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Macroeconomic and Industry Analysis

Macroeconomic and Industry Analysis. 12. Bodie, Kane and Marcus Essentials of Investments 9 th Global Edition. 12.1 Global Economy. National Economic Environment Crucial determinant of industry performance Exchange Rate

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Macroeconomic and Industry Analysis

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  1. Macroeconomic and Industry Analysis 12 Bodie, Kane and Marcus Essentials of Investments 9th Global Edition

  2. 12.1 Global Economy • National Economic Environment • Crucial determinant of industry performance • Exchange Rate • Rate at which domestic currency can be converted into foreign currency

  3. Table 12.1 Economic Performance

  4. Figure 12.1 Change in Real Exchange Rate

  5. Figure 12.2 S&P 500 Index versus Earnings per Share

  6. 12.2 The Domestic Macroeconomy • Gross Domestic Product (GDP) • Market value of goods and services produced over period of time • Unemployment Rate • Ratio of number of unemployed to total labor force • Inflation • Rate at which general level of prices for goods and services is rising

  7. 12.2 The Domestic Macroeconomy • Interest Rates • High interest rates reduce present value of future cash flows • Budget Deficit • Government spending in excess of government revenues • Sentiment • Consumer optimism/pessimism are determinants of economic performance

  8. 12.3 Interest Rates • Fundamental Factors of Interest Rates • Supply of funds from savers • Demand for funds from borrowers • Government’s net supply/demand for funds, modified by Federal Reserve • Expected rate of inflation

  9. Figure 12.3 Determination of Equilibrium Real Rate of Interest

  10. 12.4 Demand and Supply Shocks • Demand Shock • Event that affects demand for goods and services in economy • Supply Shock • Event that influences production capacity and costs in economy

  11. 12.4 Demand and Supply Shocks The price of imported oil fell dramatically in late 2008. What sort of macroeconomic shock would this be considered?

  12. 12.5 Government Policy • Fiscal Policy • Use of government spending and taxing for stabilizing economy • Monetary Policy • Actions taken by the central bank to influence money supply or interest rates • Supply-Side Policies • Address productive capacity of economy, goal is to induce workers/owners to produce goods

  13. 12.6 Business Cycles • Business Cycles • Recurring cycles of recession and recovery • Peak • Transition from end of expansion to start of contraction • Trough • Transition point between recession and recovery

  14. 12.6 Business Cycles • Cyclical Industries • Industries with above-average sensitivity to state of economy • Defensive Industries • Industries with below-average sensitivity to state of economy

  15. Figure 12.4 Cyclical Indicators

  16. Figure 12.4 Cyclical Indicators

  17. 12.6 Business Cycles • Leading Economic Indicators • Economic series that tend to rise or fall in advance of rest of economy • Stock-market-price index • Money supply • Manufacturers’ orders

  18. Table 12.2 Indexes of Economic Indicators

  19. Figure 12.5 Indexes of Leading, Coincident, and Lagging Factors

  20. 12.7 Industry Analysis • Defining an Industry • NAICS codes in the US • Classification of firms into industry groups using numerical codes to identify industries • KSE sectors

  21. Figure 12.7 Return on Equity, 2011

  22. Figure 12.7 Return on Equity, KSE

  23. Figure 12.8 Industry Stock Price Performance, 2011

  24. Figure 12.8 Industry Stock Price Performance, 2011

  25. Figure 12.9 ROE of Application Software Firms

  26. Table 12.5 Examples of NAICS Industry Codes

  27. Figure 12.10 Industry Cyclicality

  28. 12.7 Industry Analysis • Sensitivity to the Business Cycle • Sensitivity of sales • Necessary product or luxury? • Low sensitivity to income • Operating leverage • Financial leverage

  29. 12.7 Industry Analysis

  30. Figure 12.11 Stylized Depiction of Business Cycle

  31. 12.7 Industry Analysis • Sector Rotation • Shifting portfolio into industry sectors expected to outperform others based on macroeconomic forecasts • Near peak, invest in natural resource extraction and processing firms • After peak, defensive industries often better performers • In trough, capital goods industries often better performers • In expansion, cyclical industries often better

  32. Figure 12.12 Sector Rotation

  33. 12.7 Industry Analysis

  34. 12.7 Industry Analysis • Industry Life Cycles: Stages Firms Pass Through to Maturity • Start-up stage: Often characterized by new technology/product • Consolidation stage: Industry leaders begin to emerge • Maturity stage: Product has reached potential for use by consumers • Relative decline: May grow less than rest of economy or shrink

  35. Figure 12.13 Industry Life Cycle

  36. Figure 12.13 Industry Life Cycle

  37. At what stage in the life cycle of an industry is investment most attractive and lucrative?

  38. Peter Lynch’s Industry Classification

  39. 12.7 Industry Analysis • Industry Structure and Performance • Threat of entry: New entrants to industry pressure price/profits • Rivalry between existing competitors: Market share competition pressures price/profits • Pressure from substitute products: Firms in related industries can threaten market share

  40. 12.7 Industry Analysis • Industry Structure and Performance • Bargaining power of buyers • Large-scale buyers have considerable bargaining power • Bargaining power of suppliers • Large-scale suppliers have considerable bargaining power

  41. My Problems • Basic • 4 effect of policy on business conditions (1) • Intermediate (6 problems) • 17 industry sensitivity (3) • 19 industry sensitivity (3) • 21 industry life cycle (4) • 24 effect of policy on business conditions (1) • CFA Problems (2 problems) • 2 industry life cycle (4) • 4 industry life cycle (4) • Webmaster • 1

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