Investment Banking Under Inflation

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With international efforts to avert recession, fears have grown about the brunt of monetary policy and debt overhang. Sentiment fluctuates between deflationary concerns and inflationary fears, and the demand for safe-haven assets has surged. This article examines the dynamics and impact of inflation, and investigates how equities and bonds have performed under different inflationary conditions.

We search for hedges against inflation and deflation, and draw a comparison with other assets that may provide protection against changes in the real value of money.

Investors do not like to be exposed to volatility, and the persistence of volatility makes this all the more undesirable. As we show later, they can therefore be expected to pay less for securities at times of high inflation, which should enhance the rewards from investing undertaken at such times.

The search for an inflation-hedging investment therefore differs from a search for assets that have realized a return well above inflation. It also differs from a search for a deflation-hedging investment. This is because, if inflation expectations decline (i.e. if disinflation or even deflation lies ahead), inflation-hedging assets are likely to underperform. There is a price one should expect to pay for “insuring” against inflation. The cost of insuring should be a lower average investment return in deflationary environments and/or in average conditions. As we have noted, conventional bonds cannot be a hedge against inflation: they provide a hedge against deflation. Equities, however, being a claim on the real economy, could be portrayed as a hedge against inflation. The hope would be that their nominal, or monetary, return would be higher when consumer prices rise. If equities were to provide a complete hedge against inflation, their real, inflation-adjusted, return would be uncorrelated with consumer prices.

 While banking can trace its roots back to Biblical times, Italy can claim a key role in the early development of modern banking. North Italian bankers, including the Medici, dominated lending and trade financing throughout Europe in the Middle Ages. These bankers were known as Lombards, a name that was then synonymous with Italians. Indeed, banking takes its name from the Italian word “banca”, the bench on which the Lombards used to sit to transact their business. So the word “BANK” came into existence and all the investment banking concepts later.

A specific division of banking related to the creation of capital for other companies. Investment banks underwrite new debt and equity securities for all types of corporations. Investment banks also provide guidance to issuers regarding the issue and placement of stock. In addition to the services listed above, investment banks also aid in the sale of securities in some instances. They also help to facilitate mergers and acquisitions, reorganizations and broker trades for both institutions and private investors. They can also trade securities for their own accounts.

The bank regulators are cautioned on the trauma of collapse since Lehman Brothers crash more than 5 years ago. Its disintegration caused furore and ripples almost everywhere.

All the banks like Citibank and many others suffered due to the mortgage crisis and wrong investment decisions led to a manager who was Detroit in his investing schemes and earned for 15 years from 1992 to 2007.

But in the Lehman Brother collapse, all his wealth vanished.

The firms are engaged in variety of activities like advising and managing securities of clients, provide assistance in acquiring and disposing businesses and run asset management activities. It is a term of US origin and counterparts in UK term this as “merchant banking”.

Investment banking services in India:-The advent of investment banking is of recent origin although aligned with the global industry and real sign of its growth will be seen in next decade.

The industry has heterogeneous structure ranging from financial conglomerates like ICICI,SBI, IDBI, etc to pure investment banks such as JP morgan, DSP Merill lynch to pure advisory firms like KPMG, Ernst and Young, PWC ,to niche players and boutique firms which focus on 1 or more segments of investment banking spectrum.

Financial institutions appraise a project from marketing, technical, financial, economic, and managerial angles

The functional and service areas are:-

1.mergers and acquisition services

2corporate advisory services

3.brokerage and secondary markets securities.

4.allied services.

5.issue management and underwriting.

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Mufaddal Dahodwala

The author is ex-employee of Accenture and he is currently pursuing MMS finance from JBIMS,mumbai. He has won several prizes from top MNCs for his contribution towards articles as well as idea generation and business plans having a social impact to the society.

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