ECONOMIC AND FINANCIAL GLOSSARY
I - SUPERVISORY AUTHORITIES - REGULATORS
National institution that manages a country's currency, controls the money supply and interest rates, and supervises the banking system to ensure economic stability.
"L'Autorité des Marhés Financiers" is responsible for regulating financial markets. Its main tasks are to regulate and ensure the smooth operation of the markets and to protect savers.
The ACPR, or "Autorité de Contrôle Prudentiel et de Résolution", is a French body that supervises the banking and insurance sectors. It ensures financial stability, customer protection and compliance with laws and regulations. The ACPR also has the power to resolve banking crises to minimise the impact on the economy.
"Commission de Surveillance du Secteur Financier:" The CSSF is Luxembourg's financial regulator. It supervises financial institutions, such as banks, investment funds and insurance companies, to ensure the stability and integrity of the financial sector. The CSSF ensures that these institutions comply with financial laws and regulations, thereby protecting investors and consumers.
ESMA (European Securities and Markets Authority) is a European Union agency that supervises and regulates European financial markets. Its aim is to protect investors, ensure the smooth operation of financial markets and strengthen financial stability. ESMA develops rules, monitors risks and promotes market transparency and integrity.
Euroclear France is a subsidiary of Euroclear, an international financial services group. It provides securities settlement and custody services for the French financial markets. Euroclear France facilitates the secure and efficient transfer of securities between buyers and sellers, ensuring the fluidity of market transactions.
II - ECONOMIC TERMS
Inflation occurs when demand for goods and services exceeds supply, or when production costs rise, pushing up prices. It can be measured by indices such as the Consumer Price Index (CPI). Moderate inflation is often seen as a sign of economic growth, as it can encourage consumption and investment. However, inflation that is too high can erode purchasing power, create economic uncertainty and harm savings. Central banks monitor inflation closely and adjust interest rates to control it.
Also known as core inflation, it represents the long-term trend in price levels. Transient changes in the price level are removed by excluding items that are frequently subject to price volatility, such as food or energy.
A recession is a period of economic decline, generally identified by a fall in gross domestic product (GDP) for two consecutive quarters. It is characterised by a fall in output, a rise in unemployment and a reduction in consumer spending.
Stagflation is an economic situation where inflation is high, economic growth is low, and unemployment is high. It is a challenge for policymakers, as measures to reduce inflation can worsen unemployment, and vice versa. Stagflation is rare and difficult to manage, as it combines normally opposing economic problems.
III - MARKET TERMS
Impact of changes in the previous year on current growth rates.
For bonds, sensitivity is implicitly a sensitivity to interest rates. The sensitivity of a bond indicates the change in its value in the event of a change in market interest rates of around 0.01%.
As a reminder, an increase in interest rates leads to a decrease in the value of the bond. Conversely, when interest rates fall, the bond price rises.
This formula enables investors to assess the risk involved. The greater the sensitivity, the greater the investor's exposure to a sharp fluctuation in the value of the bond.
Carry trade is an investment strategy where an investor borrows money in a currency with a low interest rate to invest in another currency offering a higher interest rate. The aim is to profit from the difference in rates, known as the ‘spread’. This strategy can be profitable, but there are risks involved, including exchange rate fluctuations that can wipe out gains.
Bonds that can be converted into shares in the issuer.
Cyclical stocks are shares in companies whose performance is strongly linked to economic cycles. They thrive when the economy is growing and suffer in times of recession. These companies often operate in sectors such as the automotive, construction and tourism industries. Investors can use cyclical stocks to take advantage of phases of economic growth, but they carry a higher risk in periods of slowdown.
An indicator of the proportion of a company's debt to equity.
An ETF (Exchange Traded Fund), sometimes called a tracker, is designed to track the performance of an index, sector, commodity or other asset. ETFs offer investors a simple and often less expensive way of accessing a wide range of markets. They are traded on exchanges in the same way as shares, which means that their price fluctuates throughout the trading day. ETFs can be passive, tracking a specific index, or active, where a manager seeks to outperform an index. They are popular for their diversification, liquidity and generally low fees. In Europe, leverage is capped to protect investors from excessive losses (5x the maximum amount invested on equities, 2x for crypto-assets).
Fed Funds are reserves that US banks lend to each other, usually overnight. The interest rate applied to these loans is called the Fed Funds rate. This rate is influenced by the Federal Reserve (the Fed) and serves as the main tool for monetary policy. It affects interest rates throughout the economy, influencing borrowing, saving and investment.
Alternative investment funds using various strategies to generate returns.
‘High yield’ refers to bonds or debt securities that offer a high yield due to their higher risk. These bonds are issued by companies or governments with a credit rating below investment grade. Investors are attracted by the potentially higher returns, but must be prepared to accept an increased risk of default.
This is a contraction of Investment Grade.
Refers to a credit rating category that indicates that a bond or other debt instrument is considered a safe, high-quality investment. Rating agencies such as Moody's or Standard & Poor's assign these ratings. Investment grade securities have a low risk of default, making them attractive to investors seeking to minimise risk.
Junk bonds are high-yield but high-risk bonds. They are issued by companies or governments with a low credit rating. Because of the high risk of default, they offer higher interest rates to attract investors. They can be lucrative, but carry a greater risk of loss.
Leverage allows investors or companies to amplify their potential gains by using borrowed funds. For example, if a company uses leverage, it may invest more money than it actually has, hoping that the returns on the investment will exceed the cost of borrowing. However, if the investment is unsuccessful, losses can also be magnified, as the loan still has to be repaid. So it's a strategy that can be very profitable, but also risky.
Market capitalisation is the total value of all the shares of a listed company. It is calculated by multiplying the price of a share by the total number of shares in issue.
The Magnificent 7 (in French) is a term used to refer to the seven largest technology companies that have dominated the stock market. These companies generally include Apple, Microsoft, Amazon, Google (Alphabet), Facebook (Meta), Tesla, and Nvidia. They are known for their high market capitalisation and significant influence on stock market indices.
This is the price of a share in an investment fund. It is calculated by dividing the total value of the fund's assets by the number of units in circulation. NAV is often used to assess a fund's performance.
The P / E ratio (price / earnings) measures the valuation of a share by relating its price to net earnings per share. It indicates how much investors are prepared to pay for each euro of profit generated by the company. A high P/E often reflects growth expectations, while a low P/E may indicate undervaluation or uncertain prospects. In Nvidia's case, the P/E is extremely high and indicates that the market is expecting exceptional growth prospects for the coming years. At the risk of creating a bubble...
An indicator of a company's valuation, calculated by dividing the share price by earnings per share.
A regulated market is a financial market where transactions in financial instruments, such as shares and bonds, are supervised by an official authority. This regulation ensures transparency, fairness and investor protection. Regulated markets must comply with strict rules on listing, trading and disclosure of information.
The risk premium is an essential financial concept that refers to the additional return an investor requires to compensate for the additional risk of an investment compared with a risk-free asset. In other words, it is the remuneration expected for accepting the uncertainty associated with an investment's performance.
Spreads are used to assess risk, liquidity and transaction costs. They refer to the difference between two prices, rates or yields. In the context of financial markets, this can refer to :
- Buy/sell spread: The difference between the purchase price (bid) and the sale price (ask) of an asset. A narrower spread indicates higher liquidity.
- Credit spread: The difference in yield between a risky bond and a bond considered to have no risk of default, such as German government bonds. It reflects the perceived credit risk.
- Interest rate spread: The difference between the interest rates of two financial instruments.
A stock market index is an indicator that measures the performance of a specific group of stocks on a stock market. It reflects the overall health and trend of the market or a particular sector. Stock market indices, such as the S&P 500 or the CAC 40, are used by investors to track market performance and compare investment returns.
A stock market rally is a period of strong growth in share prices on the stock market. It often occurs after a downturn or during a period of good economic news. Investors become optimistic, which leads to increased demand and higher share prices. A rally can be short or long-lived.
Value stocks are shares in companies considered to be undervalued in relation to their fundamentals, such as earnings or assets. These stocks often trade at a discount to their intrinsic value. Value investors seek out these opportunities, hoping that the market will eventually recognise the company's true value, leading to a rise in the share price.
IV - SUSTAINABLE INVESTMENT TERMS
ESG stands for Environmental, Social and Governance. These are criteria used to assess a company's responsibility and sustainable impact.
- Environmental: Impact on nature, such as resource management, carbon emissions and sustainability.
- Social: Relationships with employees, customers and communities, including diversity and human rights.
- Governance: Management practices, ethics, and transparency in decision-making.
Investors use ESG criteria to identify responsible and sustainable companies, in the hope that they will perform better over the long term.
ESG criteria form the three pillars of extra-financial analysis, making it possible to assess the extent to which sustainable development issues are taken into account in a company's strategy.
Extra-financial rating aims to assess a company by going beyond simple economic performance. It is based on ESG criteria and can be carried out internally or by independent rating agencies.
Refers to the voluntary inclusion of sustainable development and societal issues in a company's strategy.
The Corporate Sustainability Reporting Directive will replace the current "Non Financial Reporting Directive" (NFRD) from 2024. It will require companies with more than 250 employees to assess their impact on the environment and society and to disclose data relating to sustainability issues.
Classifies activities considered ‘green’ in order to establish a common definition and limit the risks of greenwashing.
Greenwashing is a practice whereby a company gives a false impression of its ecological efforts. It pretends to be more environmentally friendly than it really is, often to attract environmentally conscious consumers. This can include misleading advertising, unverified eco-labels, or exaggerated claims about the sustainability of their products or services.
The revisions to the European directive MiFID II (Markets in Financial Instruments Directive) came into force in August 2022. They require financial investment advisers to ask customers about their sustainability preferences.
To measure extra-financial performance, fund managers use different indicators in their reporting, depending on the fund's approach and objectives. Examples include the carbon footprint of the portfolio or the number of jobs created by the stocks held.
Promulgated in 2019. Since a further revision on 1 January 2022, it requires insurers to offer at least one SRI fund, one ‘green’ fund (Greenfin-labelled) and one solidarity fund in all multisupport life insurance policies.
Principal Adverse Impact (PAI) have been defined by the EU as negative, significant or likely to be significant effects on sustainability factors that are caused, aggravated by or directly related to the investment decisions and advice provided by the legal entity.14 mandatory indicators in 5 classes: GHG emissions / Biodiversity / Water / Waste / Social and employee issues
The ‘Principles for Responsible Investment’ are an international network of financial institutions supported by the United Nations. A voluntary commitment based on six principles, this initiative aims to encourage investors to take ESG issues into account in their investment decisions.
The Sustainable Development Goals refer to the 17 targets set by UN member states brought together in the 2030 Agenda, an action plan for humanity, planet and prosperity introduced in September 2015.
The regulation measuring the ESG impact of investments since March 2021. The first European standard for sustainability reporting, it requires companies to publish data on how they do or do not integrate ESG.
Socially Responsible Investment: This is an investment approach that integrates environmental, social and governance (ESG) criteria into the investment selection and management process. The aim is to generate a positive impact on society while achieving financial returns. SRI investors seek to support responsible and sustainable companies.
In 1987, the United Nations Brundtland Commission defined sustainability as ‘meeting the needs of the present without compromising the ability of future generations to meet their own needs’. Environment, economy and social are the three components of sustainable development.