Macroeconomic Environment for Investment Desicions
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A brief introduction of the Macroeconomic factors and their effect on investment decision making and stock market performance
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Macroeconomic Environment for Investment Desicions
- 1. The Macroeconomic Environment for Investment Decisions Dr. Adeel Nasir
- 2. The Economic Envirnoment • Investment decisions made through economic environment • Economy goes through different stages known as business Cycle • There is a strong relationship between stock prices and aggregate economy • Each of these events is important. The dramatic increase in the price of oil, the collapse of segments of the banking and financial system.
- 3. Measure of Economic Activity • Gross Domestic Product (GDP) • Total value of all final goods and services newly produced within a country by domestic factors of production. • Gross National Product (GNP) • is the total value of all final goods and services newly produced by an economy and includes income generated abroad • GDP may be computed by adding the expenditures of the sectors of an economy or by adding all sources of income • personal consumption (C), gross private domestic investment (I), government spending (G), and net exports (E)
- 4. Measure of Economic Activity • GDP grows but the rate of growth varies. As the economy expands, employment also tends to increase • periods when the economy contracts and unemployment increases. If the contraction lasts for more than two quarters, it is referred to as a recession • Recession is a period of rising unemployment and declining national output.
- 5. Federal Researve • Central bank of united states • federal government and the Federal Reserve share the same general goals of full employment, stable prices, and economic growth • The Federal Reserve pursues these economic goals through its impact on the supply of money and the cost of credit
- 6. Determination of interest rate • Real interest rate (r*) • It is determine by the supply and demand • Nominal Risk free rate of interest • Real interest rate plus inflation premium • NRFR = r* + IP • Nominal interest rate • Rate of interest which is actually charged by the lender to borrower • NR = r* + IP + RP • RP is the risk premium • Risk premium can be due to business risk, default risk, counter party risk, interest rate risk, liquidity risk etc
- 7. The impact of the Federal Reserve on interest Rates • The Federal Reserve affects interest rates through its power to change the money supply by using the tools of monetary policy • Tools of monetary policy • the reserve requirements of banks, the discount rate, and open market operations. • Research requirement: The percentage of cash that banks must hold against their deposit liabilities • discount rate: The rate of interest that the Federal Reserve charges banks for borrowing reserves. • open market operations: The buying or selling of Treasury securities by the Federal Reserve.
- 8. Fiscal Policy • Taxation, expenditures, and debt management by the federal government • deficit spending: in which expenditures exceed revenues, can affect the financial markets and securities prices • The federal government may obtain funds to finance this deficit from three sources: (1) the general public, (2) banks, and (3) the Federal Reserve • Surplus: Receipts exceeding disbursements.