Evaluating Country Risk For International Investing
http://myinvestingnotes.blogspot.com/2009/12/evaluating-country-risk-for.html
Malaysia's economy stagnant, needs reform
http://myinvestingnotes.blogspot.com/2009/12/malaysias-economy-stagnant-needs-reform.html
Economics Basics: What Is Economics?
http://myinvestingnotes.blogspot.com/2009/12/economics-basics-what-is-economics.html
What is GDP and why is it so important?
http://myinvestingnotes.blogspot.com/2009/12/what-is-gdp-and-why-is-it-so-important.html
What Is The Balance Of Payments?
http://myinvestingnotes.blogspot.com/2009/12/what-is-balance-of-payments.html
Understanding The Current Account In The Balance Of Payments
http://myinvestingnotes.blogspot.com/2009/12/understanding-current-account-in.html
Current Account Deficits: Government Investment Or Irresponsibility?
http://myinvestingnotes.blogspot.com/2009/12/current-account-deficits-government.html
What is a trade deficit and what effect will it have on the stock market?
http://myinvestingnotes.blogspot.com/2009/12/what-is-trade-deficit-and-what-effect.html
What is RISK? Equity investment is the most risky investment in all the financial markets.
http://myinvestingnotes.blogspot.com/2009/12/what-is-risk-equity-investment-is-most.html
Showing posts with label GDP. Show all posts
Showing posts with label GDP. Show all posts
Sunday 6 December 2009
Saturday 5 December 2009
What is GDP and why is it so important?
- It represents the total dollar value of all goods and services produced over a specific time period - you can think of it as the size of the economy.
- Usually, GDP is expressed as a comparison to the previous quarter or year.
- For example, if the year-to-year GDP is up 3%, this is thought to mean that the economy has grown by 3% over the last year.
- either by adding up what everyone earned in a year (income approach), or
- by adding up what everyone spent (expenditure method).
The expenditure method is the more common approach and is calculated by adding total consumption, investment, government spending and net exports.
- For example, when the economy is healthy, you will typically see low unemployment and wage increases as businesses demand labor to meet the growing economy.
- A significant change in GDP, whether up or down, usually has a significant effect on the stock market.
- It's not hard to understand why: a bad economy usually means lower profits for companies, which in turn means lower stock prices.
- Investors really worry about negative GDP growth, which is one of the factors economists use to determine whether an economy is in a recession.
Sunday 5 July 2009
Long-term Stock Market Growth and GDP
A stock market represents the sum total of the public's perception of the business value of the companies trading in that market.
True business value, is the sum total of productive assets and, in particular, what those assets produce in the form of current and future earnings.
As long as companies produce more, it makes sense that their values rise.
And as long as the public perception matches true value, the stock value rises in lockstep.
GDP
You can and should expect, in aggregate, that the total value of all businesses would rise roughly in line with the increase in the size of the economy, as represented by gross domestic product (GDP). This is true.
Business value grows further through increases in productivity.
The value of market traded businesses could rise still more if the businesses grew their share of the total economy - as Borders Group and Barnes and Noble have grown their share of the total bookselling business.
Long-term stock market growth (by most measures of return, 10-11% annually) can be explained by adding together the following:
GDP growth of 3 to 5%
Productivity growth of 1 to 2%
Long-term inflation in the 3 to 6% range
In the short-term, depending on the value of alternative investments, such as bonds, real estate, and so on, market value may actually rise faster or slower than business value. And inflation also tampers with market valuations.
So can markets grow at 20% per year?
Not for long. It isn't impossible for the markets to rise 20% in a given year or two, but such growth year after year is hard to fathom if the economy at large is growing at only 3 to 5% annually.
But for a particular stock?
Sure, it's possible. If the company is building a new busines or is taking market share from existing businesses, 20% growth can be quite realistic.
But forever?
Doubtful. Some call this "reversion to the mean" - sooner or later, gravitational forces will take hold and a company will cease to grow at above-average rates. As an investor, you must realistically appraise when this will happen.
True business value, is the sum total of productive assets and, in particular, what those assets produce in the form of current and future earnings.
As long as companies produce more, it makes sense that their values rise.
And as long as the public perception matches true value, the stock value rises in lockstep.
GDP
You can and should expect, in aggregate, that the total value of all businesses would rise roughly in line with the increase in the size of the economy, as represented by gross domestic product (GDP). This is true.
Business value grows further through increases in productivity.
The value of market traded businesses could rise still more if the businesses grew their share of the total economy - as Borders Group and Barnes and Noble have grown their share of the total bookselling business.
Long-term stock market growth (by most measures of return, 10-11% annually) can be explained by adding together the following:
GDP growth of 3 to 5%
Productivity growth of 1 to 2%
Long-term inflation in the 3 to 6% range
In the short-term, depending on the value of alternative investments, such as bonds, real estate, and so on, market value may actually rise faster or slower than business value. And inflation also tampers with market valuations.
So can markets grow at 20% per year?
Not for long. It isn't impossible for the markets to rise 20% in a given year or two, but such growth year after year is hard to fathom if the economy at large is growing at only 3 to 5% annually.
But for a particular stock?
Sure, it's possible. If the company is building a new busines or is taking market share from existing businesses, 20% growth can be quite realistic.
But forever?
Doubtful. Some call this "reversion to the mean" - sooner or later, gravitational forces will take hold and a company will cease to grow at above-average rates. As an investor, you must realistically appraise when this will happen.
Friday 3 April 2009
Understanding effects of economic indicators on stock market
Understanding effects of economic indicators on stock market
Published: 2009/02/25
When the economy slows down and the market is on a downward trend, it is not necessarily bad as this could be a golden opportunity to spot some good stocks at a bargain
IF YOU have been following the news on a daily basis, you surely would have heard the repeated news on the fall of the US and European markets that are currently spreading gloom across the globe.
With the risk of global recession on the increase, global stock markets are not left unscathed by the predicament the world's economic giants are in. Stock markets worldwide are left to face strong selling pressures that are wiping out their asset values.
As a result, you might be wondering whether your portfolio (albeit confined to the local business environment) is strong enough to weather the adverse external shocks that are causing jitters in markets across the globe.
Why do you need to understand and monitor the economic situation?
A company's earnings and future prospects depend largely on the overall business and economic climate. No matter how strong a company's fundamental is, if the economy is down, the performance of a company will inevitably be affected somewhat. Cyclical stocks will probably face a larger impact compared to non-cyclical or defensive stocks.
Meanwhile, the stronger companies will be able to weather the harsh economic situation better than the weaker or less well managed ones.
Therefore, as an investor, it is important for you to understand the macro picture of the economy, not just the sector/industries or stock/company that you are interested in investing in.
What is an economic indicator
An economic indicator is in simple terms, the official statistical data of a certain economic factor that are published periodically by the government agencies, which an investor can use to gauge the economic situation. It allows investors to analyze the past and current situation and to project the future prospects of the economy.
There are three basic indicators that matter to investors in the stock market, namely inflation, gross domestic product (GDP) and the labour market.
* Inflation
Inflation is important for all investments, simply because it determines the real rate of return that you get from your investment. For instance, if the inflation rate is 5 per cent and the nominal return is 8 per cent, this means that your real rate of return is 3 per cent as the 5 per cent has been eaten by inflation.
Inflation's impact on the stock market is even more complicated. A company's profit will be affected by higher inflation. Its input cost will increase and the impact of the increase will depend on how much of the incremental cost the company is able to pass on to its consumers. The amount that the company will have to absorb will reduce its profits, assuming all else being equal.
The stock market will suffer further negative impact if it is accompanied by increased interest rates as the bond market is seen as a cheaper investment vehicle compared to stocks. When this happens, investors will sell off their stocks to invest in bonds instead.
The most commonly used indicator for the measurement of inflation is consumer price index (CPI). It consists of a basket of goods and services commonly purchased by consumers, such as food, housing, clothes, transportation, medical care and entertainment.
The total value of this basket of goods and services will be compared with the value of the previous year and the percentage increase will be the inflation rate.
On the other hand, where the value drops, it will be a deflation rate. A steady or decreasing trend will be favourable to the overall stock market performance.
* Gross Domestic Product
Another important indicator is the GDP measurement. It is the total value of goods and services produced in a country during the period being measured. When compared to the previous year's reading, the difference between these two readings indicates whether a country's economy is growing or contracting. GDP is usually published quarterly.
When the GDP is positive, the overall stock market will react positively as there will be a boost in investor confidence, encouraging them to invest more in the stock market. This will in turn boost the performances of companies.
When the GDP contracts, consumers tread cautiously and reduce their spending. This in turn will affect the performance of companies negatively, thus exerting more downward pressure on the stock market.
* Labour market
The unemployment rate as a percentage of the total labour force will basically indicate the country's economic state. During an economic meltdown, most companies will either freeze hiring or in more severe cases downsize, by cutting costs and reducing capacity. When this happens, the unemployment rate will increase, which in turn, creates a negative impact on market sentiment.
Bottom line
By understanding the economic indicators, you should be able to gauge the current state of economy and more importantly, the direction in which its headed. Pooling this knowledge together with the detailed research on the companies that you are interested in, you should be well equipped to make sound investment decisions.
Bear in mind that when the economy slows down and the market is on a downward trend, it is not necessarily bad as this could be your golden opportunity to spot some good stocks at a bargain that are worth buying.
Malaysia's economic indicator data can be obtained from the Department of Statistics website at www.statistics.gov.my
Securities Industry Development Corp, the leading capital markets education, training and information resource provider in Asean, is the training and development arm of the Securities Commission. It was established in 1994 and incorporated in 2007.
http://www.btimes.com.my/Current_News/BTIMES/articles/SIDC4/Article/index_html
» RELATED STORIES
Programme on maximising value in challenging times
Why investors behave the way they do
What causes stock prices to move?
Shield yourself from scams
Raising children to be 'money-smart'
Key habits of successful investors
Why selling is a common problem
Benjamin Graham's timeless key investing principles
Insight into bonds
Published: 2009/02/25
When the economy slows down and the market is on a downward trend, it is not necessarily bad as this could be a golden opportunity to spot some good stocks at a bargain
IF YOU have been following the news on a daily basis, you surely would have heard the repeated news on the fall of the US and European markets that are currently spreading gloom across the globe.
With the risk of global recession on the increase, global stock markets are not left unscathed by the predicament the world's economic giants are in. Stock markets worldwide are left to face strong selling pressures that are wiping out their asset values.
As a result, you might be wondering whether your portfolio (albeit confined to the local business environment) is strong enough to weather the adverse external shocks that are causing jitters in markets across the globe.
Why do you need to understand and monitor the economic situation?
A company's earnings and future prospects depend largely on the overall business and economic climate. No matter how strong a company's fundamental is, if the economy is down, the performance of a company will inevitably be affected somewhat. Cyclical stocks will probably face a larger impact compared to non-cyclical or defensive stocks.
Meanwhile, the stronger companies will be able to weather the harsh economic situation better than the weaker or less well managed ones.
Therefore, as an investor, it is important for you to understand the macro picture of the economy, not just the sector/industries or stock/company that you are interested in investing in.
What is an economic indicator
An economic indicator is in simple terms, the official statistical data of a certain economic factor that are published periodically by the government agencies, which an investor can use to gauge the economic situation. It allows investors to analyze the past and current situation and to project the future prospects of the economy.
There are three basic indicators that matter to investors in the stock market, namely inflation, gross domestic product (GDP) and the labour market.
* Inflation
Inflation is important for all investments, simply because it determines the real rate of return that you get from your investment. For instance, if the inflation rate is 5 per cent and the nominal return is 8 per cent, this means that your real rate of return is 3 per cent as the 5 per cent has been eaten by inflation.
Inflation's impact on the stock market is even more complicated. A company's profit will be affected by higher inflation. Its input cost will increase and the impact of the increase will depend on how much of the incremental cost the company is able to pass on to its consumers. The amount that the company will have to absorb will reduce its profits, assuming all else being equal.
The stock market will suffer further negative impact if it is accompanied by increased interest rates as the bond market is seen as a cheaper investment vehicle compared to stocks. When this happens, investors will sell off their stocks to invest in bonds instead.
The most commonly used indicator for the measurement of inflation is consumer price index (CPI). It consists of a basket of goods and services commonly purchased by consumers, such as food, housing, clothes, transportation, medical care and entertainment.
The total value of this basket of goods and services will be compared with the value of the previous year and the percentage increase will be the inflation rate.
On the other hand, where the value drops, it will be a deflation rate. A steady or decreasing trend will be favourable to the overall stock market performance.
* Gross Domestic Product
Another important indicator is the GDP measurement. It is the total value of goods and services produced in a country during the period being measured. When compared to the previous year's reading, the difference between these two readings indicates whether a country's economy is growing or contracting. GDP is usually published quarterly.
When the GDP is positive, the overall stock market will react positively as there will be a boost in investor confidence, encouraging them to invest more in the stock market. This will in turn boost the performances of companies.
When the GDP contracts, consumers tread cautiously and reduce their spending. This in turn will affect the performance of companies negatively, thus exerting more downward pressure on the stock market.
* Labour market
The unemployment rate as a percentage of the total labour force will basically indicate the country's economic state. During an economic meltdown, most companies will either freeze hiring or in more severe cases downsize, by cutting costs and reducing capacity. When this happens, the unemployment rate will increase, which in turn, creates a negative impact on market sentiment.
Bottom line
By understanding the economic indicators, you should be able to gauge the current state of economy and more importantly, the direction in which its headed. Pooling this knowledge together with the detailed research on the companies that you are interested in, you should be well equipped to make sound investment decisions.
Bear in mind that when the economy slows down and the market is on a downward trend, it is not necessarily bad as this could be your golden opportunity to spot some good stocks at a bargain that are worth buying.
Malaysia's economic indicator data can be obtained from the Department of Statistics website at www.statistics.gov.my
Securities Industry Development Corp, the leading capital markets education, training and information resource provider in Asean, is the training and development arm of the Securities Commission. It was established in 1994 and incorporated in 2007.
http://www.btimes.com.my/Current_News/BTIMES/articles/SIDC4/Article/index_html
» RELATED STORIES
Programme on maximising value in challenging times
Why investors behave the way they do
What causes stock prices to move?
Shield yourself from scams
Raising children to be 'money-smart'
Key habits of successful investors
Why selling is a common problem
Benjamin Graham's timeless key investing principles
Insight into bonds
Thursday 1 January 2009
What is GDP and why is it so important?
Investment Question
What is GDP and why is it so important?
The gross domestic product (GDP) is one the primary indicators used to gauge the health of a country's economy.
It represents the total dollar value of all goods and services produced over a specific time period - you can think of it as the size of the economy. Usually, GDP is expressed as a comparison to the previous quarter or year. For example, if the year-to-year GDP is up 3%, this is thought to mean that the economy has grown by 3% over the last year.
Measuring GDP is complicated (which is why we leave it to the economists), but at its most basic, the calculation can be done in one of two ways: either
The income approach, which is sometimes referred to as GDP(I), is calculated by adding up total compensation to employees, gross profits for incorporated and non incorporated firms, and taxes less any subsidies.
The expenditure method is the more common approach and is calculated by adding total consumption, investment, government spending and net exports.
As one can imagine, economic production and growth, what GDP represents, has a large impact on nearly everyone within that economy. For example, when the economy is healthy, you will typically see low unemployment and wage increases as businesses demand labor to meet the growing economy.
A significant change in GDP, whether up or down, usually has a significant effect on the stock market. It's not hard to understand why: a bad economy usually means lower profits for companies, which in turn means lower stock prices. Investors really worry about negative GDP growth, which is one of the factors economists use to determine whether an economy is in a recession.
For more on this topic, see this section of our Economic Indicators tutorial and the article Macroeconomic Analysis.
http://www.investopedia.com/ask/answers/199.asp?ad=feat_fincrisis
What is GDP and why is it so important?
The gross domestic product (GDP) is one the primary indicators used to gauge the health of a country's economy.
It represents the total dollar value of all goods and services produced over a specific time period - you can think of it as the size of the economy. Usually, GDP is expressed as a comparison to the previous quarter or year. For example, if the year-to-year GDP is up 3%, this is thought to mean that the economy has grown by 3% over the last year.
Measuring GDP is complicated (which is why we leave it to the economists), but at its most basic, the calculation can be done in one of two ways: either
- by adding up what everyone earned in a year (income approach), or
- by adding up what everyone spent (expenditure method).
The income approach, which is sometimes referred to as GDP(I), is calculated by adding up total compensation to employees, gross profits for incorporated and non incorporated firms, and taxes less any subsidies.
The expenditure method is the more common approach and is calculated by adding total consumption, investment, government spending and net exports.
As one can imagine, economic production and growth, what GDP represents, has a large impact on nearly everyone within that economy. For example, when the economy is healthy, you will typically see low unemployment and wage increases as businesses demand labor to meet the growing economy.
A significant change in GDP, whether up or down, usually has a significant effect on the stock market. It's not hard to understand why: a bad economy usually means lower profits for companies, which in turn means lower stock prices. Investors really worry about negative GDP growth, which is one of the factors economists use to determine whether an economy is in a recession.
For more on this topic, see this section of our Economic Indicators tutorial and the article Macroeconomic Analysis.
http://www.investopedia.com/ask/answers/199.asp?ad=feat_fincrisis
Friday 24 October 2008
How do I gauge the trend of interest rate?
Question: How do I gauge the trend of interest rate?
Generally, the central bank of a country uses interest rates to control inflation. Therefore, an understanding of interest rate trend is important since it invariably affects the stock market.
Basically, the trend of interest rates tend to depend on several factors.
One of the more important factors concerns the growth of money supply, that is, by comparing M3 with the economic growth which is that of Gross Domestic Product (GDP).
Illustration.
Country "A" (Broad Money Supply M3) Year 1993
*Broad money supply (M3) = A + B + C = $38.3bn
Annual % change in M3 = 24%
GDP (Rate of expansion) = 12.6%
Base Lending Rate (BLR) Current = 7.1% - 7.25%
Conclusion: The economy is facing high risks of inflation as the M3 growth rate of 24% is twice as fast as the rate of expansion which is 12.6% in nominal GDP.
Possible Action: As there is likely to be a surge in inflation in the immediate future, an increase in the BLR to 8.5% is a possible move in order to bring M3 growth rate back to about 15%.
Effect: Interest rate in Country "A" could be on the rise.
_____________
*Broad Money Supply (M3) = A+B+C
The Determinants are:......................... 1993......... % change
A. Net Lending to Government..........1.6bn........-1.0%
B. Private Sector Credit Demand........18.1bn......11.3%
Manufacturing...................2bn....+1.2%
Construction....................1.3bn....0.8%
Commerce.......................1.8bn....1.0%
Transport........................2.2bn....1.4%
Other Business...............1.0bn....0.7%
Personal...........................9.8bn...6.2%
C. External Liquidity.........................21bn......13.7%
Traders & Income
Repatriation........-5.4bn....-6.0%
Investments..................11.7bn....8.4%
Short Term Funds........15.5bn...11.3%
Ref: Making Mistakes in the Stock Market by Wong Yee
Generally, the central bank of a country uses interest rates to control inflation. Therefore, an understanding of interest rate trend is important since it invariably affects the stock market.
Basically, the trend of interest rates tend to depend on several factors.
One of the more important factors concerns the growth of money supply, that is, by comparing M3 with the economic growth which is that of Gross Domestic Product (GDP).
Illustration.
Country "A" (Broad Money Supply M3) Year 1993
*Broad money supply (M3) = A + B + C = $38.3bn
Annual % change in M3 = 24%
GDP (Rate of expansion) = 12.6%
Base Lending Rate (BLR) Current = 7.1% - 7.25%
Conclusion: The economy is facing high risks of inflation as the M3 growth rate of 24% is twice as fast as the rate of expansion which is 12.6% in nominal GDP.
Possible Action: As there is likely to be a surge in inflation in the immediate future, an increase in the BLR to 8.5% is a possible move in order to bring M3 growth rate back to about 15%.
Effect: Interest rate in Country "A" could be on the rise.
_____________
*Broad Money Supply (M3) = A+B+C
The Determinants are:......................... 1993......... % change
A. Net Lending to Government..........1.6bn........-1.0%
B. Private Sector Credit Demand........18.1bn......11.3%
Manufacturing...................2bn....+1.2%
Construction....................1.3bn....0.8%
Commerce.......................1.8bn....1.0%
Transport........................2.2bn....1.4%
Other Business...............1.0bn....0.7%
Personal...........................9.8bn...6.2%
C. External Liquidity.........................21bn......13.7%
Traders & Income
Repatriation........-5.4bn....-6.0%
Investments..................11.7bn....8.4%
Short Term Funds........15.5bn...11.3%
Ref: Making Mistakes in the Stock Market by Wong Yee
Thursday 7 August 2008
Foreign exchange risks
The roles of the central bankers and the governments are to ensure reasonable GDP growth, to manage inflation and to keep unemployment at a low rate. At anytime, their policies will be driven by the targets they choose to focus on. These can be done through fiscal and monetary policy.
The NZ and Australia government have both chosen to stimulate the growth in their economies by reducing interest rates. Their action will translate into weaker NZ and Australian dollars. Similarly, the interest rate in UK has been reduced to stimulate its weakening economy. The property prices in UK has also fallen by 10% to 20%. Japan has grown its GDP the last 5 years, but this year is likewise facing headwind given the downturn in the world economy. The yen is expected to weaken this year.
The Euro is expected to gain in strength since the ECB has chosen to control inflation by increasing its interest rate. China yuan is expected to continue to strengthen this year. The US dollar decline is not expected to continue and probably has bottomed recently. It may even strengthen slightly going forward.
What of the Malaysian ringgit? Due to the recent large hikes in oil price and electricity tariffs, the Malaysian inflation is at a high at present. This is expected to attenuate going forward. GDP is expected to slow down from 5% - 6% to 4.5% - 5.5% for this year. At present, the central bank has not felt the need to temper with the interest rate given the inflation expectation is not a problem presently. Nevertheless, the cost for borrowing for the public has increased.
My guesses are the UK pound, Australian and NZ dollar and Japanese yen are expected to weaken. The Euro, Chinese yuan and probably the US dollar, are expected to strengthen.
How will these various currency movements affect the KLSE counters that have significant business overseas? How will these movements affect capital flows seeking higher investment returns in the world?
The NZ and Australia government have both chosen to stimulate the growth in their economies by reducing interest rates. Their action will translate into weaker NZ and Australian dollars. Similarly, the interest rate in UK has been reduced to stimulate its weakening economy. The property prices in UK has also fallen by 10% to 20%. Japan has grown its GDP the last 5 years, but this year is likewise facing headwind given the downturn in the world economy. The yen is expected to weaken this year.
The Euro is expected to gain in strength since the ECB has chosen to control inflation by increasing its interest rate. China yuan is expected to continue to strengthen this year. The US dollar decline is not expected to continue and probably has bottomed recently. It may even strengthen slightly going forward.
What of the Malaysian ringgit? Due to the recent large hikes in oil price and electricity tariffs, the Malaysian inflation is at a high at present. This is expected to attenuate going forward. GDP is expected to slow down from 5% - 6% to 4.5% - 5.5% for this year. At present, the central bank has not felt the need to temper with the interest rate given the inflation expectation is not a problem presently. Nevertheless, the cost for borrowing for the public has increased.
My guesses are the UK pound, Australian and NZ dollar and Japanese yen are expected to weaken. The Euro, Chinese yuan and probably the US dollar, are expected to strengthen.
How will these various currency movements affect the KLSE counters that have significant business overseas? How will these movements affect capital flows seeking higher investment returns in the world?
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