CFA Institute Investment Foundations Program: Chapter 5 – Macroeconomics (Part II)

In a previous article, we introduced the CFA Institute Investment Foundation Program (Read more here).  It is a free program designed for anyone who wants to enter or advance within the investment management industry, including IT, operations, accounting, administration, and marketing.  Candidates who successfully pass the online exam earn the CFA Institute Investment Foundations Certificate.

There are total of 20 Chapters in 7 modules, covering all the essential topics in finance, economics, ethics and regulations.  This series of articles will highlight the core knowledge of each chapter.

Chapter 5 provides an overview of macroeconomics. The learning outcome of chapter 5 is as follows:

·        Describe why macroeconomic considerations are important to an investment firm and how macroeconomic information may be used;

·        Define gross domestic product (GDP) and GDP per capita;

·        Identify basic components of GDP;

·        Describe economic growth and factors that affect it;

·        Describe phases of a business cycle and their characteristics;

·        Explain the global nature of business cycles;

·        Describe economic indicators and their uses and limitations;

·        Define inflation, deflation, stagflation, and hyperinflation, and describe how inflation affects consumers, businesses, and investments;

·        Describe and compare monetary and fiscal policy;

·        Explain limitations of monetary policy and fiscal policy.

Economic indicators—measures of economic activity—are regularly reported and analysed. These measures may be leading, lagging, or coincident indicators.

Inflation is a general rise in the prices of products and services. Measures of inflation include consumer price indices, producer price indices, and implicit GDP deflators.

Changes in price levels can affect economic growth because consumers, companies, and governments may change the timing of their purchases, the amount of their spending, and their saving and spending decisions based on anticipated changes in prices.

Three additional price level changes investors also consider are deflation, stagflation, and hyperinflation.

Economic growth, inflation, and unemployment are major concerns of central banks and governments. They each use different financial tools to affect economic activity. Central banks, which are often independent from governments, use monetary policy. Governments use fiscal policy.

Monetary policy refers to central bank activities that are directed toward influencing the money supply and credit in an economy. Its goal is to influence output, price stability, and employment.

Fiscal policy involves the use of government spending and tax policies to influence the level of aggregate demand in an economy and thus the level of economic activity.

Both fiscal and monetary policies have limitations: they are affected by time lags and the responses to and consequences of each may not be as expected.

Source: https://www.cfainstitute.org/en/programs/investment-foundations

Sample Question:

Which of the following best describes a limitation of monetary policy?

Crowding out of private borrowers

Long time lags until implementation

Unexpected responses from consumers

 

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Ten (10) Ways to Increase Productivity at Work

To be more productive at work is not rocket science. But it does require how you manage time. John Rampton has suggested 15 ways to increase productivity but I am selecting just ten.

(i) Track and Limit

If we track time spent on social media, email, processing and other apps, we may be able to estimate passage of time and that excludes meetings. Some say only 17% of people are able to track.

 

(ii) Regular Breaks

Scheduled breaks can actually improve concentration. Some research again shows that short breaks during long tasks help maintain level of performance. Conversely, no breaks lead to decline in performance.

 

(iii) Self-imposed Deadlines

Many of us think stress is a bad thing but at manageable levels, self-imposed stress is helpful to meet goals and keep the focus. So watching the clock has benefits.

 

(iv) “Two-Minute” Rule

Entrepreneur Steve Olenski suggests the two-minute rule for tasks or action that can be done in that period and so do that immediately. That builds confidence and success in completing more complex tasks.

 

(v) Limit Meetings

Meetings are one of the biggest time wasters. The average office worker spends 31 hours each month in a meeting. The average civil servant spends perhaps more than double that!

 

Ask yourself what can be accomplished by email, WhatsApp or other web-based device, before scheduling a meeting.

 

If you absolutely must have a meeting, then have a standing meeting. That will limit time spent.

 

(vi) Quit Multitasking

Many think multitasking is great for improving efficiency – the opposite is true. Trying several tasks at once results is lost time and productivity – psychologists testify to this! So move from one task to another sequentially.

 

(vii) Give-up “Perfection”

The illusion of perfection can waste any entrepreneur’s time. Just do the best and move on. If need be, come back later and adjust what can be adjusted!

 

(viii) Work in 90-minute Intervals

Researchers at Florida State University found elite performers (athletes, chess players, musicians etc.) work in intervals of no more than 90 minutes. And so the actual work time is certainly less than 8 hours.

 

(ix) Minimise Interruptions

Interruptions are when you have unscheduled visitor. Brief interruptions hamper work pattern and hence productivity. So you may need to close the door or work from home for real, sensitive projects.

 

(x) Commute Time

Some of us may use public transport, like a train, and still others may have a driver to ferry them to work, then use that time to reply emails, check on the news, or do some brain storming.

There you have it – ten ways to increase productivity! Try 2-3 of the above and see if it works for you!

Reference:

15 ways to increase productivity at work, John Rempton 

(https://www.inc.com/john-rampton/15-ways-to-increase-productivity-at-work.html)

When Will Foreign Funds Return?

Malaysia had the worst net flow of foreign funds on a year-to-date (YTD) basis in ASEAN, up to end of first week of May (The Edge Financial Daily, May 14, 2019). The net outflow totalled USD801.3 million for Malaysia and USD562.8 million for Thailand.

Why? For Malaysia, it is the OPR reduction to 3.0%; lack of clarity of Government policies; attractiveness of other foreign markets like India or Indonesia. This is in addition to unattractive valuations and corporate earnings growth. There is also the possibility of exclusion under the FTSE Russell index. Some say fear is “over-hyped”.

The positive attributes include the Government is restoring some key mega projects like ECRL and Bandar Malaysia. This amounts to RM200 billion. The spill over/multiplier effects will bear fruit once the projects re-commence.  Oil price exceeds target and liquidity is ample. But business sentiment and confidence needs an urgent revival. So when will markets improve? The consensus by some learned economists/commentators is by the third quarter, 2019. In which case FBM KLCI will surge to 1,800 points or higher. With net inflow, the exchange rate may also improve to RM4:USD 1 or better! (Figures or forecast quoted here are purely general commentary only and should not be regarded as advice for any purchase or sale) 

Reference:

 The Edge Financial Daily, May 14, 2019

5G and the impact it will make to the global economy Part 2: The impact to the global economy

Economic impact 

5G is set to have a profound effect on countries' economic performance and GDP. Below is the projected regional impact of 5G by 2034.

5G will improve business operations, enhance customer communications and create new applications opportunities. Some of the more likely business use cases and target users for 5G in selected industries are seen in the table below:-

Reference:

1. The WRC series: Study on Socio-Economic Benefits of 5G Services Provided in mmWave Bands; and

2.Impacts of 5G on productivity and economic growth by the Department of Communication and the Arts of Australia and Bureau of Communications and Arts Research

How Do Rich People Go Broke?

Most of us think of how to be successful but a fairly decent number of rich people lose their wealth after certain decisions or events. The top 10 reasons for this to happen include:

(i)     Divorce - Divorce rates in many countries are now over 50%. And “messy” divorces crumble many mighty entrepreneurs.

(ii)  Gambling – Sometimes addictive gambling ends wealth of rich athletes or entrepreneurs. In others, it is addiction of another nature – like wine, women or drugs.

(iii)      Legal suits – Lawsuits have destroyed companies and it is best to settle them before the courts decide!

(iv)    Illness – Sometimes sickness and treatment can dry up a fortune. Blood disorders and cancer are the most expensive to treat right now.

(v)     Government intervention – A sudden legislative change could put an entire industry out of business. Sometimes it is funny when some new politicians promise to bring back old jobs like coal mining or steel when it is no great advantage to produce in the “old” country.

(vi)     Tragic death – when a key entrepreneur dies with no clear identified successor, a full “war” amongst family members may break out and destroy the business.

(vii)  Financial crisis – Crisis like in 1997 or 2007 has destroyed billionaires and millionaires. One day you are worth RM100 million, the next day it is RM20 million in debt. Over 80% of those who went broke in a crisis never recover.

(viii)  Fraud/Scam – Everyone is prone to a scam. Richard Branson says people are constantly trying to scam money out of him. A Nigerian scammer Emmanuel Nwude once sold a fake airport to a major international bank for USD242 million. The scam was not discovered until 3 years later.

(ix)     Natural disasters – Hurricanes, floods, fire etc. can crumble some businesses. In the U.S., Hurricane Harvey cost USD125 billion. While Hurricane Katrina cost USD161 billion. Worldwide cost could run into a trillion dollars.

(x)     Spend, spend, spend! – If you are spending more than you earn, you will go broke. It sounds so simple! In the U.S., 70% of National Football League (NFL) players are either bankrupt or are under financial stress within two years of retirement. Why? Wasteful spending and lack of financial literacy. In some other cases, it is because they use funds from the business to do other private enterprises that fail! Or, there are dishonest 3^rd or 4^th generation children who don’t value the business (of their grandfather) and wastefully spend resources to the detriment of the company.

There you have it, the top 10 reasons why people go broke! I am reminded of Solomon in Ecclesiastes, everything is “vanity and a chasing after the wind”! The conclusion of the whole matter is to fear God and keep His commandments.

Reference:

15 ways rich people go broke, Emil Anton (www.alux.com)

CFA Institute Investment Foundations Program: Chapter 5 – Macroeconomics (Part I)

In a previous article, we introduced the CFA Institute Investment Foundation Program (Read more here).  It is a free program designed for anyone who wants to enter or advance within the investment management industry, including IT, operations, accounting, administration, and marketing.  Candidates who successfully pass the online exam earn the CFA Institute Investment Foundations Certificate.

There are total of 20 Chapters in 7 modules, covering all the essential topics in finance, economics, ethics and regulations.  This series of articles will highlight the core knowledge of each chapter.

Chapter 5 provides an overview of macroeconomics. The learning outcome of chapter 5 is as follows:

·        Describe why macroeconomic considerations are important to an investment firm and how macroeconomic information may be used;

·        Define gross domestic product (GDP) and GDP per capita;

·        Identify basic components of GDP;

·        Describe economic growth and factors that affect it;

·        Describe phases of a business cycle and their characteristics;

·        Explain the global nature of business cycles;

·        Describe economic indicators and their uses and limitations;

·        Define inflation, deflation, stagflation, and hyperinflation, and describe how inflation affects consumers, businesses, and investments;

·        Describe and compare monetary and fiscal policy;

·        Explain limitations of monetary policy and fiscal policy.

Macroeconomic conditions affect the actions and behaviour of businesses, consumers, and governments. Macroeconomic considerations also affect decisions made by investment firms. Some investments, for instance, benefit from slow economic growth and low inflation, whereas others do well during periods of relatively strong economic growth with moderate inflation. Investment professionals use macroeconomic data to forecast the earnings potential of companies and to determine which asset classes may be more attractive.

Gross domestic product is the total value of all final products and services produced in an economy over a particular period of time. Nominal GDP uses current market values, and real GDP adjusts nominal GDP for changes in price levels.

GDP can be estimated by using an expenditure approach or an income approach. In the expenditure approach, the components of GDP are consumer spending, business spending, government spending, and net exports.

GDP per capita is equal to GDP divided by the population. It allows comparisons of GDP between countries or within a country.

GDP growth is determined by

·        growth of the labour force, which represents the increase of labour in the market;

·        productivity gains, which represent growth in output per unit of labour; and

·        availability of capital, which represents inputs other than labour necessary for production.

Phases of an economic cycle may include the following:

1.      Expansion

2.      Peak

3.      Contraction

4.      Trough

5.      Recovery

With the growth of international trade, mobility of labour, and more closely connected financial markets, movements in the business cycles of countries have become more closely aligned with each other.

Source: https://www.cfainstitute.org/en/programs/investment-foundations

Sample Question:

The largest component of total GDP is most likely to be:

gross investment.

government spending.

consumer or household spending.

 

pollcode.com free polls

How to Measure Success?

Everybody wants to look successful. Some buy a BMW or Mercedes to reflect they have arrived! But if you ask the average Joe, you may not get a clear definition of what is “success” or how to measure it. If you are a Christian, then it is likely your response will be Matthew 6:19-21 or Matthew 6:31.

In a secular setting, people measure success differently, what someone sees as the pinnacle of life it is a nightmare to another. So what could be a “fair” metrics?

Alux.com suggests 15 ways to measure success but I am going to pick only 7 of that:

(i)          Money – common measure but not the most important;

(ii)         Fame – it gives privileged access; and, measurement in today’s context it is the number of subscribers or followers you may have;

(iii)        Impact – the lives you can change for the better – this is best to count at the end of your life (?);

(iv)        Happiness – the “Pursuit of Happiness” was a movie and it is also included in the U.S. Constitution – but choose a path to pursue and be happy with that;

(v)         Passion – find a goal that you are passionate about and figure out how that is going to reward you;

(vi)        Health – take care of your mind and body – in the same way as a garden. Monetary success is short-lived if you don’t have health;

(vii)       No Regrets – If you focus on regrets then you will be in the “What If” mode. What if I had married Mr X or Ms Y? What if I had worked in Company A or started a business? What if I had forgiven Mr Chan, before he passed on? So instead of spiralling downwards try to enjoy the present and adjust where you can to live-out a full life in the service of God and others.

That’s just my pick of the top 7 on our journey on earth. Remember we are small and insignificant in the grand scheme of things. You and I are on earth to do “good works” because we are His masterpiece!

Reference:

15 steps to measure success, Emil Anton (www.alux.com)

Why You Should Rather Own Stocks

Based on Fidelity Investments Retirement Savings Assessment, there are some younger people appear to be avoiding stocks. Out of ten millennials, born 1981-1992, four of them tend to invest more conservatively than they should. Here are the reasons why you should invest in stocks instead of other options:

1) Higher rate of return.

Over the past 60 years in America, with a historical return of ~8-10% a year, stocks market has performed better compared to 2-4% for real estate, which is close to the average inflation rate by year.

Besides real estate, stocks have also outperformed bonds. The table below compares average annual stock market return to current bond and online savings account rates (in U.S.), as of March 2019.

Source: nerdwallet.com

2) More liquid.

Stock is liquid. You can easily sell your stock holdings when you need immediate cash. If you need to cash out of real estate you could potentially take out a home equity line of credit, but is costly and takes at least a month.

3) Lower transaction costs.

Online transaction costs are under $10 a trade no matter how much you have to buy or sell (In Malaysia, RM7-0.1% a trade). The real estate industry in U.S. is still an oligopoly which still fixes commissions at a ridiculously high level of 5-6% (In Malaysia, 3% maximum).

4) Less work.

Real estate takes constant managing due to maintenance, conflicts with neighbours, and tenant rotation. Stocks can literally be left alone forever and pay out dividends to investors.

5) More variety.

An appropriate mix of investments should be based on a person's time horizon, financial situation, and tolerance for risk. With stocks you can not only invest in different countries, you can also invest in various sectors. A well-diversified stock portfolio could very well be less volatile than a property portfolio.

6) Invest in what you use.

If you are a huge fan of Apple products, McDonald’s cheeseburgers, and Lululemon yoga pants, you can simply buy AAPL, MCD, and LULU. It’s a great feeling to not only use the products you invest in, but make money off your investments.

7) Tax benefits.

Long term capital gains and dividend income are taxed at lower rates (15% and 20%) in the U.S. than the top four W2 income rates (28%, 33%, 35%, 39.6%). In Malaysia, capital gains are not taxable whereas for dividends income, single-tier system is adopted. Dividends paid would be tax exempt in the hands of its shareholders.

8) Hedging is easier.

With stocks, you can short stocks or buy inverse ETFs to protect your portfolio from downside risks.

Reference：

What Percent of Americans Own Stocks? Financial Samurai https://www.financialsamurai.com

5G and its Impact on Global Economy. Part 1: What is 5G and what will 5G power?

What is 5G?

5G uses radio waves or radio frequency (“RF”) energy to transmit and receive voice and data connecting our communities. 5G is designed to cater for large growth in data and connectivity of today’s society and tomorrow’s innovations. The initial phase of 5G would tap on the existing 4G networks before developing to fully standalone networks.

Besides delivering high speed connections and greater capacity, a key advantage of 5G is the fast response time referred to as latency. Latency is the time taken for devices to respond to each other over the wireless network.  For 3G networks, a typical response time is 100 milliseconds and for a  4G network it is around 30 milliseconds. With 5G it will be as low as 1 millisecond. 

What will 5G power?

GSM Association (“GSMA”) Intelligence predicts that the number of 5G connections around the world will have hit 1.3 billion by 2025, amounting to around 40 percent, or 2.7 billion population of the world. Further, GSMA believes that transportation will be central to this rapid growth, with urban congestion a big driver of its increased usage. It is assumed that the 5G networks and AI systems will help make travelling safer, by communicating vehicle locations in real time and lessening the chances of accidents or collisions.

Australian Mobile Telecommunications Association sees the following impact that 5G will have in the future

For communities -  5G will enable the connection of billions of devices for our smart cities, smart schools and smart homes, smart and safer vehicles, enhance health care and education, and provide a safer and more efficient place to live.

For businesses and industry - 5G and IoT will provide a wealth of data allowing them to gain insights into their operations like never before. Businesses will operate and make key decisions driven by data, innovate in agriculture, smart farms and manufacturing, paving the way for cost savings, better customer experience and long term growth.

New and Emerging technologies - such as virtual and augmented reality will be accessible by everyone.  Virtual reality provides connected experiences that were not possible before. With 5G and VR you will be able to travel to your favourite city, watch a live football match with the feeling of being at the ground, or even be able to inspect real estate and walk through a new home all from the comfort of your couch.

Reference: Australian Mobile Telecommunications Associations (AMTA), EMF Explained 2.0: 5G Explained - How 5G Works

http://www.emfexplained.info/?ID=25916#What%20is%205G

Little or No Progress on Corruption?

According to Transparency International’s (“TI”) Corruption Perceptions Index (CPI), New Zealand scored 87 out of 100 – the leading country in the fight against corruption in Asia-Pacific. New Zealand was followed by Singapore and Australia.

At the bottom of the index is North Korea (with a score of 14) followed by Afghanistan (16) and Cambodia (20). Malaysia with a score of 47 is a country to watch moving forward.

But why is there little progress? One reason is an overall weakening of democratic institutions and political rights, as it is in North Korea, Afghanistan and Cambodia.  Democratic principles and institutions have proved effective in combating corruption. Citizen participation and activist engagement push for necessary reforms in those countries that are set to improve.

  

Legal infrastructure, independent judiciary, enforcement of rules, prevention mechanism and engagement of citizens are all necessary ingredients for nations to improve under the CPI formulated by TI.

Reference:

Asia Pacific: little or no progress on anti-corruption, Transparency International

CFA Institute Investment Foundations Program: Chapter 4 – Microeconomics

In a previous article, we introduced the CFA Institute Investment Foundation Program (Read more here).  It is a free program designed for anyone who wants to enter or advance within the investment management industry, including IT, operations, accounting, administration, and marketing.  Candidates who successfully pass the online exam earn the CFA Institute Investment Foundations Certificate.

There are total of 20 Chapters in 7 modules, covering all the essential topics in finance, economics, ethics and regulations.  This series of articles will highlight the core knowledge of each chapter.

Chapter 4 provides an overview of microeconomics. The learning outcome of chapter 4 is as follows:

·        Define economics;

·        Define microeconomics and macroeconomics;

·        Describe factors that affect quantity demanded;

·        Describe how demand for a product or service is affected by substitute and complementary products and services;

·        Describe factors that affect quantity supplied;

·        Describe market equilibrium;

·        Describe and interpret price and income elasticities of demand and their effects on quantity and revenue;

·        Distinguish between accounting profit and economic profit;

·        Describe production levels and costs, including fixed and variable costs, and describe the effect of fixed costs on profitability;

·        Identify factors that affect pricing;

·        Compare types of market environment: perfect competition, pure monopoly, monopolistic competition, and oligopoly.

Every time you buy or sell a product, or try to assess the value of a product or service, you are effectively applying microeconomics. You may directly use microeconomics in your everyday work. Even if you do not, it is very likely to be used by others in your workplace to make business and investment decisions. Microeconomics is an important concept in investing, so knowing about it will help you better understand the industry in which you work.

Some important points to remember about microeconomics include the following:

·        Economics is the study of production, distribution, and consumption.

·        Microeconomics is the study of how individuals and companies make decisions to allocate scarce resources.

·        The law of demand states that the quantity demanded and price of a product are usually inversely related.

·        The law of supply states that when the price of a product increases, the quantity supplied increases too. Thus, the supply curve is upward sloping from left to right.

·        Elasticity refers to how the quantity demanded or supplied changes in response to small changes in a related factor, such as price, income, or the price of a substitute or complementary product. If a product’s quantity demanded or supplied is responsive to changes in a factor, its demand or supply is said to be elastic. Demand or supply is said to be inelastic if a product’s quantity demanded or supplied does not change significantly in response to a change in the factor.

·        According to the income effect, if consumers have more purchasing power, the quantity of products purchased may increase. Increases in income lead to an increase in demand for normal products and a decrease in demand for inferior products.

·        Profit is the difference between the revenue generated from selling products and services and the cost of producing them. Accounting profit considers only the explicit costs, whereas economic profit takes into account both explicit costs and the implicit opportunity costs. Opportunity costs capture the value forgone by choosing a particular course of action relative to the best alternative that is not chosen.

·        The market environment in which a company operates influences its pricing, supply, and efficiency. It may be categorised according to the degree of competition. A perfectly competitive market is one extreme, a monopoly is the other extreme, and most markets lie between these two extremes.

·        In a perfectly competitive market, buyers and sellers trade a uniform non-differentiated product, and no single buyer or seller can affect the market price. Barriers to entry are low, the degree of competition is high, and companies usually earn normal profits.

·        In a pure monopoly, a single company produces a product for which there are no close substitutes. There are significant barriers to entry that prevent other companies from entering the industry. A monopolistic company is likely to charge higher prices, have a lower total volume of products and services, and may earn higher profits.

·        In monopolistic competition, there are many buyers and sellers who are able to differentiate their products to buyers. Each company may have a limited monopoly because of the differentiation of its products. Thus, products trade over a range of prices rather than a single market price. There are typically no major barriers to entry.

·        An oligopoly is a market dominated by a small number of large companies because the barriers to entry are high. As a consequence, companies are able to make abnormal profits for long periods. A cartel is a special case of oligopoly.

Source: https://www.cfainstitute.org/en/programs/investment-foundations

Sample Question:

Which of the following would most likely cause a steel manufacturer to increase the quantity supplied? An increase in:

input costs.

corporate taxes.

the price of steel.

 

pollcode.com free polls