also only worth 49 US cents.

These economic problems also had large impacts to the people of Zimbabwe. They stopped using banks, they stopped paying they taxes and they also stopped using the national currency as a form of trading.

This harsh economic environment lasted until 2009 when the Zimbabwean government declared bankruptcy and adopted the US currency as a means of Exchange.

Thankfully after this the Zimbabwean economy started to rebuild itself and the GDP has started to increase ever since this change (see graph).

 

This Article has shown how quickly an economy can collapse and how printing excessive amounts of money can destroy a currency. It is important that future and present governments take note of this economic disaster as it could very well happen again if the wrong decisions are made.

Daniel Butler

Sources: Trading Economics, http://www.thezimbabwean.co/comment/opinion/64699/the-economic-collapse-of-zimbabwe.html, http://www.cato.org/sites/cato.org/files/pubs/pdf/dpa5.pdf