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Macro Economics An Investor's Perspective

Macroeconomics An Investors Perspective

Corporate Bridge Academy


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Discussion topics
Macro Economics An Investor's Perspective

What is Macroeconomics?
Wealth & Income
Gross Domestic Product
Anatomy of GDP
Splitting the GDP
Consumption Key Indicators
Investments Corporate Sector
Government Expenditure
External Trade
Sector wise Contribution

Macro-Economics Management
Household
Corporation
Government
Central Bank
Inflation
Exchange Rate

Impact on Equity Markets


Sector wise affect of Macro Factors

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Macroeconomics What is it?
Macro Economics An Investor's Perspective

It is the study of the larger economic climate


Deals with overall performance of the economy
Enables investors to interpret the
Leading indicators
Lagging indicators

Important to make asset class decisions


Explains the implications of economic cycles

Can an artist create a piece of art without making the right canvas?

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End of the session summary
Macro Economics An Investor's Perspective

GDP : the concept and its importance


The economic cycles
The economic character of the world we live in
The role of consumption, savings and Investments
The triangle Inflation, Exchange rates & Growth
The star cast of any economic drama
Households with their capital
Firms with their investment plans
The Government with its fiscal policy
The central bank with its monetary policy
Capital Markets with its investors

What affects what? For the equity investors

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Wealth Vs Income
Macro Economics An Investor's Perspective

Wealth is stock, Income is flow


Wealth can create income, not vice versa
Individuals are different from economies
Wealth irrelevant in economic context?
Discussion points
Two people scenario
People and firm(s) scenario
Households, firms and Government scenario
HH, Firms, Government and Central bank scenario

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Macro Economics An Investor's Perspective

Gross Domestic Product The Nations Output

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Gross Domestic Product (GDP)
Macro Economics An Investor's Perspective

Simple sum of incomes (expenses) of all economic units in an economy


Implies the size of an economy
At market rates
Purchasing power parity

Reflects the lifestyle of the economy


GDP per capita, a critical reference point

GDP growth rates Real Vs Nominal


GDP growth rate is the benchmark for many sectors in an economy

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Points to Ponder
Macro Economics An Investor's Perspective

Just why is US so important for US as well as non-US investors?


What is the global GDP? How is it behaving?
What is this Chindia all about?
What are emerging economies? What differentiates them from developed
economies?
Is there something called quality of GDP?
Why is America called a consumption economy?
What is the flaw with the Chinese economy?
What are the unique characteristics of Indias GDP?

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The rich and the poor!!
Macro Economics An Investor's Perspective

Source : Wikipedia.org

GDP Per Capita, is what defines whether an economy is Developed, Emerging or


underdeveloped. Its all about GDP !!

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The anatomy of GDP
Macro Economics An Investor's Perspective

GDP calculation approaches


Expenditure Side, the most widely used
Income Side
Production Side

Same results, but different insights


GDP growth rate has a qualitative aspect
GDP and Employment, correlated?

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Is the world rebalancing?
Macro Economics An Investor's Perspective

Source : CIA World Fact book, 2009

GDP growth rate spread world-over will tell the basic fact that it is the poorer nations that
are growing fastest, trying to catch up with the developed world.
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Splitting the GDP (Y)
Macro Economics An Investor's Perspective

Y = C + I + G + (X M)
C stands for Private Consumption
Implies the private consumption of households, central concern of welfare economics

Qualitatively most robust and irreversible component of GDP

Two components discretionary and non-discretionary

I stands for Investments (Gross block formation)


Gains momentum in good macro climate

Investments in Plant & machinery, public infrastructure etc

G stands for Government Expenses


At discretion of Government, but has non-discretionary component

Salaries of Public servants, defense and public or social services

The only stimulation point in case of economic slow down - STIMULUS

X stands for Exports, M stands for Imports


This is where global interlinkages are at play

Remember export driven economies?

Trade deficits & surpluses

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Consumption Key Indicators
Macro Economics An Investor's Perspective

Consumption & Demographics


All consumption is not the same
Consumption & leverage in the economy
Quarterly release of GDP
Watch for durable goods
Watch for home sales

Automobile Sales
A comparison across China, India & US. A case study.

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Investments Corporate sector
Macro Economics An Investor's Perspective

Watch IIP (Index for Industrial Production)


Cement dispatches?
Order books Infrastructure companies
Most vulnerable to Interest rates
Vulnerable to hard commodity prices
Can be lumpy, unlike consumption

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Government Expenditure
Macro Economics An Investor's Perspective

Watch for Union Budget allocations


One of the controlling levers of economy
Fiscal Stimulus
But can Government spend irrationally?
Fiscal Deficit
Public Debt levels
Annual interest burden
Sovereign rating

Crowding out phenomenon?

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External Trade
Macro Economics An Investor's Perspective

It is the net exports in an economy


Commodity imbalances
Trade Deficits & Surpluses
Is China too exports driven? A case study.
Exchange rate management

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An armchair view of the big five
Macro Economics An Investor's Perspective

Country GDP Consumption Investment Imports to Exports to


(USD tn) GDP GDP

USA 14.4 70% 14% 15% 8%

China 8.0 37% 40% 14% 37%

India 3.3 57% 39% 9% 13%

UK 2.2 68% 17% 24% 17%

Japan 4.3 55% 23% 14% 15%

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Sector wise contributions
Macro Economics An Investor's Perspective

Agriculture
Low growth sector
High contribution implies underdeveloped nature

Manufacturing
Employment creating,
High growth, consumption-linked

Services
Extremely employment intensive
High contribution implies well developed nature

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Dissecting the GDP sectorwise
Macro Economics An Investor's Perspective

Country GDP Agriculture Industry Services


(USD tn)
USA GDP 14.4 1.2% 19.2% 79.6%

USA Emp 0.6% 22.6% 76.8%

China 8.0 11.3% 48.6% 40.1%

China Emp 43.0% 25.0% 32.0%

India 3.3 17.6% 29.0% 53.4%

India Emp 60.0% 12.0% 28.0%

UK 2.2 1.3% 24.2% 74.5%

UK Emp 1.4% 18.2% 80.4%

Japan 4.3 1.5% 26.3% 72.3%

Japan Emp 4.4% 27.9% 66.4%

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Macro Economics An Investor's Perspective

Macroeconomic Management The key


stakeholders

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Private and Confidential Not for Circulation
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Circulation in Macroeconomics
Macro Economics An Investor's Perspective

Source: www.wikipedia.org
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Households The consumers
Macro Economics An Investor's Perspective

Household sector
Savings rate
Household debt
Average Household income

Consumption patterns
Tax rates
Socio Economic Characteristics (SEC)
Middle Class
Poor households
The aspiring and the rich class

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Corporations Capital seekers
Macro Economics An Investor's Perspective

The business entities that look for capital


Also critical for providing employment
Focused on earning RoCE
Need deep capital markets to thrive
Superior risk pricing mechanism

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Government The stimulator
Macro Economics An Investor's Perspective

Tax policy and structure


Horizontal & Vertical equity
Enhancing Tax / GDP ratio
Progressive, Regressive or proportional
Fiscal efficiency, ICOR

Structural Vs Cyclical deficits


Government Expenditure policy
Planned expenditure
Non planned expenditure

Social infrastructure
Law enforcement

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The central bank
Macro Economics An Investor's Perspective

Tactical (macroeconomic) objectives


Inflation management
Liquidity management, the banker of last resort (repo, reverse repo, CRR, SLR)
Short-medium term exchange rate management

Strategic objective
Financial sector development to accommodate growth
Banker to the government

Sectoral (microeconomic) objectives


Prudential regulation
Maintaining health of institutions

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Inflation managing the devil
Macro Economics An Investor's Perspective

Price stability essential precondition to economic growth


Mild dose of inflation may be virtuous
Inflation,
Deflation
Stagflation

The causes of inflation


Demand pull factors (too much money)
Cost push factors (too little / volatile supply)

Interest rates & inflation


Distinct from asset-price targeting
It is the no. 1 enemy for all the developing economies

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Exchange rate management
Macro Economics An Investor's Perspective

Trade linkages (Absolute & comparative advantage)


Unequal distribution of Natural Resources
Technology differences
Consumer preferences
Cost advantages

Finance linkages
Capital flows into and from (FDI & FII)
Borrowings and various instruments (ECB, FCCB)
Invisibles
Monetary movements (IMF, WB etc)

Understanding Balance of Payments

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Determinants of Exchange rates
Macro Economics An Investor's Perspective

Interest rates
Price levels (and Inflation)
Growth rates
Other economic fundamentals
Fiscal deficit
Export competitiveness

Trade balance
Current a/c balance
Capital a/c balance

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Macro Economics An Investor's Perspective

Impact on Equity markets

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The key influencers
Macro Economics An Investor's Perspective

Inflation
Interest rates
Exchange rates
Commodity prices
Economic growth
Foreign capital flow

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What affects what?
Macro Economics An Investor's Perspective

Commodity Economic
Inflation Interest Rates Exchange Rates Prices Growth Capital Flows
Consumer - FMCG
Automobiles
Auto Ancilliaries
Banking
NBFC
Energy - E&P
Energy - Utilities
Energy - Refinery
Metals
Real Estate
Media - Electronic
Media - Print
Telecom
IT - ITeS
Logistics
Cement
Fertilizers
Retailing
Capital Goods
Infrastructure

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The nature of influence
Macro Economics An Investor's Perspective

Top line
Volumes
Realizations

Operating performance
Raw material costs without pricing power

Capital Structure
Accounting impact?
Change in valuation multiple?

Case Study.
Which of the sectoral indices were the most volatile during the recent fall?
Why?
Which were the best performing indices. Why?

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Macro Economics An Investor's Perspective

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Q&As
Thank You!

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