Wharton

Finance Minister Of India

Nirmala Sitharaman

Indias Economy

• The IMF World Economic Outlook from April 2024 indicates that the global economy, including large emerging markets like India, is showing resilience with steady growth and declining inflation. It projects global growth to remain at 3.2 percent in 2024 and 2025, which is a slight upgrade from previous projections

• The World Economic Forum mentions that India could become the world’s third-largest economy in the next five years, highlighting India’s significant economic and geopolitical power and its role in shaping the future of the global economy

• However, the Finance Ministry of India has noted that there may be risks of a recession appearing in 2024 due to uncertainties related to higher food and energy prices and geopolitical tensions

• Forbes Advisor India suggests that, based on current economic parameters, India is not headed for a recession when compared with the economies of the rest of the world

• A report by Finance Visit states that India has a low probability of recession in 2024 and is expected to be the fastest-growing economy among the seven largest emerging markets and developing economies (EMDEs), with the World Bank retaining India’s economic growth at 6.9% last year

US economy

• UBS Predictions: UBS economists forecast a recession hitting the US in mid-2024, leading to the Federal Reserve slashing interest rates by 275 basis points in response to the economic slump and falling inflation1.

• US News Guidance: Investors are advised to watch for risk factors such as inflation and elevated interest rates, which could trigger a recession. However, there’s also a possibility of a soft landing for the US economy, which would involve slowing GDP growth without entering a recession2.

• NBC News Outlook: Experts broadly agree on a slowdown but not necessarily a recession as we head into 2024. The US economy is expected to experience reduced business activity following a post-pandemic growth period3.

• Bankrate Survey: The odds of the US economy entering a recession within the next 12 months have dropped to a two-year low of 33 percent, indicating a less pessimistic view of the economic future4.

• CNBC Analysis: Some analysts, like the former Dallas Fed president, believe there’s a good possibility that the US will avoid a recession in 2024, while others predict a mild recession possibly starting in the second quarter

ECONOMIC CRISIS

As of the latest reports, several countries are facing economic challenges. The World Economic Forum’s Global Risks Report 2024 indicates that an economic downturn is a significant concern for many regions, including over 20 European countries such as Belgium, France, Germany, Portugal, Sweden, and the United Kingdom¹. Additionally, countries like Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Peru, and Venezuela in South and Central America also rate economic downturn as a top cause for concern¹.

Furthermore, the impact of insecurity, including fuel price increases and other factors, has been felt most acutely in vulnerable states such as Somalia, Sudan, South Sudan, and the Syrian Arab Republic. This may also exacerbate instability in countries facing simultaneous food and debt crises, such as Tunisia, Ghana, Pakistan, Egypt, and Lebanon².

The economic impacts of the Israel-Palestine conflict

• Global Economy: The conflict has led to a rise in oil prices due to increased tensions in the Middle East, which supplies a significant portion of the world’s oil¹.

• Oil Prices: Crude oil prices have risen to about $90 per barrel, with Brent crude futures increasing by 4% to hit $89 per barrel, and U.S. crude futures surpassing $87 per barrel¹.

• India’s Economy: India, being the world’s third-largest importer of crude oil, faces economic strain due to the increased oil prices. The Middle East is the primary source of India’s crude oil imports, with Iraq accounting for 22% of these imports¹.

• Trade Relations: India has a robust trade relationship with Israel, with significant exports and investments. Indian businesses established in the region could be affected by trade disruptions, leading to higher insurance premiums and shipping costs¹.

• Casualties and Displacement: The conflict has a long history of causing casualties and displacing people, with recent escalations resulting in thousands of injuries and a death toll reaching 1,900¹.

Equity

• Equity represents the value that would be returned to a company’s shareholders if all of the assets were liquidated and all of the company's debts were paid off.

• We can also think of equity as a degree of residual ownership in a firm or asset after subtracting all debts associated with that asset.

• Equity represents the shareholders’ stake in the company, identified on a company's balance sheet.

• The calculation of equity is a company's total assets minus its total liabilities, and it's used in several key financial ratios such as ROE.

• Home equity is the value of a homeowner's property (net of debt) and is another way the term equity is used.

• Equity can be found on a company's balance sheet and is one of the most common pieces of data employed by analysts to assess a company's financial health.

Assets

• An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit.

• Assets are reported on a company's balance sheet.

• They are bought or created to increase a firm's value or benefit the firm's operations.

• An asset is something that may generate cash flow, reduce expenses or improve sales, regardless of whether it's manufacturing equipment or a patent.

• Assets can be classified as current, fixed, financial, or intangible.

Types of assets

In accounting, some assets are referred to as current. Current assets are short-term economic resources that are expected to be converted into cash or consumed within one year. Current assets include cash and cash equivalents, accounts receivable, inventory, and various prepaid expenses.

Some assets are recorded on companies' balance sheets using the concept of historical cost. Historical cost represents the original cost of the asset when purchased by a company. Historical cost can also include costs (such as delivery and set up) incurred to incorporate an asset into the company's operations.

Fixed Assets

Fixed assets are resources with an expected life of greater than a year, such as plants, equipment, and buildings. An accounting adjustment called depreciation is made for fixed assets as they age. It allocates the cost of the asset over time. Depreciation may or may not reflect the fixed asset's loss of earning power.

Financial Assets

Financial assets represent investments in the assets and securities of other institutions. Financial assets include stocks, sovereign and corporate bonds, preferred equity, and other, hybrid securities. Financial assets are valued according to the underlying security and market supply and demand.

Intangible Assets

Intangible assets are economic resources that have no physical presence. They include patents, trademarks, copyrights, and goodwill. Accounting for intangible assets differs depending on the type of asset. They can be either amortized or tested for impairment each year.2

Depreciation

Depreciation is an accounting practice used to spread the cost of a tangible or physical asset over its useful life. Depreciation represents how much of the asset's value has been used up in any given time period. Companies depreciate assets for both tax and accounting purposes and have several different methods to choose from.

Hedging

To hedge, in finance, is to take an offsetting position in an asset or investment that reduces the price risk of an existing position. A hedge is therefore a trade that is made with the purpose of reducing the risk of adverse price movements in another asset. Normally, a hedge consists of taking the opposite position in a related security or in a derivative security based on the asset to be hedged. Besides protecting an investor from various types of risk, it is believed that hedging makes the market run more efficiently.

Diversification

• Diversification is a strategy that mixes a wide variety of investments within a portfolio in an attempt to reduce portfolio risk.

• Diversification is most often done by investing in different asset classes such as stocks, bonds, real estate, or cryptocurrency.

• Diversification can also be achieved by purchasing investments in different countries, industries, sizes of companies, or term lengths for income-generating investments.

• The quality of diversification in a portfolio is most often measured by analyzing the correlation coefficient of pairs of assets.

• Investors can diversify on their own by investing in select investments or can hold diversified funds.

Profitability ratios

Profitability ratios are a class of financial metrics that are used to assess a business's ability to generate earnings relative to its revenue, operating costs, balance sheet assets, or shareholders' equity over time, using data from a specific point in time. They are among the most popular metrics used in financial analysis.Profitability ratios assess a company's ability to earn profits from its sales or operations, balance sheet assets, or shareholders' equity. They indicate how efficiently a company generates profit and value for shareholders. Profitability ratios include margin ratios and return ratios. Higher ratios are often more favorable than lower ratios, indicating success at converting revenue to profit. These ratios are used to assess a company's current performance compared to its past performance, the performance of other companies in its industry, or the industry average.

• Gross margin

• Operating margin

• Pretax margin

• Net profit margin

• Cash flow margin

• Return on assets (ROA)

• Return on equity (ROE)

• Return on invested capital (ROIC)

• Price to sales (P/S) ratio

Great Recession / 2008 market crash

The Great Recession was the sharp decline in economic activity that started in 2007 and lasted several years, spilling into global economies. It is considered the most significant downturn since the Great Depression in the 1930s. The term "Great Recession" applies to both the U.S. recession, officially lasting from December 2007 to June 2009, and the ensuing global recession in 2009.

The economic slump began when the U.S. housing market went from boom to bust, and large amounts of mortgage-backed securities (MBS) and derivatives plummeted in value.

• The Great Recession refers to the economic downturn from 2007 to 2009 after the bursting of the U.S. housing bubble and the global financial crisis.

• The Great Recession was the most severe economic recession in the United States since the Great Depression of the 1930s.

• In response to the Great Recession, unprecedented fiscal, monetary, and regulatory policy was unleashed by federal authorities, which some, but not all, credit with the subsequent recovery.

While no explicit criteria exist to differentiate a depression from a severe recession, there is a near consensus among economists that the downturn of 2007-2009 was not a depression. During the Great Recession, U.S. GDP declined by 0.3% in 2008 and 2.8% in 2009, while unemployment briefly reached 10%.

First, the report identified failure on the part of the government to regulate the financial industry. This failure to regulate included the Fed’s inability to stop banks from giving mortgages to people who subsequently proved to be a bad credit risk.

Next, too many financial firms took on too much risk. The shadow banking system, which included investment firms, grew to rival the depository banking system but was not under the same scrutiny or regulation. When the shadow banking system failed, the collapse impacted the flow of credit to consumers and businesses.3

excessive borrowing by consumers and corporations, along with lawmakers who did not fully understand the collapsing financial system. This created asset bubbles, especially in the housing market as mortgages were extended at low interest rates to unqualified borrowers who subsequently could not repay them. The ensuing selloff caused housing prices to fall and left many other homeowners underwater. This, in turn, severely impacted the market for the mortgage-backed securities (MBS) banks and other institutional investors held, and demand for which allowed lenders to give mortgages to risky borrowers.

Revory - key interest rate near 0 to promote liquidity, money and fiscal policy , the Dodd-Frank Act, gave banks $7.7 trillion of emergency loans in a policy known as quantitative easing.

Great Depression

The term "Great Depression" refers to the greatest and longest economic recession in modern world history. The Great Depression ran between 1929 and 1941, which was the same year that the United States entered World War II in 1941. This period was accentuated by a number of economic contractions, including the stock market crash of 1929 and banking panics that occurred in 1930 and 1931.

Economists and historians often cite the Great Depression as one of the largest—if not the most—catastrophic economic events of the 20th century.

The Stock Market Crash

During the short depression that lasted from 1920 to 1921, known as the Forgotten Depression, the U.S. stock market fell by nearly 50%, and corporate profits declined by over 90%.1 The U.S. economy enjoyed robust growth during the rest of the decade. The Roaring Twenties, as the era came to be known, was a period when the American public discovered the stock market and dove in headfirst.

Speculative frenzies affected both the real estate markets and the New York Stock Exchange (NYSE).2 Loose money supply and high levels of margin trading by investors helped to fuel an unprecedented increase in asset prices.3

The lead-up to October 1929 saw equity prices rise to all-time high multiples of more than 19-times after-tax corporate earnings.4 This, coupled with the benchmark Dow Jones Industrial Index (DJIA) increasing 500% in just five years, ultimately caused the stock market crash.5

The NYSE bubble burst violently on Oct. 24, 1929, a day that came to be known as Black Thursday.6 A brief rally occurred Friday the 25th and during a half-day session Saturday the 26th. However, the following week brought Black Monday (Oct. 28) and Black Tuesday (Oct. 29). The DJIA fell more than 20% over those two days.7 The stock market would eventually fall almost 90% from its 1929 peak.5

Ripples from the crash spread across the Atlantic Ocean to Europe triggering other financial crises such as the collapse of the Boden-Kredit Anstalt, Austria’s most important bank. In 1931, the economic calamity hit both continents in full force.8

The U.S. Economy Tailspin

The 1929 stock market crash wiped out nominal wealth, both corporate and private, sending the U.S. economy into a tailspin. In early 1929, the U.S. unemployment rate was 3.2%. By 1933, it soared over 25%.910

Despite unprecedented interventions and government spending by both the Hoover and Roosevelt administrations, the unemployment rate remained above 18.9% in 1938. Real per capita gross domestic product (GDP) was below 1929 levels by the time the Japanese bombed Pearl Harbor in late 1941.

While the crash likely triggered the decade-long economic downturn, most historians and economists agree that the crash alone did not cause the Great Depression. Nor does it explain why the slump's depth and persistence were so severe. A variety of specific events and policies contributed to the Great Depression and helped to prolong it during the 1930s.

Liquidity

Liquidity refers to the efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price. The most liquid asset of all is cash itself. Consequently, the availability of cash to make such conversions is the biggest influence on whether a market can move efficiently.

The more liquid an asset is, the easier and more efficient it is to turn it back into cash. Less liquid assets take more time and may have a higher cost.

What Are the Most Liquid Assets or Securities?

Cash is the most liquid asset, followed by cash equivalents, which are things like money market accounts, certificates of deposit (CDs), or time deposits. Marketable securities, such as stocks and bonds listed on exchanges, are often very liquid and can be sold quickly via a broker. Gold coins and certain collectibles may also be readily sold for cash.

What Are Some Illiquid Assets or Securities?

Securities that are traded over the counter (OTC), such as certain complex derivatives, are often quite illiquid. For individuals, a home, a time-share, or a car are all somewhat illiquid in that it may take several weeks to months to find a buyer, and several more weeks to finalize the transaction and receive payment. Moreover, broker fees tend to be quite large (e.g., 5% to 7% on average for a real estate agent).

Why Are Some Stocks More Liquid Than Others?

The most liquid stocks tend to be those with a great deal of interest from various market actors and a lot of daily transaction volume. Such stocks will also attract a larger number of market makers who maintain a tighter two-sided market.

Illiquid stocks have wider bid-ask spreads and less market depth. These names tend to be lesser known, have lower trading volume, and often have lower market value and volatility. Thus, the stock for a large multinational bank will tend to be more liquid than that of a small regional bank.

Stock market

• The stock market refers to the collective trading network involving stocks and their derivatives.

• The original crowdsourcing, the stock market, is a central part of modern economies since it's where companies raise vast sums of money to start a business, expand, or pay off debt.

• Companies listed on stock exchanges must be public, meaning their shares are open not just to a select few but traded on stock exchanges and elsewhere. Public companies are subject to many reporting and transparency regulations.

• Stocks are sold to institutional investors and high-net-worth individuals, but also those with far more modest means looking for income from a share of the profits, to sell the stock later at a higher price, or simply to have a say in how a company is run.

• The Securities and Exchange Commission (SEC) and individual state regulators oversee the U.S. stock market.12

Dividend

A dividend is the distribution of a company's earnings to its shareholders and is determined by the company's board of directors. Dividends are often distributed quarterly and may be paid out as cash or in the form of reinvestment in additional stock.

The dividend yield is the dividend per share and is expressed as dividend/price as a percentage of a company's share price, such as 2.5%.

Common shareholders of dividend-paying companies are eligible to receive a distribution as long as they own the stock before the ex-dividend date.

Stocks

A stock, also known as equity, is a security that represents the ownership of a fraction of the issuing corporation. Units of stock are called "shares" which entitles the owner to a proportion of the corporation's assets and profits equal to how much stock they own. 

Stocks are bought and sold predominantly on stock exchanges and are the foundation of many individual investors' portfolios. Stock trades have to conform to government regulations meant to protect investors from fraudulent practices.

Shares v.s. Stocks

Of the two, "stocks" is the more general, generic term. It is often used to describe a slice of ownership of one or more companies. In contrast, in common parlance, "shares" has a more specific meaning: It often refers to the ownership of a particular company.

So if someone says they "owns shares," some people's inclination would be to respond, "shares in what company?" Similarly, an investor might tell their broker to buy 100 shares of XYZ Inc. If they said "buy 100 stocks," they'd be referring to a whole panoply of companies—100 different ones, in fact.

That comment "I own shares" might also spark a listener to respond even more generally, "Shares of what? What sort of investment?" It's worth noting that one can own shares of several kinds of financial instruments: mutual funds, exchange-traded funds, limited partnerships, real estate investment trusts, etc. Stocks, on the other hand, exclusively refer to corporate equities, securities traded on a stock exchange.
A share is a unit of stock

Common Stock v.s. Preffered Stock

There are two main types of stock: common and preferred. Common stock usually entitles the owner to vote at shareholders' meetings and to receive any dividends paid out by the corporation.

Preferred stockholders generally do not have voting rights, though they have a higher claim on assets and earnings than common stockholders. For example, owners of preferred stock receive dividends before common shareholders and have priority if a company goes bankrupt and is liquidated.2

Companies can issue new shares whenever there is a need to raise additional cash. This process dilutes the ownership and rights of existing shareholders (provided they do not buy any of the new offerings). Corporations can also engage in stock buybacks, which benefit existing shareholders because they cause their shares to appreciate in value.

Stocks v.s. Bonds

Stocks are issued by companies to raise capital to grow the business or undertake new projects. There are important distinctions between whether somebody buys shares directly from the company when it issues them in the primary market or from another shareholder in the secondary market. When the corporation issues shares, it does so in return for money.

Bonds vary from stocks in several ways. Bondholders are creditors to the corporation and are entitled to interest as well as repayment of the principal invested. Creditors are given legal priority over other stakeholders in the event of a bankruptcy and will be made whole first if a company is forced to sell assets.

Conversely, shareholders often receive nothing in the event of bankruptcy, implying that stocks are inherently riskier investments than bonds.

Fundamental Analysis v.s. Technical Analysis

Fundamental vs. Technical Analysis: An Overview

In trading, investing, and finance, two approaches help investors analyze markets and securities: fundamental and technical analysis. Each helps evaluate investment opportunities, and many traders blend both for a more comprehensive view. Fundamental analysis focuses on the quality of an asset, while technical analysis looks at market trends as an indicator of value.