Revision - Core Flashcards
The liquidity of a market is affected by four factors
1 - width: the difference between the buy–sell spread prices
2 - depth: volume of buyers and sellers
3 - immediacy: how quickly trades can be done
4 -resiliency: how quickly prices respond to large order imbalance
(initiated by uninformed traders).
The three types of powers of attorney
1 - Ordinary power of attorney
2 - Enduring power of attorney for property
3 - Enduring power of attorney for personal care and welfare
The three types of powers of attorney
Enduring power of attorney for personal care and welfare
- Enduring power of attorney for personal care and welfare: this also provides the attorney with discretion regarding medical procedures, in particular the power to make a decision to remove medical treatment if deemed appropriate. It only comes into effect if the donor is unable to make decisions for themselves, that is, they have become incapacitated.
The three types of powers of attorney
Enduring power of attorney for property
Provides power to make financial decisions on behalf of the donor and continue to act beyond the incapacity of the donor.
The three types of powers of attorney
Ordinary power of attorney
Provides power only to act as long as the ‘donor’ (person issuing the power) has capacity. This type of power is limited and rarely used in New Zealand now
NEW ZEALAND TAXATION SYSTEM
The New Zealand taxation system is divided into three main taxation points
- personal taxes,
- company taxes and
- taxation on investment returns
NEW ZEALAND TAXATION SYSTEM
The New Zealand income taxation system is a ‘progressive’ tax system - meaning PAYE
it has a base rate of tax that increases as the individual’s income increases.
PAYE = Pay as you earn
NEW ZEALAND TAXATION SYSTEM
PAYE tax brackets
- 10.50%,
- 17.50%,
- 30%,
4.33% and
5.39%
NEW ZEALAND TAXATION SYSTEM
% of companies tax
Most companies in New Zealand pay taxes on their profits at a flat rate of 28%.
NEW ZEALAND TAXATION SYSTEM
Who pays withholding tax and on which income?
Withholding tax is paid by New Zealand residents on investment returns or on contract workers’ income.
The tax is withheld by the payer of the income and paid to the IRD.
NEW ZEALAND TAXATION SYSTEM
RWT - examples
‘Resident withholding tax
1. interest payments from a savings account or term deposit to an individual are taxed at a RWT rate that the recipient chooses, depending on their income. If you do not choose a rate, then the default rate of 33% applies.
2. dividends and unit trust distributions are all taxed at a RWT rate of 33%, while portfolio investment entities (PIEs) are taxed at different rates depending on the type of fund
3. interest payments are taxed at the non-declaration rate if you have not
given your IRD number to the interest payer — from 1 April 2020,
the non-declaration rate is 45%.
NEW ZEALAND TAXATION SYSTEM
interest payments from a savings account or term deposit to an individual
are taxed at a RWT rate that the recipient chooses, depending on their
income. If you do not choose a rate, then the default rate of 33% applies
NEW ZEALAND TAXATION SYSTEM
dividends and unit trust distributions tax
are all taxed at a RWT rate of 33%
NEW ZEALAND TAXATION SYSTEM
portfolio investment entities (PIEs) tax
(PIEs) are taxed at different rates depending on the type of fund.
A prescribed investor rate (PIR) is the tax rate applicable on income earned from a portfolio investment entity (PIE).
NEW ZEALAND TAXATION SYSTEM
What is it a portfolio investment entity (PIE)
A PIE is an entity that invests the contributions from its investors in different types of passive investments.
NEW ZEALAND TAXATION SYSTEM
prescribed investor rate (PIR)
is the tax rate applicable on income earned from a portfolio investment entity (PIE).
NEW ZEALAND TAXATION SYSTEM
Interest payments are taxed at the non-declaration rate
Interest payments are taxed at the non-declaration rate if you have not
given your IRD number to the interest payer — from 1 April 2020,
the non-declaration rate is 45%.
PROVISIONAL TAX
It is designated to help self-employed people manage their annual tax bill. It is a quarterly instalment payment if the annual tax is greater thab $5000
ACC EARNERS LEVY
It is payed by employees and self-employed to cover the cost of non-work accidents.
The amount paid is based on the income earned and charged at a rate set by the goverment.
business cycle 4 stages
- peak to contraction
- contraction to trough
- trough to expansion
- expansion to peak
business cycle
peak to contraction
X6
- growth peaks, then falls
- economic indicators reach a maximum level before declining
- industrial production falls
- capacity utilisation falls
- labour productivity declines (as production falls while employment lags)
- inflation peaks, then declines.
business cycle
Contraction to trough
- unemployment rises
- retail sales decline
- inflation falls
- balance of payments deficit falls (as imports decline)
- consumer sentiment decreases.
business cycle
Trough to expansion
X5
- inflation falls with a resulting increase in consumer real income
- interest rates fall
- housing activity starts to increase
- consumer sentiment improves
- consumer demand increases (e.g. car sales, consumer credit and retail sales).
business cycle
Expansion to peak
X6
- growth broadens to include manufacturing, resulting in an increase in industrial production and capacity utilisation (and higher costs for business)
- inflation bottoms and starts to increase
- production rises to peak
- the labour market is tight
- wage demands increase
- expectations that the ‘boom’ cannot last.
NATIONAL ACCOUNTS
NATIONAL ACCOUNTING
key elements
4
- Income: which sectors have received the income earned in production of goods and services, via wages, profits and taxes.
- Saving
- Assets - Production: what value/volume of goods has been produced
- Liabilities - expenditure: on what the income has been spent (consumption, investment or imports)
NATIONAL ACCOUNTS
NATIONAL ACCOUNTS
Concept
The NZ national accounts are a group of data that explains the progress of the economy in terms of:
1. household wealth
2. changes in goverment debts and assets
3. changes in goverment income and expenditure
4. industry production and expenditure
5. NZ GDP, which provides a “snapshot” of the performance of the economy.
NATIONAL ACCOUNTS
HOUSEHOLD SAVINGS RATIO
Is the proportion of household disposable income (income from all sources less income tax, other direct taxes, fees, fines, etc).
The household savings ratio had increased in New Zealand significantly since
COVID-19
NATIONAL ACCOUNTS
NATIONAL SAVINGS
It is an indicative of Nz’s ability to finance its own investrment.
National savings is composed of savings from both the private and public sectors.
NATIONAL ACCOUNTS
LIMITATIONS OF THE NATIONAL ACCOUNTS
- Lack of timeliness: there is a laf of 8 to 10 weeks between the end of a quarter and the publication of the national accounts for that quarter.
- Magnitude of revisions: these are often substantial, as intial estimates are based on preliminary and/or partial rather than complete and final surveys.
ECONOMIC FORECASTING
It plays a key role in the economic planninf process and on the investment asset allocation process.
It uses information about where the economy is now, how it got there and what occurred whenthe economy was in a similar situation in the past to predict what is expected to happen next. As the economy is constantky responding to unanticipated supply and demand shocks, forecasts typically cover only a period of a year or so.
ECONOMIC INDICATORS
Provide key information about the direction and health of the economy. they also provide guidance on the ourlook for the economic environment, both locally and internationally.
ECONOMIC INDICATORS
3 categories
**1. Partial indicators: **provide information on specific types of economic activity, such as retail trade, motor vehicle registrations, building approvals, employment and unemployment, and financial aggregates.
**2. Broad or comprehensive indicators: **provide an overview of aggregate aconomic activity, such as the national accounts (GDP and its components, suchga as consumption and investment spending), financial accounts (flow of funds) and the balance of payments (exports and imports)
**3. Forward-looking indicators: **attempt to provide some guide to future economic developments, either by surveying expectations or by relaying on pasr statistical relationships between certain indicators and subsequent behaviour of other aggregates.
FORWARD-LOOKING INDICATORS, which are the principal in NZ?
x5
- Employment and unemployment
- Sales
- GDP
- Short-term interest rates
- Consumer sentiment
Mortgage default rate
It’s the percentage of all outstanding loans that a lender has written off as unpaid after a prolonged period of missed payments.
It is an indicator of economic stress at homeowner level and can reflect rising unemployment and rising interest rates.
Widespread difficulty in meeting mortgage payments can precipitate or exacerbate financial inestability by causing borrowers to either default, sell their house or cut their compsumption sharply.
NZ is particularly vulnerable to a sharp rise in mortgage rates as the banking system funds a large portion of its mortgages credit from offshore wholesale markets. The cost of this funding can increase sharply if there is an unexpected increase in global interest rates or a change in investor risk appetite, and banks are likely to pass on the higher funding costs to customers through higher interest rates.
ECONOMICS AND INVESTMENT PLANNING
Key economic variables that will have an impact on the investment outcomes
7
- Monetary policy
- Fiscal policy
- Taxation
- Unemployment
- Interest rates
- Inflation
- Exchange rates
ECONOMICS AND INVESTMENT PLANNING
1 - MONETARY POLICY
It refers to the setting of money conditions to achieve a desired goal for price inflation. As such, it is concerned with the behaviour of the money suppply, interest rates and financial conditions generally and is an integral part of economic policy.
MONETARY POLICY
The RBNZ has a monetary policy mandate, published in 2020, and based on the dual purpose of:
- Low & stable inflation and full employment objectives
- Best contribution to economic wellbeing of NZers.
Controlling inflation preserves the value of money and encourages strong and sustainable growing in the economy over the longer term.
ECONOMICS AND INVESTMENT PLANNING
MONETARY POLICY
How it will affect investments?
The setting of short-term interest rates can potentially impact on all asset markets:
1. Equity market: higher interest rates will impact on those sectors more reliant on borrowing.
2. Fixed interest market: if short-term interest rates are increasing, the cost of issuing fixed interest securities will suffer.
3. Property sector: higher interest rates typically have a detrimental effect.
Central banks can slo have an influence on long-term interest rates through purchase programs (quatitative easing). Long-term rates are likely to have a much grater effect on asset markets.
MONETARY POLICY
RBNZ tools of monetary policy
X6
- OCR
- Large-scale Asset Purchase (LSAP) programme (also called quantitative easing or QE). Involves the RBNZ buying bonds from banks in exchange for electronically created money. This puches down interest rates on loans. This injects more money into the economy. In contrat, savers will experience lower returns.
- Funding for Lending Programme: allows eligible banks to borrow ar the OCR. This means they are less reliant on more expensive deposits and wholesale lending, which lowers their overall funding costs.
- Negative OCR: banks would have to pay interest on their deposits with the RBNZ. This reduce market interest rates.
- Foreing exchange intervention: by reducing the value of the NZ dollar, the RBNZ can stimulate the economy and increase inflation.
- Exchange settlement funds: to create more or less reduction of cash.
OCR (Official Cash Rate)
It is the main tool used by the RBNZ to implement its monetary policy. It is the interest rate that the RBNZ charges banks to borrow money. This, in turn, influences other interest rates, like mortgages, personal loans, commercial loans, and returns on savings and term deposits.
The goal is to promote price stability and support long-term growth by influencing the demand for money.
The higher the OCR, the more expensive it will be to borrow money, which helps to bring inflation down. Conversely, if the OCR is low, the RBNZ wants to boost spending and economic activity.
It helps measure a portfolio’s performance, as it is the return achieved by doing nothing with the funds but saving. It is the risk-free rate of return.
Components of an interest rate
x 4
- Real component: the compensation to the lender for deferring consumption.
- Inflation compensation: to compensate the lender for the expected loss of purchasing power over the term of the loan.
- Risk premium: compensates for the posibility that the borrower won’t be able to repay the loan, or that the currency might weaken.
- Monetary policy: reflecting the RBNZ decision about the difficulty or easiness of borrowing money.
ECONOMICS AND INVESTMENT PLANNING
2 - FISCAL POLICY
Use of the level and compostion of public sector spending, revenue raising and borrowing, to achieve certain macroeconomic objectives such as promoting full employment, containing inlationary pressures and achieving or manteininf balance of payments in equilibrium.
The annual budget outlines the governments revenue (ie collecting taxes) and spending (ie health, education). these activities influence the purchasing power of households and business which in turn impact the economy. ie if the gov increase taxes household have fewer surplus funds for spending leading to less demand for good and services and ultimately lower economic growth
ECONOMICS AND INVESTMENT PLANNING
FISCAL POLICY
How it will affect investments?
Fiscal policy is important indirectly, in that setting policy can have a bearing on the pace of economic growth, and potentially on the outlook for inflation.
- In equity markets: the main concer is the specific measures adopted, whether there are tax changes at either personal or company level, or new spending proposals.
- In the fixed interest marker: a factor for the price is the supply of securities, which is determined by the overall fiscal policy at both central and state levels.
- In the property markets: mainly concerned with taxation issues, although inflation can be important in the medium term.
ECONOMICS AND INVESTMENT PLANNING
3 - TAXATION
How it will affect investments?
Changes in taxation will impact on investment planning as will changes in an individual’s income due to the progressive nature of income tax in NZ.
Tax minimization, or the lire of tax rebates such as imputation credits, should not be the driving force of any wealth creation strategy.
ECONOMICS AND INVESTMENT PLANNING
4 - UNEMPLOYMENT
How it will affect investments?
Rising unemployment rates leads to stagnant income growth and a reduction in spending.
Property prices fall either through forced sales by mortgage holders or through lack of interest from buyers unwilling to make a significant financial commitment in times of uncertanty.
Companies sell less, even though their costs might be falling, and this impacts in profitability. It is difficult for a company to pay dividends when at the same time is laying off employees to remain in operation or profitable. This leads to falling expectations about future growth, which is the underlating driver of current share prices.
ECONOMICS AND INVESTMENT PLANNING
5 - INTEREST RATES
How it will affect investments?
The level of interest rates within an economy drives the cost of money within the economy. Chash rates are the “do nothing” option and become the benchmark from which all other investments returns within that economy are based.
High interest rates dampen consumption and entrepreneurial activities, sucha as property development.
Some changes might have little impact. However the trend of changes in interest rates and the forecast changes plays a big part in domestic economic confidence.
The change affects more to investing based on borrowed funds, that is, capital intensive investing or fund manager using a gearing strategy to leverage growth.
Rising interest rates reward savers.
Debt is tax deductible and directors determine wheter a dividen is paid to capital contributors. If there are insufficient proficts, they may choose to retain the dividends and withhold payment. Alternatively, they may choose to retain the dividends and use the funds for capital expansion.
ECONOMICS AND INVESTMENT PLANNING
6 - INFLATION
How it will affect investments?
Shares are considered a tool to hedge against inflation, as historically the rate of return of the share market has been greater than inflation.
Rising inflation can have a negative impact on the performance of both shares and bonds, as it will affect the real rate of return.
The price-to-earnings (PE) ratios of shares typically contract when inflation is high. It is particularly important for some investment valuation methods like the Discounted Cash Flow, where the discount rate is generally based on the cost of financing. If inflation is high and persistent over time, the cost of financing will also be high, and the cost of the investment will be higher than the projected return. Hence, investors might not buy shares or will wait for the price to come down.
Inflation generates a pessimistic view of the economy, leading companies to avoid expansion, hire new staff or pursuing more aggressive growth strategies, resulting generally in less growth. It is also an indicator of higher rates. This means that is more expensive for companies to operate and borrow money.
Higher inflation can positively affect some shares, such as those invested in commodities (like gold or oil).
Particularly with bonds, their price moves in the opposite direction to interest rates. In a context of high inflation, interest rates will go up, and bond prices will go down. For investors this results in the opportunity of buying bonds at a discount. If you buy a bond at a discount, the yield to maturity goes up.
ECONOMICS AND INVESTMENT PLANNING
7 - EXCHANGE RATES
How it will affect investments?
Changes in rates have a direct impact on the competitiviness of NZ’s goods and services compared to overseas equivalents, and an indirect impact on unemployment, inflation and the price of goods and services consumed by NZers.
A failling NZ dollar leads to more demand for exports as the foreing currency can buy more of the product ar a lower price. Imports cost more and can lead to increase prices and inflation.
High local interest rates attract international investors and speculators, therefore increasing the demand for NZ dollars and pushing the price up. But high interest rates increase the cost of production, which increases the prices and leads to inflation.
