macro the bigger picture
TRANSCRIPT
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MACROThe Bigger Picture
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We AllTakeAbout
Growth
IndiaShining
But whatis this
Growth
Cartoon by Ashok Dongre
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Economic Growth
Lets Define Economic GrowthA continuous and persistent increase in the national income or output. Itrefers to a real increase in the production of goods & services.
In simple words, the increase in the goods & services produced in theeconomy
How do we measure this Output or Growth?
There are many different economic variables that measure the economicgrowth. But there is 1 measure that we all should be aware about GDP
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GDP
GDP stands for Gross Domestic Product:
Value of all final goods & services produced in a country in a given period Eg. biscuits, buildings, cars, CDs, bus rides, your doctors & CAs fees, etc.
The output of each of these (final) is measured at its market value and allsuch values are added together to get the GDP
GDP = consumption + investment + ( government spending ) + ( exports imports )
Gross: Depreciation of capital excluded.
Consumption = Private consumption of HHs on say clothing, cars, food, etc
Investment = Business investment in capital Hardware, Software, Services, etc. (It is Non-Financial)
Government Spending = on final goods & services, incl. public servants, weapons, roads, etc
http://en.wikipedia.org/wiki/Consumption_%28economics%29http://en.wikipedia.org/wiki/Investmenthttp://en.wikipedia.org/wiki/Investmenthttp://en.wikipedia.org/wiki/Government_spendinghttp://en.wikipedia.org/wiki/Exporthttp://en.wikipedia.org/wiki/International_tradehttp://en.wikipedia.org/wiki/International_tradehttp://en.wikipedia.org/wiki/Exporthttp://en.wikipedia.org/wiki/Government_spendinghttp://en.wikipedia.org/wiki/Investmenthttp://en.wikipedia.org/wiki/Consumption_%28economics%29 -
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GDP
The GDP can further be broken down into different sectors of economy
Agricultural Industry Services
A rising GDP means that more and more goods & services are beingproduced (output increased) in the economy this is good newsbecause More factors (people & capital) are being used Economic activities are increasing Higher production is because of higher demand!
GDP growth is usually higher for developing economies because a lot of scope for expansion of the economy exists in practically every aspect of economy
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Economic Growth
We all know very well what the key drivers of this growth for India are Huge demographic advantage giving us
Supply of quality work force Demand for the goods & services
High rate of investments in the economy High Consumption leading to Higher Demand and thus more production
Strong fundamentals of the economy
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Economic Growth
But how can we keep a track this Growth?We can look at the various indicators / measures easily available to estimatethe growth potential like
Demand & Supply factors
Gross Domestic Capital Formation Inflation (WPIM or Wholesale Price Index) IIPM (Index of Industrial Production) Sales (of the Private Companies)
You can get a very easy access to such key indicators in news, NJ Fundz Watch, RBI, Finance ministry, etcFor Monthly Data visit: http://finmin.nic.in/stats_data/monthly_economic_report/index.htm
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Inflation Impact
High Inflation:
Businesses: Input costs increase loss of competitiveness, Demand for higher wages Uncertainty prices, consumption & income levels and hence sales
Individuals: Fall in real value of Savings and Returns (especially fixed) Wealth destruction. Lesser disposable income. Fall in living standards
Low Inflation: Increases chances of economy moving towards deflation , i.e., falling prices Consumers postpone purchases falling levels of output stagnation of
economic activities
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Indicators
Inflation: The inflation levels, except the current temporary deviation, havebeen very steady in India and at around the levels that RBI / govt. wants it to be(around 5%)
Index of Industrial Production: This is key figure indicating the of the actualgrowth in the industrial output
Gross Domestic Capital Formation: represents the gross value of the goodswhich are added to the fixed domestic capital of the stock during an accountingyear. Expressed as % of GDP
India is currently recording very high GDCF figures or around 30%indicating the real capital formation taking place in the economy
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Growth Drivers
Sustained GDP Growth
High GDP GrowthGrowth Gap Over The World
DemographicsHalf the population below 25 yrs
ConsumerismRetail credit, low interest rates,
changing aspirations
InfrastructureDevelopment of roads, ports,
telecom Reforms
FDI, Tax reforms
Globalcompetitiveness
ExportsOutsourcing
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GDP Growth
The GDP rise over years is a fundamental led growth story
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How Can We BenefitFrom the Growth
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Being Part of Growth Meaning
Indirectly, we are already benefiting from the growth around us
But we should be the direct participants of this growth
Rather than being bystanders
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Growth Participation
You as a Lender
Why
Saving & giving money to those who need it
Saving & investing money in business You as an Owner
This bringing together of those of needs funds & those who have funds isthe most important economic activity
This is where we need to have a market !!!
Participation Is Through Markets
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Financial Markets
Financial Markets and Financial intermediaries
have the basic purpose / function is the smooth movement of fundsFrom people with who have funds To who are in need of funds
Well functioning of the financial markets and financial intermediaries arecrucial to economic health
Effective movement / circulation of funds Funds move to productive areas where there is need Enhances savings / investments in the economy Ideas can take shape !!!
Why
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Financial System / Markets
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Financial Markets
Several categorization of financial markets illustrate essential features of Financial Markets*
Structure
Debt &
Equity
Primary &
Secondary
Exchange &
O.T.C.
Money &
Capital
Provide channels / platform for allocation of savings to investments andthereby decouple these two activities.
Result: the savers and investors are not constrained by their individualabilities, to invest and save respectively
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Primary Markets
Markets have 2 interdependent & inseparable parts Primary Market (new issues) Secondary Market (stock)
Primary
The issuers of securities issue (create and sell) new securities in theprimary market to raise funds for investment and/or to discharge someobligation
a financial market in which new issues of a security such as bond or stocks are sold to initial buyers by the corporations or Government
Secondary Secondary markets deals with securities that previously issued. These
securities are resold in these markets.
How
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Markets Players
Player Objective / Activity
FI/FIIs Investments / Profiting
Mutual Funds Investments Short term / long term
Corporates Raising CapitalTreasury / Investments
Investors Investments
Traders Business Activity
Jobbers/Scalpers Create Market
Narrow spreads
Speculators Gambling instincts
Arbitrageurs Reduce price difference
Operators Create interest in a scrip
The Market enables many entities, including us, to effectively carry out the
activities to fulfill the diverse objectives
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Environment
Today the financial markets are among the Best regulated in the world Having the best clearing & risk control systems in the world Our markets have matured a lot
SEBI RBI
Regulations cover all aspects of business labour, ownership, accounting,capital markets, environment, investor services, etc
Indian companies, especially bigger ones, follow corporate governancepractices
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Security
SEBI has been established with the primary objective of protecting theinterests of the investors in securities which is defined in theSecurities Contracts (Regulations) Act, 1956 to include:
Shares, scripts, stocks, bonds, debentures, or other marketablesecurities of a like nature in or of any incorporate company or body corporate
Derivative, Units of any other instrument issued by a collective investment
scheme to the investor in such schemes, Security receipts, Government securities, Rights or interests in securities
This is the product or the commodity which is traded in various
forms in the financial markets between the players that we had seen
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Growth Participation
You as a Lender
Why
Giving business loans to peoplewho you know, directly
Giving money to intermediaries
You as a Owners
RBI Bonds Infrastructural Bonds Company deposits
Govt. Securities Debentures
Equities & relatedProducts
Participation directly in ownbusinesses / assets
Buying exiting businesses
Participating in the Financial Markets
Debt Markets Equity Markets
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Equity MarketsEquity & Related Concepts
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Equity
In financial world, Equity means Capital raised by a company through theissuance and distribution of shares
Two meanings Equality Each share represents equal rights
whole divided into equal parts
Ownership Shareholders are the owners of companypower equivalent to the number of shares
A person or organization which holds at least a partial share of stocks iscalled a shareholder.
Meaning
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Equity Options
Common or Ordinary Share This is the most common form of shares / holding The Real Owners of the company (voting rights) Have the final or residual interest in the company Bearers of the unlimited risk of loss or benefits of profits
Preference ShareLess common and have a priority over Common Shares for distributionof profits (fixed dividends / profits). Dividends are cumulative in nature.No voting rights.
Types
Being a Equity Holder can make you the owner of good businesses likeReliance, Tata, Infosys, Wipro, Bharti, ICICI
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Equity
Each Share trades at a particular price
The Price represents (expected) Todays worth of all the future profits Value of all the assets of the company
A price can never be zero or negative (limited liability)
Price
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Equity
Earnings Per Share or EPS
= PAT / No. of Equity SharesPAT is the Profits After Tax of the Company
Reliance Inds. ACC
Number of Shares (crores) 139.37 17.82
PAT (crores) Trailing 4 qrts 5,543.81 200.24
Therefore, EPS = 5,543.81 / 139.37 200.24 / 17.82
EPS in Rs. (unit) 39.78 11.24
Actual Figures. EPS as on 8 th Sept 04
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Equity
Dividend Yield
= Dividend / Price
Price: current market priceDividend = declared Dividend Per Share
Dividend is declared on the Face Value of the shares The Face value and the price of the shares differ
DY
Reliance Inds. Hero Honda
Current Price (8th Sept) 482.50 450.35
Dividend Declared per Share 5.26 19.81
Therefore, DY = 5.26 / 482.50 19.81 / 450.35
Dividend Yield 1.09% 4.40%
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Equity
Earnings Yield
= Earnings / Price
Earnings: Earnings per share or EPSPrice: current market price
Similar to Dividend Yield Inverse of PE Can be used to compare to the yields of other asset classes
EY
Reliance Inds. ACC
Current Price (8th Sept) 482.50 271.00
Earnings per Share 39.55 13.30
Therefore, EY = 39.55 / 482.50 13.30 / 271.00
Earnings Yield 8.20% 4.91%
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Equities:
Growth Stocks:
Potential to for high and/or continued growth in their businesses Consistently experience above average increases in sales and earnings Generally found in emerging business sectors with potential for high
future growth and expansion Command high prices because of the high growth potentials and thus
have relatively higher P/E multiples.
Growth Investing Style of Funds
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Equities:
Value Stocks:
Stocks that are available at prices lower than their fundamental worth. Good stocks with good earnings history available at lower prices. A stock may turn a value stock when the markets fall or when there is
a general downturn in the markets. The person investing in value stock hopes that the market will
ultimately discover the stocks and their prices would rise. The value stocks generally have lower PE multiple and lower price to
book value ratio.
Value Investing Style of Funds
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Research in Equity:
Lies at the heart of any actively managed fund
Fund Management Team consists of >> Fund managers (schemes) +Researchers & Analysts who carry out all the research and study work+ Dealers & Traders who execute the transactions in the markets
Types:
Fundamental Analysis Top Down Approach Bottom Up Approach
Technical Analysis Quantitative Analysis
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Equity
Earnings from Equities
Dividends Generally at the end of the year or interim
Capital gainsOn sales converting notional gains into real
Risk in Equities
Returns are unsure! Equity owners risk
Volatility of returns Market Risk Sentiments in ST, Herd
Mentality
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Benefiting from Growth
Households
Consumption
Sales
Profits
Production
Factor Payments
We have already seen Indiasgrowth potential.
The corporate profit growth isdirectly to the economic growth
The corporate profitability growthcan be guessed from the nominaleconomic growth
In India we can take it at around13% for good companies, wecan assume the growth of around15% or above
How Indias Growth will drive Profits of Companies?
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Benefiting from Growth
Proof: Strong Earnings of Indian Companies
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If Earnings Grow, Prices have to Grow
Equity
Relationship of Price & Earnings
WHY?
Relationship
EPS of Infosys in 1998 was 18.28 &
Market price 457.00
P/E of Infosys was Price / EPS = 457/18.28 = 25
Earnings Yield of Infosys =18.28*100/457 = 4%
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Equity Relationship
The EPS of Infosys has grown to 170.30 in 2004. If the price dont grow, then,
P/E of Infosys would be 457/ 170 = 2.68 &
Earnings Yield would be 170*100/457 = 37.19%
Such a high earnings yield is so attractive that the price of Infosyshas to increase. HENCE if earnings grow prices have to GROW
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Equity
Infosys Price Movement:
Relationship
Growth in Earnings & Growth in Prices matches in long run
Mar-98 457 18.28 4.00 25
Mar-00 8902 38.70 1998-00 45.51% 341% 0.43 230
Mar-04 4938 170.28 2000-04 44.83% -17.83% 3.45 29
1998-04 45.05% 48.69%
INFOSYS PRICE MOVEMENT
Growthin EPS
Growthin Price
EarningsYield
P/EPrice EPS Period
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Equity
Mar-99 616 44 7.21 14
Mar-01 258 25 1999-01 -24.76% -35.31% 9.75 10Mar-04 912 69 2001-04 40.09% 52.40% 7.58 13
1999-04 9.25% 8.17%
Bajaj Auto Ltd. - PRICE MOVEMENT
Price EPS PeriodGrowthin EPS
Growthin Price
EarningsYield %
P/E
Growth in Earnings & Growth in Prices broadly move together
Bajaj Auto Price Movement:
Relationship
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Relationship
Proof: Equity in Long Term is function of corporateprofitability
BSE Sensex Vs Earning
Jan-91 Sep-93 May-96 Jan-99 Oct-01 Jun-04 Feb-07
BSE SensexSensex Earning
MonthsSensexValue
SensexEarnings
Mar-91 1,167.97 59.35Mar-07 13,072.10 658.88
16.29% 16.24%
PERFORMANCE OF BSE SENSEX - Equities not risky in long run
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Years YEAR END SENSEX level 1 year 3 years 5 years 7 years 10 years 12 years 15
1 31-Mar-80 128.57 28.57% 31-2 31-Mar-81 173.44 34.90% 103 31-Mar-82 217.71 25.52% 29.61%4 31-Mar-83 211.51 -2.85% 18.05%
5 31-Mar-84 245.33 15.99% 12.25% 19.66%6 31-Mar-85 353.86 44.24% 17.58% 22.44%7 31-Mar-86 574.11 62.24% 39.49% 27.05% 28.36%8 31-Mar-87 510.36 -11.10% 27.66% 18.58% 21.77%9 31-Mar-88 398.37 -21.94% 4.03% 13.50% 12.61%
10 31-Mar-89 713.60 79.13% 7.52% 23.81% 18.48% 21.72%11 31-Mar-90 781.05 9.45% 15.24% 17.16% 20.52% 19.77%12 31-Mar-91 1167.97 49.54% 43.12% 15.26% 24.97% 21.01% 22.73%13 31-Mar-92 4285.00 266.88% 81.76% 53.04% 42.80% 34.71% 33.94%14 31-Mar-93 2280.52 -46.78% 42.93% 41.76% 21.78% 26.84% 23.95%15 31-Mar-94 3778.99 65.71% 47.90% 39.57% 33.11% 31.45% 26.85% 27.16 31-Mar-95 3260.96 -13.71% -8.70% 33.09% 35.03% 24.87% 25.60% 24.17 31-Mar-96 3366.61 3.24% 13.86% 23.58% 24.81% 19.35% 24.39% 21.18 31-Mar-97 3360.89 -0.17% -3.83% -4.74% 23.18% 20.74% 20.63% 20.19 31-Mar-98 3892.75 15.82% 6.08% 11.29% 18.77% 25.60% 17.29% 21.20 31-Mar-99 3739.96 -3.92% 3.57% -0.21% -1.92% 18.02% 18.05% 19.21 31-Mar-00 5001.28 33.73% 14.17% 8.93% 11.87% 20.40% 23.47% 19.22 31-Mar-01 3604.38 -27.93% -2.53% 1.37% -0.67% 11.93% 14.45% 13.22 31-Mar-02 3469.35 -3.75% -2.47% 0.64% 0.89% -2.09% 13.23% 13.22 31-Mar-03 3048.72 -12.12% -15.21% -4.77% -1.41% 2.95% 8.32% 14.23 31-Mar-04 5590.60 83.38% 15.76% 8.37% 7.54% 3.99% 2.24% 14.24 31-Mar-05 6492.82 16.14% 23.23% 5.36% 7.58% 7.13% 9.11% 15.25 31-Mar-06 11279.96 73.73% 54.67% 25.63% 17.08% 12.85% 9.54% 16.
26 31-Mar-07 13,072.10 15.89% 32.73% 30.38% 14.71% 14.55% 12.27% 7.10/28 5/26 3/24 3/22 1/19 0/17 0Probability of Loss
As Time IncreasesVolatility & Range
Decreases
4,285Harshad Mehta
5,001Tech Boom
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Indicators for Equity Investment
Corporate profitability has been rising at impressive growth due to better higher consumption, cost competitiveness, benign interest rates,increasing presence in world market, etc
Sound banking system with a network of 70,000 branches, among thelargest in the world
Favorable Tax structure (LTCG Zero and STCG @10%, Dividend taxfree)
Corporatisation of Indian stock exchanges India has one of the world's lowest transaction costs based on screen-
based transactions and paperless trading According to Morgan Stanley Research, trading volumes are expected to
double to $3.2 trillion in 2010 from about $1.6 million currently No. of FIIs increased to 1030 in 2006 from 814 in 2005 Earning growth is among highest in the Asia-Pacific region
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Equity Investing
Relatively high investment amount needed
Lack of expertise Inadequate information on
time
Full time job !!
Higher risks
High Transaction Costs
Dependence on Brokers who have their own agenda!
Direct Investing In-direct Investing - MF
Very low investment amountneeded (SIP of Rs.100/-)
Professional Expertise Full time Fund Mngt. team
High quality & timely info
Lower of Risks due todiversification
Low transaction costs
Many other advantages
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Equity Investing Styles of MFs
Active Fund Management Growth Investing Style Value Investing Style Blend
Passive Fund Management
(Index Funds)
Belief in the ability to out-runbenchmark / markets
High Research costs Higher Expenses
Lower Expenses
Rebalancing of portfolio for index Tracking error