Union budget proposed big rise in Capital Expenditure. What does does it mean?

A simple thread to understand Capital Expenditure vs Revenue Expenditure and its potential impact on the economy.

And why this may lead to rotation in sectoral winners.

1/n

The expenditure presented by the government is mainly defined in 2 ways

1. Expenditure which results in creation or acquisition of assets.
2. Expenditure on operational expenses that don't create any assets, but are routine spends.

2/n

The 1st is called capital expenditure, and the 2nd one is revenue expenditure.

3/n

Revenue Expenditure:

1. It is incurred for normal running of government departments and maintenance.

2. It does not result in creation of assets.

3. It is recurring in nature and incurred regularly.

4/n

4. It is short period expenditure.

5. For example, expenditure on medicines, salaries of government employees, subsidies and other freebies like loan waivers, etc..

Such Expenditure, if increased disproportionately, usually leads to cycles of higher inflation in the economy
5/n

A simple thread to understand relationship between US Dollar and Emerging Markets.

The relationship between the performance of Emerging Market stocks and the US Dollar is one of the tightest macro relationships that exists in investing.

1/15

The weekly return correlation between US Dollar and MSCI Emerging Market Index is -0.70 over last 10 years. Which means when US Dollar weakens, Emerging Market stocks rally and vice versa.

2/15

As seen in this chart, the MSCI EM Index and the MSCI World Index ratio and the US Dollar Index are negatively-correlated.

When US Dollar weakens, EM index outperform World Index and when US Dollar strengthens EM index underperform World index.

3/15

From 1995 to 2000, the USD appreciated over 30%, while the MSCI EM Index underperformed the MSCI World Index by over 15% annualised.

Then from 2001 to 2010, the U.S. dollar depreciated over 18% while the MSCI EM Index outperformed the MSCI World Index by 14% annualised.

4/15

Then from 2011 to 2020, the U.S. dollar appreciated over 30%, while the MSCI EM Index underperformed the MSCI World Index by 7% annualized.

Overall, from 1995 to 2020, this relationship has a correlation of -0.35.

5/15