Thursday, January 25, 2007

Key talking points 3

Some questions on stock market and economy this time

1. If Government goes ahead with the decision to invest about 5% of pension funds in the stock market, would is push the stock market higher?
2. A company has a PE ratio of x and is doing 30% profit growth every year. If starts doing 50% growth a year, does the PE ratio go up?
3. If company A has profits higher than that of company B, who would have a higher PE ratio, with both being in the same industry
4. If returns become higher by investing in stock market, why are people opposed to pension funds investing in stock market?
5. If a stock worth Rs 1000 is split into two stocks worth Rs 500, would it have an upward impact on the price?
6. If the exports of India were to increase by 25% next year, would it have an appreciating effect on the rupee?
7. If reserve bank of India increases the lending rate, would it have an upward impact on the real estate prices?
8. If the prices of fuel were to go up, would it have upward pressure on inflation?
9. If the prices of dal were to go up, would it have upward pressure on inflation?
10. If the prices of cars were to go up would it have upward pressure on inflation?


If you have any questions on the stock market or the economy that would help clear your basics, let me know in the comments section. The questions are not knowledge based, but based on thinking. So I am sure all of you can pitch in.

Click here for the answers
Click here for previous Key talking point

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10 Comments:

Anonymous Anonymous said...

1.YES, I think the stock market sud respond positively as it indicates of a government planning to take a little risk
2. I dont think so although I m not sure abt this
3. No Idea
4. as risks also increases
5. nopes, need not be the case. If the stock is in demand as in case of infy and ONGC then it will have an upward effect
6. Yes, it wud appreciate the rupee
7. Yes
8. Yes
9. Wud not effect much
10. Wud not effect much

I m completely stumped by these question and my confidence in economics has hit rock bottom

-PS

2:48 AM, January 25, 2007  
Blogger Gyan-ee said...

Hey,

There were not intended to kill your eco confi, but to increase your knowledge in that. I agree that the questions on the stocks are a little tough. But I thot that people shud think hard.

And I am sure when I post the answers, many basic ideas will get cleared.

One clue on thinking. When I talk about an event, think about its effect standalone with all other factors remaining the same.

3:19 AM, January 25, 2007  
Anonymous Anonymous said...

A humble attempt by an engineer :

1. Yes. 5% of pension funds wud be a substantial amount and the stock market is bound to rise.
(Linked - FII inflows with bull run here)

2. Cant say.. PE ratio afaik is price/earning ratio.. if profit increases, denominator increases..
dunno if numrtr too increases or not..

3. Again cant say. cant comment unless price of share is known(although thy mayb in same industry.. eg. infy is 2k+ while hcl is 650+)

4. Stock market is volatile.. if fiis withdraw, sensex can crash.. nd pension funds ought be parked somewhr safe as thy r not equity funds..

5. No.

6. no.. mayb bcoz if rupee appreciates, exports wud become costlier..

7. yes.. home loans wud become more expensive.. demand wud go down so real estate prices wud come down..

8. yes.. a major one as fuel hike causes other hikes too : groceries etc..

9. yes.. as i guess inflation concerns more day to day items purchased..

10. insignificant change.

Jatin

10:37 AM, January 25, 2007  
Anonymous Anonymous said...

My take on the answers:

(1) Yes.

(2)No,it goes down.,since d dr. has increased.

(3)Will depend on P. if P is d same 4 both..being in d same industry...co. b will have a higher PE ratio.

(4)Bcoz they r prone 2 d d risk factor which cannot b ignored.

(5)No idea.

(6)Yes.

(7)Loans 2 buy real estate wud becum expensive..consequently d demand 4 real estate wud go down..so real estate prices wud also fall.

(8)Yes.

(9)Not really,only a negligible effect.

(10) Not a significant effect.

ANYA..

5:31 AM, January 26, 2007  
Anonymous Anonymous said...

1) Depends How the Government is investing it. Agreed that government is willing to invest 5% of pension funds but that doesn't mean that all that money would be invested at one go into the stock market. It might be invested in blue-chip companies only whose stock prices are already very high. The fund manager might decide to invest at a later stage when the sensex comes down. So, it is not necessary that sensex will go up instantaneously. In fact, it might be possible that as soon as the government invests, everyone decides to exit and market comes crashing down.

2) Not necessary. Depends on Numerator's behaviour of P/E ratio as well.

3) Different Numerators. Different story. can't say.

4) High gains come with High risk in this case. People want safety in case of Pensions as.

5) It can promote the stock price up as the retail investors might be interested in buying the stock at a lower price. However, it's not mandatory that price will go up.

6) Yes. It should appreciate. However, RBI has a habit of intervening based on past records. In case of China, perhaps there would be no appreciation(Due to forced-pegging of yuan against dollar by Central Bank).

7) Yes. Housing will become costlier due to increased cost of home loans.

8) Yes. Due to increased transportation cost, Groceries and other basic items will become costlier.

9) Yes. Dal is considered in the list of commodities on whose prices, inflation is calculated.

10) No. I think that Cars are included neither in CPI(Consumer Price index) nor in WPI(wholesale price index) parameters on which inflation is calculated.

7:14 AM, January 26, 2007  
Anonymous b2b said...

1) The Pension fund under question is NPS( New Pension fund) with collected corpus of 1500 crore todate. 5% translate to 75 crore which is penny change for Indian Stock Market. So no, stock market wont be pushed higher due to new money supply.

This new pension corpus should not be confused with the old (before 2004) pension corpus whose size is Rs 1000 billion for 400 lakhs employees which it cover.

2) Assuming, 50% growth means growth in profit again.
For the same stock price(same as when profit was 30%) a 50% growth in profit would mean lower PE ratio(attractive stock)
If none of this assumption can be made. Then nothing can be said.

3) PE= Stock Price/ Earnings per share
Since no infor is provided. Nothing can be said.

4) Pension funds are for people who retire (old age). This group needs stability in returns on pension money. Stock market has high risk associated with it, with nofixed return guarenteed. Hence, the opposition.

5) Usually higher price band means less number of stocks being traded since the price of the stock is entry barrier. So, splitting means more interest from all sort of investors (individual as well as institutional). True in case of Infosys, but the same cannot be said about Rs 1000 though. Since, many stocks trade in this range with ample daily trade.

6) More export means more foreign currency reserve means more supply of foreign currency for exporter’s means less rupees needed to buy foreign currency means rupee appreciation.

7) Increase in lending rates means higher cost of borrowing money means less money supply for real estate which are bought against loans. Real estate market would slump downwards.

8) Yes, increased fuel prices push up price of commodities involved indirectly too(transportation cost)

9) Yes, pulses are part of the index

10) No, a particular model of car could be popular and hence priced costly. Cars do not make components.

9:30 AM, January 26, 2007  
Anonymous Anonymous said...

1)It depends, on which stocks the govt invests. If they're the same ones for all the polocies, those stocks would definitely rise.

Whether it has an impact on the index depends on the variety & number of stocks they purchase.

2)No.The P/E ratio will go down, assuming the price of the stock has not changed yet. Price/Earnings ->Earnings go up, ratio decreases.

3)Cant say. Even though they may be in the same industry, their stock prices may differ. It depends whose stock price is higher.

4)The stock market can give high returns as well as large losses. The people dont want the pensioners to invest in such a high risk instrument at a point, where they have no other type of income.

Their monthly pension could decrease due to this.

5)No. It would make it easier for people to purchase the stock. This is done when the stock prices rise too much for small investors to buy. But it has no change in the net worth of the stock.

6)I am not sure about this, but will try.
Assuming the imports to be the same,the exports increasing means more demand for indian goods. That means the currency will appreciate.

7)No.The real estate prices would decrease. An increase in the lending interest rate, would mean more money to be paid out.

This would deter people from investing in real estate. The lowering of demand, would cause the prices to lower a bit.

8)Yes. The increase in the price of fuel, would cause all travel related goods ; Air travel, shipping, processed goods, & logistics prices to go up.
This will be reflected in the prices of commodities, & hence will raise inflation.

9)Yes. As you had mentioned in the case of corn, the increase in dal prices, would cause demand for pulses other than dal as well.

Plus, dal being a staple diet, would create a lot of problems in the market.

The prices of dal, & other related pulses will increase, causing inflation.

10)Car prices increasing, would increase inflation, as car purchaes form a major contribution.

The demand for cars would not go down substanstially in a boom phase of the economy, so that wouldnt dent the demand much.

Aparna

11:35 PM, February 05, 2007  
Blogger Gyan-ee said...

Hey Aparna,

Check for my answers at http://catfundae.blogspot.com/2007/01/solutions-to-key-talking-points-3.html

11:43 PM, February 05, 2007  
Blogger Atul said...

1. If Government goes ahead with the decision to invest about 5% of pension funds in the stock market, It will increase the cash inflow in the market. More cash flow will result in increased prices for shares which in turn will increase the sensex for a short term.

2. i am not sure about it as since its earning per share will incerase but a good profit will also mean a high share price so it will more or less balance.

3. the P/E ratio will depend upon teh no. of shares both co's a&b have given to its shareholders.

4. Stock market also follows the high risk high gain rule. It has a uncertaininty much higher than other investments like govt. bonds. So people want the pension money to be as much safe as possible as its used in old age when other earning resources are not there.

5. Since the breaking up of stock would result it being much cheaper per unit so more people can afford to investin it which increases demand and may increase its price a bit.

6.now thats a difficult one. ok let me try. the export rise by 25%, so more foreign currency inflow will be there,.more cash reserve resulting in more spending ans less dependency on debt. means economic boom.so rupee must appreciate but a appreciated rupee will make our exports non competitive and margins may reduce reducing growth. so a balance has to be found.

7.if rbi increases the landing rate, it will increase the hoam loan making it dearer, so ppl will opt less for it bringing down the growth of real estate prices a bit.

8. increase in fuel prices means increase in transportation cost of all goods and essential commodities. so it will indirectly increase teh inflation.

9.dal is counted as a essential commodity used in order to determine the rate of inflation. so inflation will increase.

10.if the prices of cars went up, they will become less affordable. so increase in consumption will be less. resulting in less import of crude oil so more cash reserve, less dependency on global oil market, strong economy, less inflation..:)

2:45 AM, February 16, 2007  
Anonymous Anonymous said...

1) EPFO corpus is huge and s0 it will make difference.Positive aspect is Govt. will be able to give higher returns keep the left happy and do all this without increasing budget deficit.
4)People are opposed because of the inherent volatility of stock markets.People however are not aware that in long run stocks give returns that beat all asset classes and the risk of stock market investment reduces with long time frame.

10:55 PM, May 14, 2007  

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