Seven Steps For Forming Capital Market Expectations

1. Determine capital market expectations needed based on tax status , horizon and type of assets .

2. Asset’s historical data

3. Valuation methods used and it’s input requirements

4. Collect best possible data

5. Experience and judgement to evaluate current market conditions

6. Formulate CME

7.Monitor Performance and refine

Frameworks For Capital Market Expectations

1. Statistical Tools

2. Discounted Cash Flow Model

3. Risk Premium Approach

4. Financial Equilibrium Model

Business Cycle – Cyclical Growth

Is defines as fluctuations in GDP in relation to long term growth rate .

5 Phases :

1. Initial Recovery

2. Early Upswing

3. Late Upswing

4. Slowdown

5. Recession

Inventory Cycle

Measured as inventory to sales .

Short Term/Long Term Capital Market Expectations

Both Inventory Cycle and Business Cycle affects interest rate and corporate profits . Key factors in Capital Market Expectations.

Consumer and Business spending are two other factors affecting GDP.

Fiscal and Monetary policy are ways to influence business cycles .

Impact Of Inflation On Returns

Inflation can be affected through monetary policy .

Taylor Rule – Economic Growth

Is used to assess central bank’s stance . Gives the optimal short term interest rate as neutral rate plus .5 times GDP forecast excess over trend plus .5 times inflation forecast over target .

The value produced by the rule is what the rate should be .

Yield Curve As Economic Predictor

Yield curve has a positive relationship with Monetary Policy . MP direction overrides FP.

Emerging Economies

1. FP & MP

2. Growth

3. Currency volatility and Current Account Deficits

4. Leverage

5. Foreign Exchange Reserves

6 . Government structural reform

Economic Growth Trends

• Consumer Spending
• Changes in employment levels
• Changes in Productivity
• GovernmentPolicies

Linkage Between World Economies

Macroeconomic Link – similar business cycles and linked by trade and capital flows

Exchange Rate link – linked exchange rates relationship between the interest rate difference

Interest rate link – relationship between two countries interest rates

Economic Forecasting

1. Economic Models

2. Economic Indicators

3. Checklist Approach

Exogenous Shocks

1. Oil crisis

2. Financial crisis

3. Natural disasters

Asset Class Returns

Bonds tend to be lower as inflation rises .

Real estate and cash returns are higher as inflation rises .