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AFMA Core > Ch 3: Investment Analysis > Flashcards

Ch 3: Investment Analysis Flashcards

1
Q 
Fundamental market analysis
Factors influencing interest rates
- monetary policy:
- inflation
- government fiscal policy
A

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
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2
Q

Fundamental market analysis

Factors affecting equity prices (4)

A
  • MP
  • Inflation
  • Govt FP
  • Earnings
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3
Q

Fundamental market analysis

Factors affecting foreign exchange rates (9)

A
  • 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)
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4
Q

Short term effects of interest rate changes

A
  • increased demand or supply for the local currency

- fall or rise in the price of securities

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5
Q

Increased interest rates : impact in short term

A

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.
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6
Q

Decreased interest rates : impact in short term

A

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.
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7
Q

Higher interest rates: long term effects

A
  • discourage investment in real economic activity (risk of currency depreciation)
  • depress ecnoomic activity in local economy, discouraging foreign investment
  • usually associated with soft currencies
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8
Q

Difference between MP and FP in effect:

A

MP has an immediate and visible impact on interest rates, the level of the currency and even economic activity

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9
Q

Impact of altering MP: (4)

Tighten MP ->

A

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

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10
Q

Impact of altering MP: (4)

ease MP ->

A

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.

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11
Q

When is MP tightened / eased:

When is it left on hold

A
  1. when economy is growing too quickly (risking upward pressure on prices) (ease if weak)
  2. left on hold if rate is not causing inflation to rise, or unemployment to fall.
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12
Q

Fiscal Policy:
- easing occurs when (?)
-

A

Fiscal Policy:
- easing occurs when the financing requirement is greater than that of the previous year.
-

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13
Q

Longer term effects of FP tightening: (4)

reverse for easing

A
  1. slower ec activity taking pressure off MP
  2. Reduction of real interest rates - financing requirement of govt declines and therefore less borrowing by treasury
  3. reduction in political risk premium
  4. reduce govt debt supply
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14
Q

International trade: describe currency impact of imports and exports

A

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.

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15
Q

Balance of payments

  • define
  • Trade balance = ?
  • name 2 accounts
  • dealer conclusions
A

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
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16
Q

Current account: define

Capital account: define, list 2 components

A

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)
17
Q

PPP
A country’s competitiveness depends on:
(4)

A 
PPP
A country's competitiveness depends on:
- cost of production
- exchange rate
- infrastructure
- resources
18
Q

PPP

- If cost structure of coutnry is rising faster than ogther countries, what is impact on demand, and the exchange rate

A
  • 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
19
Q

PPP examines relationship between which 2 factors?

A
  • relative inflation performance of countries

- longer term exchange rate movements

20
Q

Inflation: long term effects of high inflation

A
  • negative impact on country’s currency
  • reduced investment from investors, therfore currency declines
  • can push interest rates higher, depressing stock and bond prices
21
Q

Commodity prices: impact of increased commodity prices

A
  • benefits the exporting country, increased export receipts allows purchase of more of local country
  • adverse impact on importing country
22
Q

impact of increase in asset prices

A

attracts foreign capital to Australia, causing AUD to strengthen and currency reserves to increase

23
Q

Statistics that impact FX markets (2)

A
  1. Current account balance:
    Measures trade in G&S and includes income from o/s investments & pmts to o/s entities. Measured montly released qtrly
  2. Trade or Balance of Payments
    Difference between exports & imports of G&S
24
Q

List leading indicators

A
  • housing finance and building approvals
25
Q

List lagging indicators

A
  • GDP
  • CPI
  • employment
26
Q

The indicator of the relative inflationary performance of countries is called:

A

Purchasing Power parity

27
Q

A decrease in the price of Australia’s commodity exports would tend to:

A

decrease export revenues via the price effect of decreased prices paid by Australia’s export customers

28
Q

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

A

b) ABS releases latest sales figures, which are lower than expected

29
Q

Fundamental analysis of equities focuses on:

and uses:

A

Focuses on:
- past and current earnings
- structure of balance sheet, which reflects cumulative earnings through retained earnings component
Uses:
- qualitative and quantitative measures (ratios)

30
Q

PESTE analysis = ?

A 
Political
Economic
Social
Technological
Environmental
31
Q

Market fatcors influencing market prices (5)

A 
sentiment
movements in other currencies and markets
market rumours
large deals
speculative trades
32
Q

Technical anlaysis attempts to:

define;

A

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

33
Q

Technical Analysis: Name 3 Premises

A
  1. Market action incorporates all public and non public information into the market price (includes forecasts and expectations)
  2. Price move in trends
  3. History repeats itself
34
Q

Technical Analysis: 2 branches / styles

A
  1. graphical or charting technique

2. mathematical style - algorithms

35
Q

Technical Analysis -Dow; define 3 market movements

A
  1. Primary (overall direction)
  2. Secondary (opposite direction of primary, appear as a retracement)
  3. Minor (ST trading only, contained within secondary, create aberrations due to immediate supply / demand factors)
36
Q

Technical Analysis: 3 market phases

A
  1. Accumulation
  2. Trend following
  3. Distribution
37
Q

What happens to volume if price rises in bullish market? What would indicate trend reversal?

A

Volumes increase as prices rise in bullish market. If volumes fall, may indicate trend reversal

38
Q

Chart types

A
  1. Bar chart (high low open close, note open is to left)
  2. Point & figure (X = rising price, 0 = reversal)
  3. Japanese candlestick (black = open higher than close)

AFMA Core (8 decks)

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