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CHAPTER 17. Macroeconomic and Industry Analysis. Fundamental Analysis Approach to Fundamental Analysis: Domestic and global economic analysis Industry analysis Company analysis Why use the top-down approach?. Framework of Analysis. Performance in countries and regions is highly variable
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CHAPTER 17 Macroeconomic and Industry Analysis
Fundamental Analysis Approach to Fundamental Analysis: Domestic and global economic analysis Industry analysis Company analysis Why use the top-down approach? Framework of Analysis
Performance in countries and regions is highly variable Political risk Exchange rate risk Sales Profits Stock returns Global Economic Considerations
Table 17.1 Economic Performance in Selected Emerging Markets
Figure 17.1 Change in Real Exchange Rate: U.S. Dollar versus Major Currencies, 1999–2006
Gross domestic product Unemployment rates Interest rates & inflation Budget deficit Consumer sentiment Key Economic Variables
Demand shock - an event that affects demand for goods and services in the economy Demand Shocks
Supply shock - an event that influences production capacity or production costs Supply Shocks
Federal Government Policy Fiscal Policy: Demand-side management Tax rate cut Increases in government spending
Federal Government Policy Continued Monetary Policy- Demand-side management Manipulation of the money supply to influence economic activity Initial & feedback effects Tools of monetary policy Open market operations Discount rate Reserve requirements
Federal Government Policy Continued Fiscal Policy: Supply-side management Incentive or marginal taxes National policies on education, infrastructure, and research are important elements
Business Cycles The transition points across cycles are called peaks and troughs A peak is the transition from the end of an expansion to the start of a contraction A trough occurs at the bottom of a recession just as the economy enters a recovery
Leading indicators tend to rise and fall in advance of the economy Examples: Avg. weekly hours of production workers Stock Prices Leading Indicators
Coincident Indicators - indicators that tend to change directly with the economy Examples: Industrial production Manufacturing and trade sales Coincident Indicators
Lagging Indicators - indicators that tend to follow the lag economic performance Examples: Ratio of trade inventories to sales Ratio of consumer installment credit outstanding to personal income Lagging Indicators
Figure 17.4 Indexes of Leading, Coincident, and Lagging Indicators
Industry Analysis Sensitivity to business cycles Factors affecting sensitivity of earnings to business cycles: Sensitivity of sales of the firm’s product to the business cycles Operating leverage Financial leverage Industry life cycles
Defining an Industry North American Industry Classification System, or NAICS codes Codes assigned to group firms for statistical analysis
Figure 17.7 Industry Stock Price Performance as Measured by Rate of Return on Dow Jones Sector iShares, January-October 2007
Table 17.6 Operating Leverage of Firms A and B Throughout the Business Cycle
Sector Rotation Portfolio is adjusted by selecting companies that should perform well for the stage of the business cycle Peaks – natural resource extraction firms Contraction – defensive industries such as pharmaceuticals and food Trough – capital goods industries Expansion – cyclical industries such as consumer durables
StageSales Growth Start-up Rapid & Increasing Consolidation Stable Maturity Slowing Relative Decline Minimal or Negative Industry Life Cycles
Industry Structure and Performance Threat of entry Rivalry between existing competitors Pressure from substitute products Bargaining power of buyers Bargaining power of suppliers
