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Economic influences on investment markets (economic influences and the…
Economic influences on investment markets
general level of the market of an asset class
interaction of buyers and sellers
i,e, supply and demand
demand
investors' expectations for the level of returns
investors' expectations for the riskiness
economic influences on short-term interest rates
economic growth
low interest rates => increased consumer and investment spending => economic growth
Inflation
low interest rates => increased demand for money => which may be met by increased money supply => higher inflation
exchange rate
low interest rates relative to other countries => less investment from international investors => depreciation of domestic currency.
economic influences on short-term government bond yields
short-term interest rates
because short-term government bonds and money market instruments are close substitututes
economic influences on long-term government bond yields
supply
government's fiscal deficit and funding policy
demand (expected return and risk)
expectations of future short-term real interest rates
expectations of inflation
the inflation risk premium
the exchange rate, which affects overseas demand
institutional cashflow, liabilities and investment policy
returns on alternative investments
other economic factors (e.g. tax, political climate)
factors affecting the yield gap between government and corporate bonds
differences in security
differences in marketability and liquidity
the relative supply and demand for government and corporate bonds
Economic influences on the equity market
supply
relative attractiveness of debt and equity financing
rights issues, buy-backs, privatisations
demand
expectations of real economic growth
expectations of real interest rates and inflation
should be relatively indifferent to inflation
because if inflation high, dividend growth would be expected to increase but so would the investor's required return
indirect effects of inflation
high inflation often associated with high interest rates which can be unfavourable for economic growth => reduced equity prices
expectations of high inflation may cause the Government to raise real interest rates (to control inflation) => reduce equity prices
high inflation may cause greater uncertainty over inflation. this may encourage investors to increase their demand for real assets such as equities, which would increase equity prices.
expectations of the equity risk premium
the exchange rate, which affects overseas demand
institutional cashflow, liabilities and investment policy
other economic factors e.g. tax political climate
economic influences and the property market
occupation market
expectations of real economic growth, buoyancy of trading conditions and employment levels
expectations of real interest rates
structural changes
e.g. a move to out of town working
development cycles
investment market (demand)
occupancy market as provides rental income
other
inflation (infrequent reviews could lead to erosion of rental value)
real interest rates (lead to lower valuation of future rents)
institutional cashflow, liabilities and investment policy
demand from public/ private property companies
the exchange rate, which affects overseas demand
returns on alternative investments
other economic factors (e.g. tax, political climate)
Supply
Development time (gaining consent and construction)- can be up to five years long
economic growth- peak of development cycle lags behind peak of business cycle
real interest rates- affect cost of borrowing to develop property
statutory control
fixity of location, high transaction costs and segmented markets