Macroeconomics - CBA PDF

Macro Economics An Investor's Perspective
Macroeconomics An Investors Perspective
Corporate Bridge Academy

www.corporatebridge.net
1
Discussion topics
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
Macroeconomics What is it?
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?
End of the session summary
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
Wealth Vs Income
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
Gross Domestic Product The Nations Output
6
Gross Domestic Product (GDP)
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
Points to Ponder
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?
The rich and the poor!!
Source : Wikipedia.org
GDP Per Capita, is what defines whether an economy is Developed, Emerging or

underdeveloped. Its all about GDP !!
The anatomy of GDP
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?
Is the world rebalancing?
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.
Splitting the GDP (Y)
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
Consumption Key Indicators
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.
Investments Corporate sector
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
Government Expenditure
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?
External Trade
It is the net exports in an economy

Commodity imbalances
Trade Deficits & Surpluses
Is China too exports driven? A case study.
Exchange rate management
An armchair view of the big five
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%
Sector wise contributions
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
Dissecting the GDP sectorwise
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%
Macroeconomic Management The key

stakeholders
20
Private and Confidential Not for Circulation
Circulation in Macroeconomics
Source: www.wikipedia.org
Households The consumers
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
Corporations Capital seekers
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
Government The stimulator
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
The central bank
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
Inflation managing the devil
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
Exchange rate management
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
Determinants of Exchange rates
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
Impact on Equity markets
29
The key influencers
Inflation
Interest rates
Exchange rates
Commodity prices
Economic growth
Foreign capital flow
What affects what?
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
The nature of influence
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?
Q&As
Thank You!
33

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Macro Economics An Investor's Perspective

Macroeconomics An Investors Perspective

Corporate Bridge Academy

Impact on Equity Markets

It is the study of the larger economic climate

Important to make asset class decisions

GDP : the concept and its importance

What affects what? For the equity investors

Wealth is stock, Income is flow

Gross Domestic Product The Nations Output

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

Reflects the lifestyle of the economy

GDP growth rates Real Vs Nominal

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

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

GDP calculation approaches

Same results, but different insights

Source : CIA World Fact book, 2009

Qualitatively most robust and irreversible component of GDP

Two components discretionary and non-discretionary

I stands for Investments (Gross block formation)

Investments in Plant & machinery, public infrastructure etc

G stands for Government Expenses

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

Remember export driven economies?

Trade deficits & surpluses

Consumption & Demographics

Watch IIP (Index for Industrial Production)

Watch for Union Budget allocations

Crowding out phenomenon?

It is the net exports in an economy

Country GDP Consumption Investment Imports to Exports to

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%

Country GDP Agriculture Industry Services

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%

Macroeconomic Management The key

The business entities that look for capital

Tax policy and structure

Structural Vs Cyclical deficits

Tactical (macroeconomic) objectives

Sectoral (microeconomic) objectives

Price stability essential precondition to economic growth

The causes of inflation

Interest rates & inflation

Trade linkages (Absolute & comparative advantage)

Understanding Balance of Payments

Impact on Equity markets

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