Security Analysis & Portfolio       Management     Fundamental Analysis             ISB&M              1
Fundamental AnalysisWhat is Fundamental Analysis?Investment Process is consisting of two stages:  Asset Allocation  Securi...
Fundamental Analysis Approaches to Equity Analysis              •   Study and then selecting the specific securities.Activ...
Fundamental Analysis• A fundamental analyst compares the fair value of the  share with its market price.• On a long run th...
Fundamental AnalysisTop-down Approach                                  Economic Analysis• Broader framework of fundamental...
Economic AnalysisEconomic Analysis• The first and foremost in the top-down approach.• Deals in analysis of forces operatin...
Economic AnalysisThe Global Economy• The Top-down analysis begin with Global Economy• The International Competition• Profi...
Economic AnalysisChanging Global Economic Order• The US economy has been the principal engine of world economy.• In the la...
Economic AnalysisCentral Government Policy• Demand side policies    – Influence the demand for goods and services• Supply ...
Economic AnalysisMonetary Policy• Concerned with manipulation of money supply• Other main plank of demand-side economics.•...
Economic Analysis•   Bank rate is the rate at which RBI provides Finances.•   A reduction in bank rate signals an expansio...
Economic AnalysisMacro Economic Analysis Macro economy is the overall economic environment in which all firms  operative....
Economic AnalysisForecasting the GDP Growth Rate•   Estimate the most likely growth rates of 3 sectors of the economy, Agr...
Economic AnalysisSavings and Investments•   The demand for corporate securities has an important bearing on stock price.• ...
Economic AnalysisMoney Supply•   M1 = Currency with public + demand deposits with bank + other deposits with RBI.•   M3 = ...
Economic AnalysisForeign Investment•   Foreign Direct Investments and Foreign Portfolio Investment.Infrastructural Facilit...
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Industry analysis tkn

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Analysis of Industry

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Industry analysis tkn

  1. 1. Security Analysis & Portfolio Management Fundamental Analysis ISB&M 1
  2. 2. Fundamental AnalysisWhat is Fundamental Analysis?Investment Process is consisting of two stages: Asset Allocation Security Selection Process of Security Selection (i) • Valuation (ii) • Analysis of different Securities ISB&M 2
  3. 3. Fundamental Analysis Approaches to Equity Analysis • Study and then selecting the specific securities.Active or • Identify and pick undervalued equity. Primary • Attempt to beat the market.Approach • Identify high growth shares.Passive or • Buy & Hold ApproachSecondary • Index Fund ApproachApproach ISB&M 3
  4. 4. Fundamental Analysis• A fundamental analyst compares the fair value of the share with its market price.• On a long run the market price tends to move towards its fair or intrinsic value• Dividends and market price of a share are determined by the performance of the company.• The performance and success depend upon broader industry, economic, political and social factors.• Small investors can start with the company analysis.• Detailed financial analysis may be made to find out the long-term growth prospects.Bottom-up Approach• Financial analysis of financial statements• Find out the long term growth prospects• Find out expected earnings in future• Under valued shares would provide superior returns. ISB&M 4
  5. 5. Fundamental AnalysisTop-down Approach Economic Analysis• Broader framework of fundamental Business Cycle, Monetary analysis is known as Top-down approach Policy, Fiscal• Attempts to study the economic Policy, Inflation, Interest Rate Structure, GDP scenario, Industry position and the Growth, Unemployment, For company expectations. eign Trades, Etc.,• On the basis positive signals by economic Industry Analysis analysis the investor moves to specific Demand-supply company analysis. Relationship, Industry Structure and• At the national level focuses affection on Competition, Cost the economic data to assess the present Structure, Quality and future growth of the economy Control Standards etc., Company Analysis Expected Earnings, Dividends, Fun ds position, Accounting policies, Risk Returns, Etc., ISB&M 5
  6. 6. Economic AnalysisEconomic Analysis• The first and foremost in the top-down approach.• Deals in analysis of forces operating in the overall economy.• Overall economic activities affect corporate profits and investors expectations.• It plays an important role in investment decision.• Examine the state of International economic conditions.Procedure for Fundamental Analysis Understanding of the macro-economic environment and developments Analyzing the prospects of the industry to which the firm belongs Assessing the projected performance of the company and the intrinsic value of its shares. ISB&M 6
  7. 7. Economic AnalysisThe Global Economy• The Top-down analysis begin with Global Economy• The International Competition• Profitability of its overseas investments• Economic performance varies widely across countries• Political and economic factors.• Exchange RatesGlobal Economic Sense• US, Eurozone, Japan and china account for about 72% of global GDP• The Global real GDP growth, which was about 3% in 1970 has risen to about 4%.• The global real long-term interest rate is currently about 3%• In the most developing countries, the volatility of economic growth has decreased over the last thirty years. ISB&M 7
  8. 8. Economic AnalysisChanging Global Economic Order• The US economy has been the principal engine of world economy.• In the late 1990s it accounted for nearly one-half of the incremental growth of the global economy.• US still dominates the world economic scene• Any developments in US like employment figures, housing starts, interest rates and current account deficits are keenly wanted.• In recent years China’s contribution to the incremental growth matches or slightly outpaces US.Global Savings Glut• Ben Bernanke – The US Federal Reserve Board Chairman.• China currently has a savings rate of 50% of GDP.• Wake of Global savings glut, interest rates have fallen across the globe.A Strong Global Equilibrium• Capital flows from rich countries to poor countries ISB&M 8
  9. 9. Economic AnalysisCentral Government Policy• Demand side policies – Influence the demand for goods and services• Supply side policies – Influence the supply for goods and services.Fiscal Policy• Concerned with the spending and tax initiatives.• Most direct tool to stimulate or dampen the economy.• Increase in govt spending stimulates the demand for goods and services.• Decrease in govt spending deflates the demand for goods and services.• Decrease in tax rate increases the consumption of goods and services• Increase in tax rates decreases the consumption of goods and services.• The deficit or surplus in governmental budget summarizes the net effect of fiscal policy.• A large deficit may stimulate the economy and large surplus may dampen the economy. ISB&M 9
  10. 10. Economic AnalysisMonetary Policy• Concerned with manipulation of money supply• Other main plank of demand-side economics.• It affects economy mainly through its impact on interest rates.• An expansionary policy lowers short-term interest rates.• Lower interest rates stimulates the investment and consumption demand.• Higher money supply raises the price level without any enduring effect on economic activity.• A contractionary monetary policy increases short-term interest rates.• Stimulating the economy in the short term and containing inflation in the long run.• Easy to formulate and implement but impacts the economy In a roundabout way.• Open market operation involves buying or selling of govt secs by RBI.• When RBI buys increases money supply• When RBI sells money supply diminishes. Continues……. ISB&M 10
  11. 11. Economic Analysis• Bank rate is the rate at which RBI provides Finances.• A reduction in bank rate signals an expansionary monetary policy.• A increase in bank rate is a contractionary monetary policy.• Reserve requirement in India are CRR, SLR.• RBI may resort to direct credit controlsSupply Side Policies• Focus on creating an environment in which the productive potential of the economy is increased• Pays attention to tax policy from a different angle.• Look at the effect of taxes on incentives to work and invest.• They believe that lower tax rates stimulates economic growth. ISB&M 11
  12. 12. Economic AnalysisMacro Economic Analysis Macro economy is the overall economic environment in which all firms operative.Key variables used to describe the state of the macro economy are:Gross Domestic Product (GDP)• Market value of goods and services produced in an economy during a period.• Growth rate of GDP is the most important indicator of the performance of the economy.• Avg. growth rate during 1950 to 1980 was around 3.5% in real terms.• GDP rate raises to 5% in the decade of 1980.• During 1995-2003 avg. was around 6%.• From 2004 onwards it is slightly above 8%.• India’s Savings rate is around 35%• Structural changes – FDI, FII ISB&M 12
  13. 13. Economic AnalysisForecasting the GDP Growth Rate• Estimate the most likely growth rates of 3 sectors of the economy, Agriculture, Industry and service• Calculate the weighted arithmetic average of three rates, the weight of a sector being its share in the GDPIndustrial Growth Rate• Publicly listed companies play a major role in the industrial sector• Only minor role in the service sector and agricultural sector.• Stock market analysts focus more on industrial sector.• Look at overall industrial growth rate as well as growth rate of different industries.Agriculture and Monsoons• It account for about a quarter of the Indian economy.• It has important linkages direct and indirect with industry.• A spell of good monsoons imparts dynamism to the industrial sector. ISB&M 13
  14. 14. Economic AnalysisSavings and Investments• The demand for corporate securities has an important bearing on stock price.• Level of investment in the economy• Proportion of that investment is directed toward the capital market.• Level of investment = Domestic Savings + Inflow of foreign capital – investment made abroad.• Current savings rate in India is around 34%.• How the savings are allocated over various instruments.Government Budget and Deficit• Provides information on revenues, expenditures and deficit or surplus.• Revenue comes from Indirect taxes and Direct Taxes.• Bulk goes towards administration, interest payment, defense, subsidies and public investment.• The excess of expenditure over revenue represents the deficit. ISB&M 14
  15. 15. Economic AnalysisMoney Supply• M1 = Currency with public + demand deposits with bank + other deposits with RBI.• M3 = M1 + time deposits with banks.• For money supply we usually refer to M3Price Level and InflationInterest Rate• A rise in interest rates depresses corporate profitability• Leads to an increase In the discount rate applied by equity investors.• A fall in interest rates improve corporate profitability.Balance of Payments, Forex Reserves and Exchange Rates• Balance of trade - Imports Minus Exports• If rupee weakens it hurts importers but benefits exporters and vice versa. ISB&M 15
  16. 16. Economic AnalysisForeign Investment• Foreign Direct Investments and Foreign Portfolio Investment.Infrastructural Facilities and Arrangements• Electric power.• Transport and Communication System.• Industrial Raw Material• Financial Support for Fixed Assets and Working Capital.SentimentsEconomics Variables and their impact on Stock PricesIndian Economic Reforms - Discuss ISB&M 16
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