Fundamental Analysis2

8/4/2019 Fundamental Analysis2

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Fundamental AnalysisFundamental Analysis deals with the macro level analysisof the economy by which the prospective ness of theeconomy is analyzed.

Before investing into any stock market Institutionalinvestors are interested in the present and futuregrowth prospects of that market.Therefore fundamental analysis or economic analysis

serves a great purpose to the investors.


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Relationship betweenEconomic Fundamentals and

Stock Market

BullishStock Market

Strong EconomicFundamentals

More FIIs


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1.Growth Rate-defined as the total market value of allfinal goods and services produced within the country in agiven period of time. Whereas Gross National Product isthe market value of final products and earning from

abroad.

0

1

2

3

4

56

7

8

9

1996-9

7

1997-9

8

1998-9

9

1999-0

0

2000-0

1

2001-0

2

2002-0

3

2003-0

4

2004-0

5

2005-0

6

Year

GDPGrowthR

ate

Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Growth Rate 7.8 4.8 6.5 6.1 4.4 5.8 4.0 8.5 7.5 8.1 9.0 9.5
http://en.wikipedia.org/wiki/Market_valuehttp://en.wikipedia.org/wiki/Market_value


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2. Per Capital Income-Per capita income means how mucheach individual receives, in monetary terms, of the yearly

income that is generated in their country throughproductive activities. That is what each citizen wouldreceive if the yearly income generated by a country fromits productive activities were divided equally amongeveryone.

3. FII and FDI- Foreign institutional investment refersinvestment into financial securities like equities, mutualfunds, derivatives, bonds. Whereas FDI refers toinvestment in real assets like plant, machinery etc.


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4. Inflation Rate-the inflation rate is a measure of inflation, therate of increase of a the price of basic goods which iscalculated by some price index (usually some form of

consumer price index). Equivalently, the rate of decrease inthe purchasing power of money. A high inflation willdiscourage the foreign investment whereas a low inflationencourage the foreign investment.

Inflation Stock Market
http://en.wikipedia.org/wiki/Price_indexhttp://en.wikipedia.org/wiki/Consumer_price_indexhttp://en.wikipedia.org/wiki/Purchasing_powerhttp://en.wikipedia.org/wiki/Purchasing_powerhttp://en.wikipedia.org/wiki/Consumer_price_indexhttp://en.wikipedia.org/wiki/Price_index


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5. Interest Rate- The interest rate which isoffered by banks over their deposits is alsomajor determinate of foreign investment. A

high interest rate will encourage investment

in Debt Market, whereas a low interest ratewill en

courage the foreign investment in

Capital Market.

Interest rate Stock Market


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-40.00

-20.00

0.00

20.00

40.00

60.00

80.00

May-96

May-97

May-98

May-99

May-00

May-01

May-02

May-03

May-04

May-05

May-06

Year

Return

6. Capital Market Analysis- Movement of Sensex

May-96 May-97 May-98 May-99 May-00 May-01 May-02

3709 3724 3673 3835 4434 3623 3136

May-03 May-04 May-05 May-06 May-07 May-08

3172 4760 6666 10679 14451 17000


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Comparative Analysis of

Difference Stock MarketsMarket/Index March 2006 Dec. 2006South Korea

KOSPI10.86 12.21

Thailand SET 9.97 9.40Indonesia JCI 21.68 25.10

Malaysia KLCI 15.33 17.35

Taiwan TWSE 14.62 20.85BSE SENSEX 20.92 22.76

NSE S & P

NIFTY20.26 21.26


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Scenario


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A short CaseABN Mutual Fund (FII) invested $100 million inSensex portfolio on Jan,1, 2007. On that daySensex closed at 14,000 and exchange rate wasRe.45/1$. On 31 May, 2007 ABN Mutual Fund

withdrew its total investment. On that daySensex closed at 15000 points and exchange ratewas Re. 40/$1. During the investment period ABNMutual Fund got Rs. 10cr as dividends. Calculatethe relative rate of return which ABN MutualFund got from Indian Stock market?


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omparat ve na ys s oDifferent Stock

Exchanges*Country In local Currency In $ termDifference

Brazil 21.7 3311.3

India 4.7 138.3 Thailand 13.4 18.6 5.2 China 52.1 55.8 3.7 Malaysia 23.8 25.4 1.6 Pakistan 36.1 37.0

0.9 Singapore 17.4 17.1 0.3 Taiwan 13.0 12.3

0.7 Argentina 6.5 5.0

1.5 Indonesia 17.7 15.9 1.8


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Growth Prospectus of Stock Returns

S & P 500 Hang Sang Kospi Sensex SSE Com. Index Nikkei 227

Op 1478 15532 943 3972 1535 8340

Cl 1523 27812 1897 20287 5261 15307

CAGR for the Period 2000-2007

CAGR 0.4% 8% 10% 26% 19% 12%

CAGR isn't the actual return in reality. It's an imaginary number that describes therate at which an investment would have grown if it grew at a steady rate. You canthink of CAGR as a way to smooth out the returns.


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Returnwealthperiod-of-beginning

wealthperiod-of-beginningwealthperiod-of-endReturn

--

0V

1V

Initial value of investment

Final value of investment

0

01

V

VVr

Return is

Or as a percentage 1000

01

V

VVr


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Return Example 1 An initial investment is made of $10,000. One year

later, the value of the investment has risen to$12,500. The return on the investment is

Example 2 An investment initially costs $5,000. Three months

later, the investment is sold for $6,000. Thereturn on the investment per three months is

%2510010000

1000012500 r

%201005000

50006000

r


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Return and Risk

The risk inherent in holding a security is thevariability, or the uncertainty, of its return

Factors that affect risk are

1. Maturity Underlying factors have more chance to change

over a longer horizon

Maturity value of the security may be eroded by

inflation or currency fluctuations Increased chance of the issuer defaulting the

longer is the time horizon


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Return and Risk

2. Creditworthiness The governments of the developed countries

are all judged as safe since they have no

history of default in the payment of theirliabilities Some other countries have defaulted in the

recent past Corporations vary even more in their

creditworthiness. Eg.market exists for highreturn, high risk corporate bonds that arejudged very likely to default


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Return and Risk 3. Priority

Bond holders have the first claim on the assetsof a liquidated firm

Bond holders are also able to put thecorporation into bankruptcy if it defaults onpayment

4. Liquidity

Liquidity relates to how easy it is to sell anasset

The existence of a highly developed and activesecondary market raises liquidity

A security's risk is raised if it is lackingliquidity


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Risk and Return

5. Underlying Activities The economic activities of the issuer of the

security can affect how risky it is

Stock in small firms and in firms operatingin high-technology sectors are on averagemore risky than those of large firms intraditional sectors


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Return and Risk

The greater the risk of a security, thehigher is expected return

Return is the compensation that has to bepaid to induce investors to accept risk

Success in investing is about balancing riskand return to achieve an optimal

combination The risk always remains because of

unpredictable variability in the returns onassets

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Fundamental Analysis2