Chapter 3 - The macroeconomic environment and its impact on asset classes Flashcards
Why should investors pay attention to political developments?
Governments policy changes can have an important impact on economic and financial conditions. Political developments can change the investment climate, both for the economy and for individual sectors
Why are international developments increasingly important for investors?
National economies have become increasingly integrated and financial markets move more and more in step, so investors need an international perspective when allocating assets.
What are the four main phases of the business cycle?
- Recovery-followed by expansion of acceleration of economic growth;
- boom;
- slowdown or contraction;
- recession
How can the business cycle affect the stock market?
Share prices generally begin to recover while their country is in recession, falter when interest rates are raised to curb inflation in a boom and fall back as the economy slows down.
How may a governments fiscal policy affect the behaviour of individuals and companies?
- The different tax treatment of different types of assets will influence investment decisions.
- The tax treatment of a company‘s earnings will affect its dividend policy and whether it raises capital through debts or equities.
What are the two main measures of money supply and what do they comprise?
The most commonly quoted measures of the money supply in the UK are M0 (narrow money) and M4 (broad money):
- M0 comprises notes and coins in circulation plus banks operational deposits with the Bank of England.
- M4 comprises notes and coins in circulation plus all instant access and deposit accounts of UK residence with UK banks and building societies.
What are the effects when the Bank of England reduces short-term interest rates?
- It eases monetary policy.
- If the market agrees with the banks view of the prospects for inflation, longer-term interest rates will reduce.
- This will lead to rising asset prices, wealth will increase, making people more willing to borrow and spend, stimulating demand.
- Low interest rates will encourage more borrowing.
- Those dependence on income from cash deposits will be worse off.
What is the balance of payments & How does a countries balance of payments current account affect currency values?
The balance of payments provide a statement of a countries trade and financial transactions with the rest of the world.
- If there is a surplus, it means that the country exports more goods than its imports. Buyers have to acquire the currency to pay for the goods, increasing the country‘s foreign reserves and strengthening the currency
- if there is a deficit, it implies the need to sell the local currency to acquire foreign goods.
How do exchange rates impact on investments in the domestic and foreign markets?
The value of any profit earned from either investments in overseas markets or from selling products overseas is affected by the exchange rate. The profit may be increased or reduced depending on the exchange rate when it is converted into the domestic currency.
The profitability of the exporting business affects the value of the shares exporting companies
Formula for real rate of return
Interest rates minus inflation rates
Why do financial bubbles occur
Financial bubbles are often associated with a genuine technological breakthrough. Typically, investors overestimate potential returns and underestimate competitive pressures. The Bubble swells as more and more investors are lured into buying equities because they have resigned rather than because they offer reasonable value
Which types of industries are at a disadvantage because of the effects of globalisation
Low skilled, labour-intensive industries in the developed world that compete with developing countries
What is gross domestic product
GDP which is calculated by adding together the total value of all goods and services produced domestic later in a calendar year, is a measure of the country’s overall economic activity.
When GDP falls compared with previous quarter the economy said to be contracting, after two successive quarters of decline GDP it said to be in recession. When GDP rises compared to previous quarter the economy is expanding, the peak of the cycle refers to the point of which GDP is at its highest level before it starts to fall
Public-sector net cash requirement
The PS NCR indicates the extent to which the public sector needs to borrow money from other sectors of the economy and from overseas, in order to finance the difference between the expenditure and the receipts arising from this various activities.
In a recession tax avenues will be weak, causing spending on an unemployment to rise, meaning PSNCR is likely to grow
How do you think the bank of England ‘creates’ money or reduces the supply of money?
The BOE can create digital money, which is unused to buy assets such as government debt in the form of gilt. They can reduce the money supplied by selling government securities
