MACRO the Bigger Picture

8/14/2019 MACRO the Bigger Picture

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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

Documents

MACRO the Bigger Picture