Ch 3: Investment Analysis Flashcards
Fundamental market analysis Factors influencing interest rates - monetary policy: - inflation - government fiscal policy
Factors influencing interest rates
- monetary policy: RBA ises MP to slow or speed economy
- inflation: rate evokes response from RBA or govt; measured by CPI
- government fiscal policy; use of FP to increase/decrease level of spending in economy
Fundamental market analysis
Factors affecting equity prices (4)
- MP
- Inflation
- Govt FP
- Earnings
Fundamental market analysis
Factors affecting foreign exchange rates (9)
- interest rates
- international trade (measured by balance of payments)
- PPP (frelative inflation, longer term exch rate movements & values)
- commodity prices
- asset prices
- international credit ratings
- central bank intervention
- currency controls
- third currency movements (trends in others influence local)
Short term effects of interest rate changes
- increased demand or supply for the local currency
- fall or rise in the price of securities
Increased interest rates : impact in short term
increased rates -> investment in AUD bonds and/or long currency positions and a sell off in ASX equitiies.
- Discourages borrowing and/or short currency positions
- Results in money drawn away from sharemarket back into bond & money mkt, stock prices likely to decline.
Decreased interest rates : impact in short term
Decreased rates -> selling of local currency, buying in ASX equities
- discourages buying of local currency (incl bonds) as AUD returns are reduced and foreign currencies provide higher return.
- Results in share prices likely to rise.
Higher interest rates: long term effects
- discourage investment in real economic activity (risk of currency depreciation)
- depress ecnoomic activity in local economy, discouraging foreign investment
- usually associated with soft currencies
Difference between MP and FP in effect:
MP has an immediate and visible impact on interest rates, the level of the currency and even economic activity
Impact of altering MP: (4)
Tighten MP ->
Impact of altering MP:
Tighten MP ->
- RBA raises cash rates
- this reduces the funds available in the market place and increases interest rates
- eventually the higher cost of wholesale funds will flow through to higher retail rates
- economy slows down as people borrow less; share prices likely to decline
Impact of altering MP: (4)
ease MP ->
Impact of altering MP: (4)
ease MP ->
- RBA lowers cash rates
- this increases the funds available in the market place and decreases interest rates
- eventually the lower cost of wholesale funds will flow through to lower retail rates
- economy is stimulated as people are encouraged to spend; supports companies and their share prices.
When is MP tightened / eased:
When is it left on hold
- when economy is growing too quickly (risking upward pressure on prices) (ease if weak)
- left on hold if rate is not causing inflation to rise, or unemployment to fall.
Fiscal Policy:
- easing occurs when (?)
-
Fiscal Policy:
- easing occurs when the financing requirement is greater than that of the previous year.
-
Longer term effects of FP tightening: (4)
reverse for easing
- slower ec activity taking pressure off MP
- Reduction of real interest rates - financing requirement of govt declines and therefore less borrowing by treasury
- reduction in political risk premium
- reduce govt debt supply
International trade: describe currency impact of imports and exports
Imports
- pay for G&S by selling A$. Therefore negative impact on local currency
Exports
- Payment for exported goods by selling foreign currency. Therefore upward pressure on exchange rate.
Balance of payments
- define
- Trade balance = ?
- name 2 accounts
- dealer conclusions
Balance of payments
- define: indicator of relative balance of country’s transactions with other countries. Summarises demand and supply for a country’s currency.
- Trade balance = component of BOP and measures difference between a countries exports & imports
- name 2 accounts: current account & capital account
- dealer conclusions: when exports are more than imports, currency will go up. Trade deficits (imports greater than exports) put pressure on currency
Current account: define
Capital account: define, list 2 components
Current account: define: changes affect LT value of exchange rate, relate to what a country has bought or sold from outside world, determines the supply or demand for currency
Capital account: define: records inward and outward flow of a currency. Two components:
- investment into Australia from o/s (and borrowing by RBA & private sector)
- investment by local Aus residents and businesses abroad (incl investments in overseas holdings of the RBA)
PPP
A country’s competitiveness depends on:
(4)
PPP A country's competitiveness depends on: - cost of production - exchange rate - infrastructure - resources
PPP
- If cost structure of coutnry is rising faster than ogther countries, what is impact on demand, and the exchange rate
- demand for goods and services will decline
- when exchange rate changes are taken into account, declining competitiveness will result in appreciating real effective exchange rate
PPP examines relationship between which 2 factors?
- relative inflation performance of countries
- longer term exchange rate movements
Inflation: long term effects of high inflation
- negative impact on country’s currency
- reduced investment from investors, therfore currency declines
- can push interest rates higher, depressing stock and bond prices
Commodity prices: impact of increased commodity prices
- benefits the exporting country, increased export receipts allows purchase of more of local country
- adverse impact on importing country
impact of increase in asset prices
attracts foreign capital to Australia, causing AUD to strengthen and currency reserves to increase
Statistics that impact FX markets (2)
- Current account balance:
Measures trade in G&S and includes income from o/s investments & pmts to o/s entities. Measured montly released qtrly - Trade or Balance of Payments
Difference between exports & imports of G&S
List leading indicators
- housing finance and building approvals
List lagging indicators
- GDP
- CPI
- employment
The indicator of the relative inflationary performance of countries is called:
Purchasing Power parity
A decrease in the price of Australia’s commodity exports would tend to:
decrease export revenues via the price effect of decreased prices paid by Australia’s export customers
In which scenarios would Jack be most likely to sell Harvey Normal shares:
a) RBA announces an increase in interest rates of 25 bps
b) ABS releases latest sales figures, which are lower than expected
b) ABS releases latest sales figures, which are lower than expected
Fundamental analysis of equities focuses on:
and uses:
Focuses on:
- past and current earnings
- structure of balance sheet, which reflects cumulative earnings through retained earnings component
Uses:
- qualitative and quantitative measures (ratios)
PESTE analysis = ?
Political Economic Social Technological Environmental
Market fatcors influencing market prices (5)
sentiment movements in other currencies and markets market rumours large deals speculative trades
Technical anlaysis attempts to:
define;
Attempts to: quantify and track market sentiment, generally has a short term effect on financial asset’s price
Define: Study of price behaviour through charts and mathematical analysis of price and other indicators, such as volume
Technical Analysis: Name 3 Premises
- Market action incorporates all public and non public information into the market price (includes forecasts and expectations)
- Price move in trends
- History repeats itself
Technical Analysis: 2 branches / styles
- graphical or charting technique
2. mathematical style - algorithms
Technical Analysis -Dow; define 3 market movements
- Primary (overall direction)
- Secondary (opposite direction of primary, appear as a retracement)
- Minor (ST trading only, contained within secondary, create aberrations due to immediate supply / demand factors)
Technical Analysis: 3 market phases
- Accumulation
- Trend following
- Distribution
What happens to volume if price rises in bullish market? What would indicate trend reversal?
Volumes increase as prices rise in bullish market. If volumes fall, may indicate trend reversal
Chart types
- Bar chart (high low open close, note open is to left)
- Point & figure (X = rising price, 0 = reversal)
- Japanese candlestick (black = open higher than close)
