Macro2: Economic Activity and the Financial Markets Flashcards
What are the five major asset classes?
1) Cash
2) Fixed Income
3) Equities
4) Property
5) Commodities
How is the performance of equities and Fixed Income linked?
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.,
Think flight to safety
What is gold’s value linked to?
Gold often rises when the USD declines as investors look for a safe haven asset.
Why are developed markets able to deal with a financial crisis better?
Developed Markets:
- More fiscal room to finance larger defecits
- Greater scope to loosen monetary policy
- Helps lead to a soft landing
Why are emerging markets less equipped to deal with an economic shock?
Developed Markets:
- less fiscal room to finance defecits
- Less scope to loosen monetary policy
- Leads to a hard landing
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
MAKE STICKY NOTE OF INVESTMENT CLOCK MACRO 2
MAKE STICKY NOTE OF INVESTMENT CLOCK MACRO 2
MAKE STICKY NOTE OF INVESTMENT CLOCK MACRO 2
What sectors perform well in these economic stages:
1) Growth
2) Downturn
3) Perform well regardless of stage
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
What effects a companies ability to withstand economic shocks?
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)
What is the difference between growth & value investing
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
What is the difference between primary and secondary markets?
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
What are the purposes of the primary and secondary markets
Primary
- Raise Capital
Secondary
- Provide liquidity to capital markets
What are money markets?
Decentralised interconnected markets that provide access to short term whole sale funding
What are the two major forms of money markets
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.
What is the repo market?
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”
What is globalisation?
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.
How is inflation measured?
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
How do RPI and CPI differ?
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 ! ! !
What is PPI and what are the 3 types?
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
Why is PPI particuarly useful for monitoring inflation?
It identifies changes in price before goods reach conusmers
Therefore it is an earlier indicator of inflation
What are the 4 sources of inflation?
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
What is the difference between procyclic and countercyclic indicators?
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)
What are the 3 indicator timings?
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.
Purchasing Managers Index
How does the PMI Index work
What does the output show?
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.
What are the three major types of unemployment?
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
What is the balance of payments?
A lagging indicator that compares inflows and outflows of imports and exports.
A positive balance means more mone flowing in than out
What are the three accounts that must balance?
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
What 4 things is the financial account made up of?
1) Foreign Direct Investment
2) Other Investment
3) Reserve Account Flows
4) Portfolio Investment
If imports exceed exports, what can a goverment do to fix the balance of trade?
Devalue the currency in order to limit imports and increase exports.
What is purchasing power parity?
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
What is a pegged exchange rate, give an example
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
What is a managed floating rate? (also called dirty float)
A floating currency rate where the central bank intervene in order to keep the currency at a specified level (or within a specified band)
What are foreign reserves?
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
