Week 6 Flashcards
Is there a link between economic growth and the stock market? Why?
No. Positive economic growth does not guarantee a positive stock market.
Economic growth does not mean higher profits for individual firms.
The relationship between economic growth and the share market are dependent on the function of:
- Competition in the market
- Technology
- Political climate
What are the three factors underpinning supply and demand
- Economic-wide factors
- Industry-wide factors
- Firm-specific factors
What is the relationship between GDP growth and risk-adjusted returns? why?
Countries with low GDP growth tend to have higher risk-adjusted returns. While the exact reason is uncertain there are three theories.
Value effect - countries with low GDP growth and weak currency are riskier. Investors place higher premiums and have higher expected returns
Behavioural Argument - Investors are choosing to overpay for safer growth stocks while avoiding riskier countries
- High GDP does not equal high profits
What would a rise in wages do to the fundamental analysis equation? why?
an increase in wages will decrease expected cash flows. lowering share prices.
Any change in the economy affects at least one component of the fundamental analysis equation
Can a fundamentally bad company achieve a higher return than a fundamentally good company? why?
A fundamentally bad company can achieve better returns because it is riskier. The higher risk means higher expected returns. The market would undervalue future cashflows and growth options. If the risks do not eventuate, it will achieve higher returns than a safer company that already has future cashflows and growth options factored into the price
What determines GDP growth
Labour
Capital
Productivity
What is the relationship between productivity and GDP? Who benefits from increasing productivity?
Productivity is a critical component of GDP. As productivity increases so does GDP. It allows the increase of output from the same amount of fixed capital and labour.
The benefitting parties
- Providers of capital = higher dividends +
capital appreciation
- Labour = Higher wages
- Consumers = Lower prices and better quality goods
What determines the distribution of gains? What trends have been occuring?
Competition
Technology
Politics
Recent trends are:
- Distribution of gains shifting from labour
to capital
What determines a firm’s capital returns in a growing market?
a) new entrants (loss of market share)
b) employees
c) Taxes
d) consumers
What is the significance of competition?
What are the factors of competitiveness?
Importance of Competitiveness:
- More innovation (beat competitors)
- Higher consumer benefits (stuff cheaper, better quality and new products)
Factors of competitiveness:
- Cost of production
- Product differentiation
- Quality of management
What are Michael Porter’s five factors of profitability?
- Rivalry amongst existing firms
- Threats of new entrants
- Threats of substitutions
- Bargaining power of customers
- Bargaining power of suppliers
What is technology’s impact on profits?
- Allows for better products
- lowers costs = higher profit margins
- increases productivity = higher output
What is a SPAC, and why do they exist?
Special Purpose Acquisition Company
- Exchange traded fund that’s sole purpose is to purchase small technology companies
They purchase technology companies because:
- Low marginal costs
- Increasing returns to scale
- Strong network effect (sticky)
They exist because:
1. Technology allows for better control of large rescources by a single firm
2. There are large fixed-costs that require large upfront investments
What are the benefits of a SPAC
- Investors can spread capital to lower risk
- Entrepreneurs have already tested the company to a limited degree
- Entrepreneurs can raise capital easier by receiving money from the fund manager that originates from many people
- Investors only need to make the judgement call on the fund manager’s expertise and trustworthiness
What is the importance of unit economics?
- Allows for analysis of revenue
-marginal revenue & marginal costs - Allows for firms to accurately cover fixed costs
- increases competitiveness
