Securities Analyst Program 2016 – 2017 Academic Year

Plan for the Year Investment Styles / Famous Investors Fall Winter Investment Styles / Famous Investors What Makes a Good Investment? Macroeconomic Analysis Fixed Income Valuation Other Asset Classes (Commodities, Derivatives) Industry Specific Analysis How To Leverage Resources Key Moments in the History of Finance

Agenda Key Concepts & Indicators The Top Down Investment process Economic indicators Macro Strategies Understanding Monetary Policy Central Banks Negative Interest Rates primer Forecasting Central Banks’ decisions Oil Discussion Questions

Key Concepts & Indicators 1 Key Concepts & Indicators 2 Understanding Monetary Policy 3 Oil Discussion 4 Questions

The Top-Down Investment Process Macroeconomic Analysis GDP Consumer Price Index Inflation Expectations Fiscal & Monetary Policy Balance of Payments Consumer Confidence Index Industry Analysis Competitive Structure Demand Government Involvement Buyer/Supplier Power Company Analysis Relative Valuation Techniques Precedent Transactions Discounted Cash Flow Techniques Research Analyst Recommendations Qualitative Considerations

Economic Cycles Drive Stock Market Returns The Market Moves 6-12 Months Ahead of Economic Cycles

Economic Outlook Drives Sector Allocation

The Pros and Cons Pros Cons Framework to organize stock selection effort Possibility to put hugely profitable trades by getting a theme right Correlations spike when market are in a downturn Economic analysis has a lot of noise which distracts from fundamental analysis Often tough to dissociate macro outlook and market outlook “Economists have predicted five of the last three recessions”

The Economic Calendar – US Traders & Investors Track the Economic Calendar to Take Investment Decisions

The Economic Calendar – Impact on Financial Markets US Fed keeps rate unchanged Release of Economic Indicators Impact Financial Markets

Key Indicators That Move The Markets Non Farm Payroll, Unemployment Rate Employment Real GDP Growth, Net Exports, Industrial Production Economic Growth Personal Consumption Expenditure, Consumer Price index Inflation University of Michigan Consumer Confidence Index Surveys + Central Bank Meetings

Economic Indicators: Pro-cyclical vs. Counter-cyclical & Leading vs Economic Indicators: Pro-cyclical vs. Counter-cyclical & Leading vs. Lagging Pro-cyclical vs. Counter-cyclical Indicators Leading vs. Lagging Indicators A pro-cyclical indicator has a positive correlation with real GDP A counter-cyclical indicator has a negative correlation with real GDP A leading indicator helps explain the future path of real GDP The path of real GDP helps explain the future path of a lagging indicator

Summary of Business Cycle Facts Economic Indicators: Pro-cyclical vs. Counter-cyclical & Leading vs. Lagging Summary of Business Cycle Facts

What Makes Economic Forecasting Challenging? Short Term is easy because persistent – turns are very hard to predict 1 No Regularity in the Amplitude of Business Cycles 2 No Regularity in the Frequency of Business Cycles

Making Money With Macro Trends: Currencies Net Exports Impact the Value of a Currency Oil Exporters Have Oil Prices Driven Currencies Currency Appreciation Net Exports Decrease Currency Depreciation Net Exports Increase

Making Money With Macro Trends: Risk & Volatility Risk-On, Risk-Off Investing: Describes a process where investors move to riskier and potentially higher yielding investments when risk is perceived to be low, and towards safer investments when risk is perceived to be high Very Risky Growth Stocks Value Stocks Brexit Corporate Bonds Risky Government Bonds Brexit Gold Deposits Safe

Making Money With Macro Trends: Risk & Volatility The VIX Index – indicator of market fears The VIX index measures the implied volatility of the S&P500 – It is forward looking and reflects sentiment 2008 Financial Crisis Euro Debt Crisis Fears of China slowdown

Key Concepts & Indicators 1 Key Concepts & Indicators 2 Understanding Monetary Policy 3 Oil Discussion 4 Questions

Monetary Policy: Driving Financial Markets Worldwide Monetary Policy Has a Large Impact on Asset Prices

Monetary Policy: Central Banks 101 What Are Central Banks? The institution that controls the money supply in a country Conventional tools: interest rates, reserve requirements, open market operations (buying and selling government securities) Unconventional tools: negative interest rates, quantitative and qualitative easing, fixing treasury yields, etc… How Do They Function?

Monetary Policy: Central Banks 101 Current Theme: Central Banks have been increasing the amounts of assets that they own to fight liquidity traps

Monetary Policy: Central Banks 101 Monetary Policy Objectives US Federal Reserve (Fed) – “Maximum employment and stable prices (2% inflation target)” Bank of Canada (BoC) – “Keeping inflation low and stable” (Target range for inflation: 1-3%) European Central Bank (ECB) – “Maintain price stability” (Target inflation: 2%) Bank of Japan (BoJ) – “Achieving price stability” (Target inflation: 2%) Counter-cyclical Monetary Policy: Smoothing Out Business Cycles Rate Hike Peak Trend Line Rate Hike Peak Recession Recession Real GDP Expansion Expansion Rate Cut Through Rate Cut Through Time

Monetary Policy Impacts Currency Prices Appreciation Process Interest Rate Increase More Investors Want to Invest Demand Increases Currency Appreciates Depreciation Process Interest Rate Decrease Less Investors Want to Invest Demand Decreases Currency Depreciates

Monetary Policy: Style Differs Across Central Banks Janet Yellen, Chair of the US Federal Reserve System Conservative – doesn’t like to surprise markets Mario Draghi, President of the European Central Bank Hero figure - nicknamed “Super Mario”: “Whatever it takes to save the Euro” from the debt crisis - fueled a global rally in markets Haruhiko Kuroda, Governor of the Bank of Japan Specialist at surprising markets Unconventional monetary policy: negative interest rates, buying ETFs and REITS, 0% 10Y yield target

Negative Interest Rates 101 Seem counter-intuitive – why would you pay someone to lend them money? There is a cost to holding cash You might think that the price of the asset will increase You might be using the asset to speculate on the currency You might be required to purchase certain type of assets (insurance company or pension fund) Swiss food and drink company

Monetary Policy: Predicting Changes in Monetary Policy Mimicking the Central Bank’s Decision Process Statement Wording Analysis Central Banks care about Economic data: Economic Growth Inflation Labor Market Developments in Financial Markets Qualitative Analysis What Would You Do If You Were the Central Bank? Source: http://projects.wsj.com/fed-statement-tracker/ Changes in the Central Bank’s Wording Can Provide Useful Insights

Quick Analysis of the Chances of a Rate Hike in December in the US Economic Growth Analysis Labor Market Analysis Inflation Analysis Inflation Expectations Analysis Source: http://projects.wsj.com/fed-statement-tracker/ Economic Fundamentals Seem In Line for a December Rate Hike

Quick Analysis of the Chances of a Rate Hike in December in the US Fact: In the last 25 years, the Fed has never raised interest rates when the market implied probability of a rate hike was less than 70%

Key Concepts & Indicators 1 Key Concepts & Indicators 2 Understanding Monetary Policy 3 Oil Discussion 4 Questions

Oil Discussion New technologies have enabled oil production to increase leading to drop in prices

The upside for oil prices in the short-term seems limited Oil Discussion Supply/Demand Analysis: Rough Balance Stocks are Down But Remain High Highest Marginal Increase The upside for oil prices in the short-term seems limited

Producers accept lower $ price Pressure on fiscal budgets Oil Discussion The USD-Oil Cycle The USD and Oil Are Inversely Correlated Oil prices decrease Supply Increases USD Strength Producers accept lower $ price Pressure on fiscal budgets Flight to Safety The upside for oil prices in the short-term seems limited

Key Concepts & Indicators 1 Key Concepts & Indicators 2 Understanding Monetary Policy 3 Oil Discussion 4 Questions