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CHAPTER 17

Investments

Macroeconomic

and Industry

AnalysisSlides by

Richard D. Johnson

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reservedMcGraw-Hill/Irwin

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Fundamental Analysis

Approach to Fundamental Analysis:

Domestic and global economic analysis

Industry analysis

Company analysis

Why use the top-down approach?

Framework of Analysis

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Performance in countries and regions ishighly variable.

Political risk

Exchange rate risk Sales

Profits

Stock returns

Global Economic Considerations

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Table 17.1 Economic Performance in SelectedEmerging Markets

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Figure 17.1 Change in Real Exchange Rate:Dollar versus Major Currencies, 1999 2005

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Gross domestic productUnemployment rates

Interest rates & inflation

Budget deficit

Consumer sentiment

Key Economic Variables

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Figure 17.2 S&P 500 Index versus EarningsPer Share Estimate

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Demand shock- an event that affectsdemand for goods and services in theeconomy.

Tax rate cut

Increases in government spending

Demand Shocks

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Supply shock- an event that influencesproduction capacity or production costs.

Commodity price changes

Educational level of economic participants

Supply Shocks

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Fiscal Policy- government spendingand taxing actions.

Direct policy

Slowly implemented

Federal Government Policy

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Monetary Policy- manipulation of themoney supply to influence economicactivity.

Initial & feedback effects

Tools of monetary policy

Open market operations

Discount rate

Reserve requirements

Supply Side Policies

Federal Government Policy (contd)

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Sensitivity to business cyclesFactors affecting sensitivity of earnings to

business cycles: Sensitivity of sales of the firms product to

the business cycles Operating leverage Financial leverage

Industry life cycles

Industry Analysis

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Figure 17.6 Returns on Equity, 2005

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Figure 17.7 Rate of Return, 2005

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Figure 17.8 ROE of Money Center Banks

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Figure 17.9 Industry Cyclicality

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Table 17.6 Operating Leverage of Firms A andB Throughout the Business Cycle

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Figure 17.10 A stylized Depiction of theBusiness Cycle

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Stage Sales GrowthStart-up Rapid & Increasing

Consolidation Stable

Maturity SlowingRelative Decline Minimal or Negative

Industry Life Cycles

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Figure 17.11 The Industry Life Cycle

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Sector Rotation

Portfolio is adjusted by selectingcompanies that should perform well forthe stage of the business cycle

Peaks natural resource extraction firms

Contraction defensive industries such aspharmaceuticals and food

Trough capital goods industries

Expansion cyclical industries such asconsumer durables