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Chapter 6 - Macroeconomic and Industry Analysis

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25 views39 pages

Chapter 6 - Macroeconomic and Industry Analysis

Uploaded by

ktthuy6102003
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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You are on page 1/ 39

CHAPTER 6

Macroeconomic
and Industry
Analysis
Fundamental Analysis
A firm’s value comes from its earnings
prospects, which are determined by:
– The global economic environment
– Economic factors affecting the firm’s
industry
– The position of the firm within its
industry

17-2
The Global Economy
• Stock markets around the world responded
in unison to the financial crisis of 2008.
• Performance in countries and regions can be
highly variable.
• It is harder for businesses to succeed in a
contracting economy than in an expanding
one.

17-3
The Global Economy
• Political risk:
– The global environment may present
much greater risks than normally
found in single country based
investments.
• Exchange rate risk:
– Changes the prices of imports and
exports.

17-4
Economic Performance

17-5
The Domestic Macroeconomy
• Stock prices rise with earnings.
• P/E ratios are normally in the range of
12-25.
• The first step in forecasting the
performance of the broad market is to
assess the status of the economy as a
whole.

17-6
S&P 500 Index versus Earnings Per Share

17-7
The Domestic Macroeconomy:
Key Variables
• Gross domestic product
• Unemployment rates
• Inflation
• Interest rates
• Budget deficit
• Consumer sentiment

17-8
Demand and Supply Shocks
• Demand shock - an • Supply shock - an event
event that affects that influences
demand for goods and production capacity or
services in the production costs
economy

17-9
Demand-side Policy
• Fiscal policy – the government’s spending
and taxing actions
• Monetary policy – manipulation of the
money supply

17-10
Fiscal Policy
• Most direct way to stimulate or slow the
economy
• Formulation of fiscal policy is often a
slow, cumbersome political process

17-11
Fiscal Policy
• To summarize the net effect of fiscal policy,
look at the budget surplus or deficit.
• Deficit stimulates the economy because:
– it increases the demand for goods (via
spending) by more than it reduces the
demand for goods (via taxes)

17-12
Monetary Policy
• Manipulation of the money supply to
influence economic activity.
• Increasing the money supply lowers
interest rates and stimulates the economy.
• Less immediate effect than fiscal policy
• Tools of monetary policy include open
market operations, discount rate, reserve
requirements.

17-13
Monetary Policy
• Not all countries implement monetary policy by
targeting interest rates.
• Singapore’s monetary policy is determined by its
central bank, the Monetary Authority of
Singapore (MAS).
• MAS manages the exchange rate of the
Singapore dollar against a trade-weighted basket
of currencies of Singapore's major trading
partners and competitors.

17-14
Supply-Side Policies
• Goal: To create an environment in which
workers and owners of capital have the
maximum incentive and ability to produce
and develop goods.
• Supply-siders focus on how tax policy can
be used to improve incentives to work and
invest.

17-15
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.

17-16
The Business Cycle
Cyclical Industries Defensive Industries
• Above-average sensitivity to • Little sensitivity to the
the state of the economy. business cycle
• Examples include producers • Examples include food
of consumer durables (e.g. producers and processors,
autos) and capital goods (i.e. pharmaceutical firms, and
goods used by other firms to public utilities
produce their own • Low betas
products.)
• High betas

17-17
Economic Indicators
• Leading indicators tend to rise and fall in
advance of the economy.
• Coincident indicators move with the
market.
• Lagging indicators change subsequent to
market movements.

17-18
Indexes of Leading,
Coincident, and Lagging Indicators

17-19
Useful Economic Indicators

17-20
Economic Calendar
Many sources, such as The Wall Street
Journal and Yahoo! Finance, publish
the public announcement dates of
various economic statistics.

17-21
Economic Calendar at Yahoo!

17-22
Industry Analysis
• It is unusual for a firm in a troubled
industry to perform well.
• Economic performance can vary widely
across industries.

17-23
Return on Equity, 2009

17-24
Industry Stock Price Performance,
2009

17-25
Sensitivity to the Business Cycle
1. Sensitivity of sales:
• Necessities vs.
discretionary goods
THREE
factors determine how sensitive a • Items that are not sensitive
firm’s earnings are to the business to income levels (such as
cycle.
tobacco and movies) vs.
items that are (such as
machine tools, steel, autos)

17-26
Industry Cyclicality

17-27
Sensitivity to the Business Cycle

2. Operating • Firms with low operating


leverage : the leverage (less fixed assets) are
less sensitive to business
split between conditions.
fixed and • Firms with high operating
variable costs leverage (more fixed assets)
are more sensitive to the
business cycle.

17-28
Operating Leverage of Firms A and B Throughout
the Business Cycle

17-29
Sensitivity to the Business Cycle

3. Financial • Interest is a fixed cost that


leverage: the increases the sensitivity of
use of profits to the business
borrowing cycle.

17-30
A Stylized Depiction of the Business Cycle

17-31
Sector Rotation
• Portfolio is shifted into industries or
sectors that should outperform,
according to the stage of the business
cycle.
• Peaks – natural resource extraction
firms
• Contraction – defensive industries
such as pharmaceuticals and food

17-32
Sector Rotation
• Trough – capital goods industries
• Expansion – cyclical industries such as
consumer durables

17-33
Sector Rotation

17-34
Industry Life Cycles
Stage Sales Growth
• Start-up • Rapid and increasing
• Consolidation • Stable
• Maturity • Slowing
• Relative Decline • Minimal or negative

17-35
The Industry Life Cycle

17-36
Which Life Cycle Stage is Most Attractive?
• Quote from Peter Lynch in One Up on Wall
Street:
" Many people prefer to invest in a high-growth
industry, where there’s a lot of sound and fury.
Not me. I prefer to invest in a low-growth
industry. . . .

17-37
Which Life Cycle Stage is Most Attractive?

…In a low-growth industry, especially one that’s


boring and upsets people [such as funeral homes
or the oil-drum retrieval business], there’s no
problem with competition. You don’t have to
protect your flanks from potential rivals . . . and
this gives you the leeway to continue to grow.”

Peter Lynch in One Up on Wall Street

17-38
Industry Structure and Performance:
Five Determinants of Competition
1. Threat of entry
2. Rivalry between existing competitors
3. Pressure from substitute products
4. Bargaining power of buyers
5. Bargaining power of suppliers

17-39

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