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ADMS 4501 Midterm > Lecture 2 - Macro and Economic Analysis > Flashcards

Lecture 2 - Macro and Economic Analysis Flashcards

1
Q

Three Types of Portfolio Management

A

1) Passive
2) Structured
3) Active

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2
Q

What do passive portfolio managers believe?

A

Markets are efficient

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3
Q

What do structured portfolio managers believe?

A

Markets are mostly efficient

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4
Q

What do active portfolio managers believe?

A

Markets are inefficient

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5
Q

Fundamental Analysis

A

Market price of firm is tied to future earnings and dividends which is tied to the future business success of the firm.

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6
Q

Top-Down Approach Components

A
  • Global Factors
  • Country Specific Factors
  • Sector Specific Factors
  • Stock Selection
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7
Q

Global Factors

A

1) Political Risk
2) FX Risk
3) Global Growth Outlook

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8
Q

Domestic Macroeconomy goal is

A

Analyze the countries you want to invest in, in order to figure out which asset classes to overweight and underweight

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9
Q

Country Specific Factors

A

1) Current equity valuation levels
2) Fiscal Policy
3) Monetary Policy
4) Economic Indicators
5) Business Cycle

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10
Q

Demand Shock

A

An event that affects demand for goods and services in the economy

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11
Q

Supply Shock

A

An event that influences production capacity or production costs

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12
Q

How to resolve demand shock

A

1) Fiscal Policy
2) Monetary Policy

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13
Q

Fiscal Policy

A

Government’s spending and taxing actions

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14
Q

Monetary Policy

A

Manipulation of the money supply

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15
Q

Types of Economic Indicators

A
  • Leading
  • Coincident
  • Lagging
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16
Q

Leadings Indicators

A

Rise and fall in advance of the economy

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17
Q

Coincident Indicators

A

Change at the same time as the economy

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18
Q

Lagging Indicators

A

Lag economic performance

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19
Q

Canadian Economic Indicators

A
  • Money Supply
  • Stock Market
  • Commodity Prices
  • Avg. workweek in manufacturing
  • US leading indicator
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20
Q

Industry Analysis (Sector Specific)

A

There are a wide range of returns for different industries

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21
Q

Business Cycle

A

Recurring pattern of expansions and contractions in the economy

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22
Q

Components of a business cycle

A
  • Peaks (Top of the cycle)
  • Through (Bottom of the cycle)
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23
Q

Where are “financial stocks” in the business cycle and why?

A

Financial stocks usually excel when we head into a recessions since interest rates are dropping so the spread at which banks can earn profits increase as they usually delay passing on the cut of rates by central banks to their customers

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24
Q

Where are “consumer durables” in the business cycle and why?

A

Consumer durables outperform in the bottom of the recessions and interest rates are low and people take advantage of cheap financing

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25
Q

Where are “capital goods” in the business cycle and why?

A

Capital goods do well as we head towards a recovery as their customers (other businesses) want to see an increase in sales before they do any large purchases

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26
Q

Where are “base industries” in the business cycle and why?

A

Basic industries do well at the top of the cycle since they can pass on higher inflation in their end prices so profit margins stay constant

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27
Q

Where are “consumer staples” in the business cycle and why?

A

Consumer staples do well as we turn down towards a recession since people prefer low cost items prior to a recession.

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28
Q

Sector Rotation

A

Different industries/sectors are over-weighted or under-weighted based on the portfolio manager’s view of the current state of the business cycle

29
Q

What types of changes can occur in an industry?

A

Cyclical or Structural

30
Q

Cyclical Changes

A

Temporary changes caused by:

  • Inflation
  • Interest Rates
  • International Economics
  • Consumer Sentiment
31
Q

Structural Changes

A

Permanent Changes caused by:

  • Social Influences
  • Technology
  • Politics and Regulations
32
Q

Industry Life Cycle Importance

A

Portfolio Managers need to be aware of the stage their industry/company are operating in

33
Q

Industry Life Cycle Stages

A

1) Start-Up
2) Consolidation
3) Maturity
4) Relative Decline

34
Q

Competitive Environment Factors

A

1) Threat of New Entrants
2) Bargaining Power of Buyers
3) Threat of Substitute
4) Bargaining Power of Suppliers

35
Q

What monetary and fiscal policies might be prescribed for an economy in a deep recession?

A

Expansionary monetary policy to lower interest rates

Expansionary fiscal policy such as lower taxes, increased government spending, etc. would stimulate aggregate demand

36
Q

Advantage of top-down approach

A

Provides a structured approach by incorporating the impact of economic and financial variables at every level in the analysis

37
Q

You believe the Fed is going to loosen monetary policy, give investment recommendations for the gold mining industry

A

Expansionary monetary policy leads to increased inflation which increases the value of gold as gold is hedged against inflation

38
Q

You believe the Fed is going to loosen monetary policy, give investment recommendations for the construction industry

A

Expansionary monetary policy will lead to lower interest rates which increases housing demand and thus will benefit the construction industry

39
Q

Why is the index of consumer expectations a useful leading indicator?

A

If consumers are optimistic of the future, they will be willing to spend more money which increases demand and will stimulate the economy

40
Q

Why is unemployment rate considered a lagging indicator

A

Economy has already started to turn down before employees are laid off.

41
Q

Three ways by which central banks can influence money supply and credit in the economy

A

1) Changing the reserve requirement ratio
2) Adjusting the overnight discount rate
3) Open market operations (QE or QT)

42
Q

What is an inverted yield curve?

A

An inverted yield curve happens with the 10-year yield is lower than the 2-year yield.

It reflects long-term interest rates falling below short-term rates.

43
Q

Why is an inverted yield curve considered a leading indicator?

A

It is considered a leading indicator as this has been a predictor of an upcoming recession or near-term economic deadline.

Most recessions occurred within 12 months of the yield curve inversion.

44
Q

What is the current state of the yield curve?

A

The yield curve keeps “uninverting”

45
Q

What does the current state of the yield curve mean?

A

This means that a recession was starting or about to begin with short-term yield falling faster than longer ones

46
Q

Advantage of using the Canadian Composite Indicator?

A
  • Blend of many leading indicators that predict economic activity
  • Designed to provide early signals or turning points
  • Comprised of ten components which lead cyclical activity in the economy
47
Q

Why is the U.S. Composite Index a leading indicator for Canada?

A

The U.S. is Canada’s largest trading partner

48
Q

Three Main Forces

A

1) Productivity Growth
2) Short term debt cycle
3) Long term debt cycle

49
Q

Why is credit so important?

A

Because the buyer is now able to increase his spending which drives the economy.

50
Q

Creditworthy Borrower Requirements

A

1) Ability to repay
2) Collateral

51
Q

Why does the debt cycle fluctuate?

A

Because when we borrow, we spend more than we can and when be repay, we spend less since we need to repay.

52
Q

Productivity Growth

A

Illustrates the increase in living standard without the use of debt as individuals increase their income solely based off of their productivity

53
Q

Short Term Debt Cycle Phases

A

1) Expansion
2) Peak
3) Contraction
4) Trough
5) Recovery

54
Q

Expansion Phase

A

When spending continues to increase and prices rise since spending is fueled by credit

55
Q

Why does inflation happen

A

People borrow more –> Spend more –> Causes less products to be available –> Prices for these products increase –> Banks increase interest rates to decrease spending

56
Q

Why does deflation happen

A

Less borrowing –> Less money to spend –> less income for others –> Prices go down –> Recession –> Central banks will lower interest rates to increase borrowing again

57
Q

How long does the short-term debt cycle last?

A

5-8 years

58
Q

Long Term Debt Cycle

A

1) Early Growth: Low debt and high productivity with strong growth
2) Debt Accumulation: Borrowing rises as confidence growa
3) Debt Saturation: High debt levels
4) Deleverging: Debt reduction through 4 methods
5) Reset: Economy stabilizes

59
Q

Deleverging

A

People cut spending –> Incomes fall –> Credit disappears –> asset prices drop since people sell collateral –> Lenders stop lending

60
Q

Why doesn’t lowering interest rates work for deleverging?

A

Because interest rates are already low

61
Q

How to fix deleveraging?

A

1) Cut Spending
2) Debts reduces
3) Redistribute wealth
4) Central Bank prints money

62
Q

Austerity (Cut Spending)

A

Reduced spending to bring debt under control

63
Q

Debt Restructing

A

Lenders get paid back less or over a longer period of time

64
Q

Wealth redistribution

A

Governments tax the wealthy to redistribute money which then goes back to the central government

65
Q

Printing money

A

Central banks print money so people can repay their debts and inject liquidity into the economy

66
Q

Quantitative Easing

A

1) Central banks decide to use QE
2) Central banks create new money
3) Central banks buy financial assets (bonds)
4) When assets are bought, financial institutions are paid which increases their reserves
5) Once they receive funds, their liquidity increases so they can lend/invest
6) Bond prices increase and their yields decrease
7) Interest rates decrease so people borrow more
8) More economic activity
9) Sell assets or let them mature

67
Q

Quantitative Tightening

A

1) Central banks decide to do QT
2) Stop purchasing financial assets
3) Let QE bonds mature or sell assets
4) Bond prices decrease and interest rates increase
5) Bank reserves decrease so less borrowing
6) Less transactions so economy slows down
7) Inflation lowers

68
Q

3 Rules of Thumb

A

1) Don’t have debt rise faster than income
2) Don’t have income rise faster than productivity
3) Do all that you can to raise productivity

ADMS 4501 Midterm (5 decks)

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