1. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Investments, by Bodie, Ariff, da Silva Rosa, Kane & Marcus Slides prepared by Harminder Singh Chapter 17 Macroeconomic and Industry Analysis 17-1

2. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Investments, by Bodie, Ariff, da Silva Rosa, Kane & Marcus Slides prepared by Harminder Singh Fundamental Analysis Approach to Fundamental Analysis: –Domestic and global economic analysis –Industry analysis –Company analysis Why use the top-down approach? Framework of Analysis 17-2

3. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Investments, by Bodie, Ariff, da Silva Rosa, Kane & Marcus Slides prepared by Harminder Singh Performance in countries and regions is highly variable Political risk Exchange rate risk –Sales –Profits –Stock returns Global Economic Considerations 17-3

4. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Investments, by Bodie, Ariff, da Silva Rosa, Kane & Marcus Slides prepared by Harminder Singh Global Environment Recent examples: -Mexican stock market in 1992-93 -NAFTA factor -Hong Kong market’s sensitivity of 1997 -Handover to China -South-East Asian economies 1997-98 -Contagion impact 17-4

5. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Investments, by Bodie, Ariff, da Silva Rosa, Kane & Marcus Slides prepared by Harminder Singh Global Environment Political Issues: Protectionism and trade policy Free Flow of Capital Status of a nation’s workforce 17-5

6. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Investments, by Bodie, Ariff, da Silva Rosa, Kane & Marcus Slides prepared by Harminder Singh Economic Performance in Selected Emerging Markets 17-6

7. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Investments, by Bodie, Ariff, da Silva Rosa, Kane & Marcus Slides prepared by Harminder Singh Economic Performance in Selected Emerging Markets Positive growth and positive return in $ terms in 2002 -India -Indonesia -Colombia -South Africa -Russia 17-7

8. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Investments, by Bodie, Ariff, da Silva Rosa, Kane & Marcus Slides prepared by Harminder Singh Gross domestic product Unemployment rates Interest rates & inflation International measures Consumer sentiment Key Economic Variables 17-8

9. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Investments, by Bodie, Ariff, da Silva Rosa, Kane & Marcus Slides prepared by Harminder Singh Forecasting Forecasting earning per share (EPS) -Level of main stock market index -Level of interest rates -Firm specific risk -Inflation rates > Forecasting better than competitors 17-9

10. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Investments, by Bodie, Ariff, da Silva Rosa, Kane & Marcus Slides prepared by Harminder Singh Macroeconomic Vs. Industry Analysis Picking industry as per macroeconomic environment Picking good ones Avoiding bad ones Beware: -Macro economic predictions are not always reliable -Predictions on the base of publicly available information 17-10

11. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Investments, by Bodie, Ariff, da Silva Rosa, Kane & Marcus Slides prepared by Harminder Singh Fiscal Policy – government spending and taxing actions –Direct policy –Immediate impact –Slowly implemented Federal Government Policy 17-11

12. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Investments, by Bodie, Ariff, da Silva Rosa, Kane & Marcus Slides prepared by Harminder Singh Monetary Policy – 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 (cont’d) 17-12

13. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Investments, by Bodie, Ariff, da Silva Rosa, Kane & Marcus Slides prepared by Harminder Singh Monetary vs. Fiscal Monetary Policy:Fiscal policy - Direct implementation - Cumbersome - Roundabout affect - Direct stimulation - Slow impact on investments - Immediate impact 17-13

14. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Investments, by Bodie, Ariff, da Silva Rosa, Kane & Marcus Slides prepared by Harminder Singh Demand shock – an event that affects demand for goods and services in the economy –Tax rate cut –Increases in government spending Demand Shocks 17-14

15. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Investments, by Bodie, Ariff, da Silva Rosa, Kane & Marcus Slides prepared by Harminder Singh Supply shock – an event that influences production capacity or production costs –Commodity price changes –Educational level of economic participants Supply Shocks 17-15

16. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Investments, by Bodie, Ariff, da Silva Rosa, Kane & Marcus Slides prepared by Harminder Singh Business Cycle –Peak –Trough Industry relationship to business cycles –Cyclical –Defensive Business Cycles 17-16

17. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Investments, by Bodie, Ariff, da Silva Rosa, Kane & Marcus Slides prepared by Harminder Singh Leading Indicators – tend to rise and fall in advance of the economy Examples: –Avg. weekly hours of production workers –Stock Prices –Money supply NBER Cyclical Indicators: Leading 17-17

18. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Investments, by Bodie, Ariff, da Silva Rosa, Kane & Marcus Slides prepared by Harminder Singh Coincident Indicators – indicators that tend to change directly with the economy Examples: –Industrial production –Manufacturing and trade sales NBER Cyclical Indicators: Coincident 17-18

19. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Investments, by Bodie, Ariff, da Silva Rosa, Kane & Marcus Slides prepared by Harminder Singh 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 NBER Cyclical Indicators: Lagging 17-19

20. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Investments, by Bodie, Ariff, da Silva Rosa, Kane & Marcus Slides prepared by Harminder Singh Industry Analysis Industry groups: > Grouping firm for statistical analysis -Standard industry classification (SIC) -North American Industry Classification System (NAICS) 17-20

21. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Investments, by Bodie, Ariff, da Silva Rosa, Kane & Marcus Slides prepared by Harminder Singh 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 17-21

22. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Investments, by Bodie, Ariff, da Silva Rosa, Kane & Marcus Slides prepared by Harminder Singh Operating Leverage Ratio of fixed and variable cost Firms with high fixed cost: -High operating leverage -More sensitive to business conditions -Advantageous position in environment of rising sales 17-22

23. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Investments, by Bodie, Ariff, da Silva Rosa, Kane & Marcus Slides prepared by Harminder Singh Degree of Operating Leverage 17-23

24. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Investments, by Bodie, Ariff, da Silva Rosa, Kane & Marcus Slides prepared by Harminder Singh Financial Leverage Use of outsiders’ funds Fixed Costs Interest should be paid irrespective of sales Impact on business cycle sensitivity 17-24

25. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Investments, by Bodie, Ariff, da Silva Rosa, Kane & Marcus Slides prepared by Harminder Singh Classification of Firms Peter Lynch approach: -Slow Growers -Stalwarts -Fast Growers -Cyclicals -Turnarounds -Asset Plays 17-25

26. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Investments, by Bodie, Ariff, da Silva Rosa, Kane & Marcus Slides prepared by Harminder Singh StageSales Growth Start-upRapid & Increasing ConsolidationStable MaturitySlowing Relative DeclineMinimal or Negative Industry Life Cycles 17-26

27. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Investments, by Bodie, Ariff, da Silva Rosa, Kane & Marcus Slides prepared by Harminder Singh The Industry Life Cycle 17-27

28. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Investments, by Bodie, Ariff, da Silva Rosa, Kane & Marcus Slides prepared by Harminder Singh 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 17-28

29. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Investments, by Bodie, Ariff, da Silva Rosa, Kane & Marcus Slides prepared by Harminder Singh Industry Structure and Performance Determinants of competition: -Threat of entry -Rivalry between existing competitors -Pressure from Substitute Products -Bargaining power of buyers -Bargaining power of sellers 17-29

30. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Investments, by Bodie, Ariff, da Silva Rosa, Kane & Marcus Slides prepared by Harminder Singh Summary Trade-off between full employment and inflation Tools of macro economic policy Fiscal policy Monetary policy Business cycle Operating leverage Financial leverage 17-30