Business investment

1. Macroeconomic and Market Analysis: The
Global Asset Allocation Decision
 What are the expected and the empirical relationships
between economic activity and security markets?
 What is the macroeconomic approach to estimating
future market returns?
 What are the major macroeconomic techniques used to
project the securities market?
 What are the expected and the empirical relationships
between inflation, interest rates, and bond prices?

2. Economics is a social science that focuses on the production,
distribution, and consumption of goods and services, and
analyzes the choices that individuals, businesses,
governments, and nations make to allocate resources.
A market is any place where makers, distributors or retailers
sell, and consumers buy.
Examples include shops, high streets, or websites. The term
may also refer to the whole group of buyers for a good or
service

3. Economies and Markets
A strong relationship exists between the
economy and the stock market
Security markets reflect what is going on in
an economy because the value of an
investment is determined by
 its expected cash flows
 required rate of return

4. Economic Activity and
Security Markets
Economic activity is the activity of making, providing, purchasing, or selling goods
or services. Any action that involves producing, distributing, or consuming products
or services is an economic activity.
 Economists say there are four basic types of economic activities:
• The Primary Sector, i.e., raw materials.
• The Secondary Sector, which includes industry and manufacturing.
• The Tertiary Sector, i.e., services.
• The Quaternary Sector, which we also call the ‘knowledge sector.’

5. Security Markets is the market for equity, debt, and
derivatives
There are two types of security markets
 Primary market: is the financial market where
new securities are issued and become available for trading by
individuals and institutions.
 Secondary market: Trading of already issued securities among
investors occurs in the secondary market, secondary market is
where existing shares, debentures, bonds, etc

6. Cyclical Indicator Approach to
Forecasting the Economy
Analytical measures of performance
• diffusion indexes
• trends
• rates of change
• direction of change
• comparison with previous cycles

7. Limitations of cyclical indicator approach
Currency of the data and revisions: Some data series take time to be reported,
but a bigger problem are revisions in data especially if the revision changes the
direction implied by the original data.
Economic sectors not represented:
Examples include the service sector, import
exports, data, and many international series.
high variability
political and international developments are not factored into a statistical system

8. Monetary Variables, the Economy, and
Stock Prices
Other economic variables and stock prices
• growth in industrial production
• changes in the risk premium
• twists in the yield curve
• measures of unanticipated inflation
• changes in expected inflation during periods of
volatile inflation

9. Inflation, Interest Rates, and Security
Prices
 Inflation and interest rates
 generally move together
 investors are not good at predicting inflation
 Inflation rates and bond prices
• negative relationship
• more effect on longer term bonds
 Interest rates and stock prices
• not direct and not consistent
• effect varies over time

10. Macroeconomic and Industry Analysis
Global Economy
• National Economic Environment
• Crucial determinant of industry performance
• Exchange Rate
• Rate at which domestic currency can be converted into
foreign currency

11. The Domestic Macroeconomy
 Gross Domestic Product (GDP)
• Market value of goods and services produced over period of time
 Unemployment Rate
• Ratio of number of unemployed to total labor force
 Inflation
• Rate at which general level of prices for goods and services is
rising

12. The Domestic Macroeconomy
 Interest Rates
• High interest rates reduce present value of future cash flows
 Budget Deficit
• Government spending in excess of government revenues
 Sentiment
• Consumer optimism/pessimism are determinants of economic performance
Interest Rates
 Fundamental Factors of Interest Rates
• Supply of funds from savers
• Demand for funds from borrowers
• Government’s net supply/demand for funds, modified by Federal Reserve
• Expected rate of inflation

13. Demand and Supply Shocks
 Demand Shock
• Event that affects demand for goods and services in economy
 Supply Shock
• Event that influences production capacity and costs in economy
Government Policy
 Fiscal Policy
• Use of government spending and taxing for stabilizing economy
 Monetary Policy
• Actions taken by the central bank to influence money supply or interest rates
 Supply-Side Policies
• Address productive capacity of economy, goal is to induce workers/owners
to produce goods

14. Business cycle
The term Business cycle refers to economy –wide
fluctuations in production, trade, and general
economic activity.
The Business cycle is the upward and downward
movements of levels of Gross domestic product and
refers to the period of expansions and contractions in
the level of economic activities around a long term
growth trend.

15. PHASES OF THE BUSINESS CYCLE
• Expansion/Growth: The first stage in the business cycle is
expansion. In this stage, there is an increase in positive economic
indicators such as employment, income, output, wages, profits,
demand, and supply of goods and services
• Peak: After a period of growth, an economy will reach a peak,
where business is producing at or near full capacity, and the economy
is at or near full employment.
.

16. • Recession: This is a phase when real GDP begins to decline.
Consumers and business reduce their spending, unemployment
rises, investment declines, and pessimism about the economy is
likely to grow.
• Trough/Depression: This is the lowest point of the business
cycle. Factories will be operating below capacity, allowing
unemployment to reach high levels. Jobs are difficult to find in
this phase, and many businesses may fail