Macro2: Economic Activity and the Financial Markets

Question 1

What are the five major asset classes?

Answer 1

1) Cash
2) Fixed Income
3) Equities
4) Property
5) Commodities

Question 2

How is the performance of equities and Fixed Income linked?

Answer 2

Equities do well in growth phases and poorly in contractions.

Fixed income benefits from rate cuts in contractions and performs poorly with rate rises as growth peaks.,

Question 3

Think flight to safety

What is gold’s value linked to?

Answer 3

Gold often rises when the USD declines as investors look for a safe haven asset.

Question 4

Why are developed markets able to deal with a financial crisis better?

Answer 4

Developed Markets:
- More fiscal room to finance larger defecits
- Greater scope to loosen monetary policy
- Helps lead to a soft landing

Question 5

Why are emerging markets less equipped to deal with an economic shock?

Answer 5

Developed Markets:
- less fiscal room to finance defecits
- Less scope to loosen monetary policy
- Leads to a hard landing

Question 6

MAKE STICKY NOTE OF INVESTMENT CLOCK MACRO 2

MAKE STICKY NOTE OF INVESTMENT CLOCK MACRO 2

MAKE STICKY NOTE OF INVESTMENT CLOCK MACRO 2

MAKE STICKY NOTE OF INVESTMENT CLOCK MACRO 2

Answer 6

MAKE STICKY NOTE OF INVESTMENT CLOCK MACRO 2

MAKE STICKY NOTE OF INVESTMENT CLOCK MACRO 2

MAKE STICKY NOTE OF INVESTMENT CLOCK MACRO 2

Question 7

What sectors perform well in these economic stages:
1) Growth
2) Downturn
3) Perform well regardless of stage

Answer 7

1) Consumer Discretionary e.g. cars
2) Utilities, Consumer staples (movie streaming)
3) Food, healthcare & utilities

Downturn = less money to go out = streaming services do better

Question 8

What effects a companies ability to withstand economic shocks?

Answer 8

1) The sector they operate in (e.g. consumer discretionary will find it harder)
2) The size (e.g. smaller companies tend to struggle, but can also be more nimble)
3) Level of gearing (have to service debt at a time profitability is low)

Question 9

What is the difference between growth & value investing

Answer 9

Growth - Targets companies who will outperform the market over time due to growth potential
Value - Invest in companies who are perceived as undervalued / trading below intrinsic value

Value tends to fare better during rising interest rates as inflaion can strip away growth potential

Question 10

What is the difference between primary and secondary markets?

Answer 10

Primary Markets - a place for new securities to be issued (shares, bonds etc - includes the IPO market)
Secondary Markets - a place to trade securities already in issue - e.g. equities or bonds before their maturity

Capital markets are broadly centralised

Question 11

What are the purposes of the primary and secondary markets

Answer 11

Primary
- Raise Capital

Secondary
- Provide liquidity to capital markets

Question 12

What are money markets?

Answer 12

Decentralised interconnected markets that provide access to short term whole sale funding

Question 13

What are the two major forms of money markets

Answer 13

1) Interbank Lending - Banks lend to eachother at overnight repo rates for shorterm wholesale funding.
2) Commercial Paper Markets - Companies effectively write IOUs to banks / FIGs to access shorterm wholesale funding at more advantageous rates.

The Money market also includes, Certificates of Deposit, USTs and Repos.

Question 14

What is the repo market?

Answer 14

A borrower can pledge a security as collateral to borrow money.

Borrower sells the asset and agrees to buy it back at a fixed price (often overnight)

The difference between the price it is sold at and the repurchase price is the “repo rate”

Question 15

What is globalisation?

Answer 15

The interconnected and interrealted nature of business
- Companies offering services / products further afield
- Products, processes and lifestyles becoming similar

WTO contribute to globalisation through multilateral trade agreements.

Question 16

How is inflation measured?

Answer 16

Inflation is measured as the weighted change in price of a basket of goods. This is known as the CPI.

Previously CPI was known at the HICP (harmonised index of consumer prices)
RPI is another measure

Question 17

How do RPI and CPI differ?

Answer 17

CPI and RPI both measure the change in price of a basket of goods
CPI
- Geometric Mean
- Includes: University Fees, Stockbroker / Unit Trust Fees and Uni Accom

Whereas RPI
- Arithmetic Mean
- Includes Rent and Mortgage
- Excludes Pensioners and highest earners
- Tends to be 1%~ higher than CPI

MAKE A STICKY NOTE FOR THIS ! ! !

Question 18

What is PPI and what are the 3 types?

Answer 18

Measures the changes of prices of inputs into the production process
1) Commodity PPI - Input materials
2) Stage of processing - Intemediary goods (e.g leather, paper, refined sugar)
3) Core PPI - Finished Goods

Core PPI is the most watched by economists and analysts

Question 19

Why is PPI particuarly useful for monitoring inflation?

Answer 19

It identifies changes in price before goods reach conusmers
Therefore it is an earlier indicator of inflation

Question 20

What are the 4 sources of inflation?

Answer 20

1) Cost Push - Factors of production increase in cost, these costs are pushed onto customers
2) Demand Pull - Demand outstrips supply increasing prices
3) Imported Inflation - Depreciation in currency increases the cost of imports
4) Monetary Inflation - Excess money supply causes inflation

Imported inflation also due to inflation in the export country

CDIM

Question 21

What is the difference between procyclic and countercyclic indicators?

Answer 21

Procyclic indicators move in the same direction as the economy as a whole (e.g. GDP)
Countercyclic move in the opposite direction as the economy (e.g. Unemployment)

Question 22

What are the 3 indicator timings?

Answer 22

Leading (Stock Market)
Lagging (e.g. Unemployment)
Coincident (e.g. GDP, Sales and Production)

Most economists view consumer confidence as a lagging indicator that follows or confirms economic trends, while others consider it a leading indicator that provides an indication of future developments of households’ consumption and spending.

Question 23

Purchasing Managers Index

How does the PMI Index work
What does the output show?

Answer 23

A monthly survey of private sector companies
1) Companies are surveyed on conditions of: Output, Sales, Employment, Costs etc
2) Rank them (improving or contracting) +1 - -1
3) Final output shows sentiment. >50 means improving (and can gauge how much by) <50 is the opposite and 50 is staying the same.

Question 24

What are the three major types of unemployment?

Answer 24

1) Structural - arising from a mismatch in jobs available and the skills of the workforce
2) Frictional - arises when moving between a job (e.g. resignation or redundancy)
3) Cyclical - arises from downturn in the economy

Question 25

What is the balance of payments?

Answer 25

A lagging indicator that compares inflows and outflows of imports and exports.

A positive balance means more mone flowing in than out

Question 26

What are the three accounts that must balance?

Answer 26

1) Current Account (balance of trade) - Imports and Exports
2) Capital Account - Investment in the country and to other countries
3) Financial Account - International ownership of assets

Question 27

What 4 things is the financial account made up of?

Answer 27

1) Foreign Direct Investment
2) Other Investment
3) Reserve Account Flows
4) Portfolio Investment

Question 28

If imports exceed exports, what can a goverment do to fix the balance of trade?

Answer 28

Devalue the currency in order to limit imports and increase exports.

Question 29

What is purchasing power parity?

Answer 29

Parity is the rate at which two countries domestic purchasing power is the same. (e.g. a basket of goods costs the same)

Price in FX1 / Price in FX2

Question 30

What is a pegged exchange rate, give an example

Answer 30

A pegged exchange rate is where the value of one currency is set against another (usually USD)

For example HKD to USD (0.13:1)

The opposite is a floating exchange rate

Question 31

What is a managed floating rate? (also called dirty float)

Answer 31

A floating currency rate where the central bank intervene in order to keep the currency at a specified level (or within a specified band)

Question 32

What are foreign reserves?

Answer 32

Large holdings of foreign denominated currency in order to facilitate international trade.

e.g. USD / RMB

A currency is attractive for foreign transactions when it demonstrates a proven track record of stability