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Fundamental analysis lecture mba finace
 

Fundamental analysis lecture mba finace

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    Fundamental analysis lecture mba finace Fundamental analysis lecture mba finace Presentation Transcript

    • FUNDAMENTAL ANALYSIS INVESTMENT ANALYSIS COURSE
    • Fundamental vs. Technical
        • Fundamental = Qualitative analysis of a company’s fundamental drivers driven by factual numbers and industry analysis
        • Technical = Quantitative (Charts) The quantitative performance of a company’s security
    • WHAT IS FUNDAMENTAL ANALYSIS?
      • Fundamental analysis is the examination of the underlying forces that affect the well being of the economy, industry groups, and companies.
      • The most common way that fundamental analysis is done in is in three steps:
    • fundamental analysis is done in is in three steps
      • 1. Economic Analysis:-
      • The first step to this type of analysis includes looking at the macroeconomic situation.
      • GDP
      • growth rates
      • Inflation
      • interest rates
      • exchange rates,
      • productivity
      • energy prices.
      • Analyze the state of the world economy
      • Pick certain asset classes that will outperform others
      • Pick geographic locations
      • Narrow to industry analysis
    • 2. Industry Analysis
      • The SECOND step taken in FUNDAMENTAL analysis is looking at the industry as a whole.
      • INDUSTRY ANALYSIS LOOKS AT
      • total sales
      • price levels
      • competition and their effects
      • Foreign competition
      • any entrances or exits from the industry
    • 3. Company Analysis:-
      • Last in this process of studying the fundamentals includes looking at the company individually
      • This includes looking at
      • unit sales
      • prices
      • new products
      • earnings and
      • Any chance of debt or equity occurring
    • Economic analysis
      • The economy is like the tide and the various industry groups and individual companies are like boats
      • When the economy expands, most industry groups and companies benefit and grow.
      • When the economy declines, most sectors and companies usually suffer
      • Many economists link economic expansion and contraction to the level of interest rates.
      • Interest rates are seen as a leading indicator for the stock market as well.
    • GROSS NATIONAL PRODUCT (GDP)
      • GDP is one of the core indicators of the current condition of a country's economy.
      • It measures the monetary value of all final goods and services produced over a specified period (one year) within the boundaries of a country.
      • Gross Domestic Product (GDP) is the broadest measure of economic activity; however it is only released quarterly
    • GROSS NATIONAL PRODUCT (GNP)
      • The broad components of GDP are:
      • consumption
      • Investment
      • net exports
      • government purchases
      • and inventories.
    • PERSONAL CONSUMPTION
      • Personal consumption expenditures ( PCE ) represent roughly 2/3 of GDP. By monitoring retail sales, policy makers are able to make an assessment of the likely growth of PCE for the current and future quarters.
    • INFLATION
      • Is a general increase in prices in an economy and consequent fall in the purchasing power of money.
      • Economists distinguish between two types of inflation.
      • Demand-pull inflation arises when the economy is trying to spend beyond its capacity to produce.
      • Cost-push inflation is driven by increases in nominal wages and in the prices of non-wage inputs such as raw materials and energy.
    • INTEREST RATES
      • If there is an uncertainty in the market in terms of interest rates
      • then any developments regarding interest rates will usually have a direct and immediate effect on the currency market.
      • Generally, when a country raises its interest rates, it’s currency will strengthen in relation to other currencies around the world
    • INTEREST RATES
      • WHEN INTEREST RATES ARE HIGHER global assets will be shifted internationally by their owners to gain a higher return on their investments
      • Interest rate hikes are usually not good news for a nation’s internal stock markets because many investors within the country will withdraw money from a country's stock market to take advantage of the higher / more secure rate of return.
    • Consumer Price Index (CPI)
      • CPI IS An index designed to measure the change in price of a fixed market basket of goods and services.
      • The market basket of goods and services is representative of the purchases of a typical urban consumer.
      • The index is intended to measure pure price change only; attempts are made to remove changes in price resulting from changes in quality.
    • CONSUMER PRICE INDEX
      • The rate of change of the CPI is one of the key measures of inflation for the U.S. economy.
      • Acceleration or deceleration of inflation may signal that a change in monetary policy may be appropriate
    • Industrial Production/Capacity Utilization INDEX
      • An index designed to measure changes in the level of output in the industrial sector of the economy.
      • The index is grouped by both products (consumer goods, business equipment, intermediate goods, and materials) and industry (manufacturing, mining, and utilities
    • Industrial Production/Capacity Utilization
      • The industrial sector of the economy represents only about 20% of GDP, because changes in GDP are heavily concentrated in the industrial sector, changes in this index provide
      • useful information on the current growth of GDP.
      • information on the overall level of resource utilization in the economy which may in turn provide information on the likely future course of inflation.
      • Greater utilization will tend to increase inflation
    • Business Sales and Inventories
      • Total current-dollar sales and inventories for the manufacturing, wholesale, and retail sectors of the economy
      • The rate of inventory accumulation plays a key role
      • in determining the current pace of economic growth
      • provides useful clues about the future pace of growth as well.
      • For example,
      • if inventories are accumulating at a rapid pace, such that inventory sales ratios are rising,
      • it may portend a slowing of growth in the near future as firms cut production to bring inventories back into line with sales.
      • Vice versa, if inventories are growing slowly or actually falling, it may signal a future pickup in production.
    • S&P 500 Stock Index
      • S&p 500 is one of several indices designed to measure changes in price of a broad array of stocks.
      • The stock market is one measure of the current value of the nation's stock of capital and is often viewed as a barometer of business and consumer confidence regarding the future.
      • A high and/or rising stock market may signal robust growth of business investment and consumer spending in the near future
      • while a low and/or falling stock market may signal sluggish spending. For this reason, the S&P 500 is 1 component of the Index of Leading Indicators.
    • EMPLOYMENT
      • The unemployment rate represents the percentage of employable individuals who are actively looking for work within the county.
      • Unemployment has been a persistent problem in industrial economies during economic slowdowns over the last 200 years and is therefore used as a primary indicator of the health of an economy.
      • In most cases, statistics are based on the number of people claiming unemployment benefits. A certain level of unemployment is considered to be unavoidable due to
      • (1) structural changes in an economy
      • (2) workers who are voluntary switching jobs.
      • This unavoidable level of unemployment is called the natural level of unemployment.
    • INTERNATIONAL TRADE
      • The trade balance portrays the net difference (over a period of time) between the imports and exports of a nation.
      • When a nation imports more than it exports, the trade balance shows a deficit.
      • Although this is for the most part considered unfavorable, a deficit in and of itself is not necessarily a bad thing.
    • GLOBAL ECONOMIC ANALYSIS
      • OVER VIEW
      • Growth in the WORLD economy has resumed after the most virulent recession in decades.
      • Recession caused by world financial meltdown triggered by the subprime loan problem
    • World economic recovery continued
      • The recovery is driven by
      • exceptionally strong demand-supporting policy measures
      • public interventions in financial markets
      • a strong pick-up in demand in the THE INDUSTRIAL WORLD
      • a positive contribution from inventory adjustment
    • World economic recovery
      • unemployment is set to continue to rise well into 2010 and to fall only modestly in 2011 from its peak of over 9%
    • Table 1.1. A modest recovery from widespread recession OECD area, unless noted otherwise Average 2009 2010 2011 1997-2006 2007 2008 2009 2010 2011 q4 q4 q4 Per cent Real GDP growth¹ 2.8 2.7 0.6 -3.5 1.9 2.5 -1.0 2.1 2.8 United States 3.2 2.1 0.4 -2.5 2.5 2.8 -0.3 2.5 3.0 Euro Area 2.3 2.7 0.5 -4.0 0.9 1.7 -2.1 1.2 2.0 Japan 1.1 2.3 -0.7 -5.3 1.8 2.0 -1.1 1.4 2.2 Output gap² 0.1 1.8 0.3 -4.6 -4.1 -3.2 Unemployment rate³ 6.5 5.6 5.9 8.2 9.0 8.8 8.8 9.1 8.6 Inflation⁴ 3.0 2.3 3.2 0.5 1.3 1.2 0.7 1.2 1.2 Fiscal balance⁵ -2.0 -1.3 -3.5 -8.2 -8.3 -7.6 Memorandum items World trade growth 7.1 7.3 3.0 -12.5 6.0 7.7 World real GDP growth⁶ 3.8 4.6 2.2 -1.7 3.4 3.7
      • Year-on-year increase; last three columns show the increase over a year earlier.
      • Per cent of potential GDP.
      • Per cent of labor force.
      • Private consumption deflator. Year-on-year increase; last 3 columns show the increase over a year earlier
      • Per cent of GDP.
      • OECD countries plus Brazil, Russia, India and China only, representing 81% of world GDP purchasing power parities. Fixed weights based on 2005 GDP and purchasing power parities
      • Source: OECD Economic Outlook 86 database
    • World economic out look
      • Upward and downward risks are broadly balanced
      • The uncertainty surrounding this projection is very high, but the risks are broadly balanced
      • Financial conditions could continue to improve faster and more extensively than assumed, setting in motion a positive feedback loop:
    • Upward and downward risks are broadly balanced
      • better economic prospects and stronger business investment driven by better financial conditions reducing concerns about the health of financial institutions
      • in turn improving financial conditions, and thereby growth, still further.
      • On the other hand, financial conditions could worsen abruptly, for example, if a large financial institution were to get into difficulty
    • UNEMPLOYMENT
      • Unemployment also represents a negative risk to the outlook.
      • as its continued increase may depress household expenditure and negatively affect financial institutions to a greater extent than anticipated.
    • Economic policy requirements are…
      • Monetary policy. Given continued slack, close-to-zero interest rates are appropriate in most OECD countries until the latter half of 2010 and in Japan to beyond the projection period
      • scale back monetary policy stimulus as the recovery progresses…
      • the process of normalization of interest rates must start thereafter and progress at a pace which will depend inter alia on the withdrawal of other demand-supporting measures
      • Given low levels of inflation, policy interest rates would only need to reach neutrality by the time that upward pressures on inflation emerge.
    • Fiscal policy.
      • Currently all western world fiscal policy is that of stimulating the economy
      • policy stimulus measures already decided need to be implemented fully.
      • However, as the recovery gathers strength, the focus needs to shift from supporting aggregate demand to consolidating budgets.
    • Financial policy
      • In order to reduce uncertainty, and thus facilitate recapitalization.
      • pressure must be maintained on banks to write down the value of problem assets on their balance sheets .
      • to sell such assets to public or private asset management companies
    • Structural policy.
      • As the recovery progresses, crisis-driven emergency measures of subsidizing production ( e.g. in the auto industry) or subsidizing jobs (e.g. short time working schemes) need to be scaled back
      • as their continuation would undermine the productive capacity of the economy
    • Zambian economy
      • ZAMBIA
      • Area: 752,614 sq km
      • Population Estimate: 12.1 mn
      • Independence: 1964
      • GDP: US $14,757.6 mn: 2008
      • GDP per Capita: US $1,22
    • Developments in Real GDP up 2009
      • Economy has experienced strong growth averaging at least 5.9% over the last five years and 6.2% over the last three years
      • Growth driven by the private sector supported by sound economic policies.
      • Economy benefited from favourable external sector developments:
      • Debt relief in 2006
      • And High copper prices until the Q3 of 2008.
    • Table 1: Major Macroeconomic Indicators, 2004-2009 2004 2005 2006 2007 2008 2009* Real GDP growth (%) 5.4 5.3 6.4 6.2 6.0 6.3 GDP per capita (US $) 515.1 654.9 908.1 1,024.1 1,229.8 902.2 Inflation end-period (%) 17.5 15.9 8.2 8.9 16.6 11.5 Average selling exchange rate(ZK/ US $) 4,670.94 3,454.71 4,142.75 3,845.77 3, 756.01 5,157.65 Comm. banks weighted lending base rate (%) 29.8 27.4 21.6 18.3 20.8 23.2 Comm. banks ASR (%) 5.6 6.1 6.1 4.8 4.8 4.7 II Developments in Real GDP
    • Zambian economy
      • Despite global economic crisis, economy expected to
      • grow by 6.3% in 2009 from the 6.0% in 2008.
      • This is due to robust growth in mining, agriculture and construction sectors.
      • Mining growing by 21.4%
      • Construction by 15.5%
      • Agriculture by 7.1%
    • Mining sector
      • Mining expected to post robust growth of 13% in 2009 (2.4% in 2008) largely due to:
      • Improved copper prices;
      • Conducive business environment;
      • Commencement of production at Lumwana Copper
      • Mine
      • 4.And Investments into operations at KCM, MCM and
      • Chambishi Copper Smelter that increased production
      • capacity
    • Agriculture
      • Agriculture - strong recovery of 5.2% in 2009 (1.2% in 2008):
      • Maize output rose to 1.8 million metric tons from 1.5million metric tons, the highest production in 10 years.
      • Notable contribution from small-scale farmers supported by the Farmer Input Support Programme and marketing services
    • construction
      • Construction:
      • Increased public & commercial infrastructure investments;
      • Continued high demand for housing; and
      • Expanded domestic production of cement.
    • Manufacturing and tourism
      • However, projected slow down in manufacturing and a contraction in tourism
      • Manufacturing:
      • increase in the cost of imported raw materials mainly
      • due to the depreciation of the Kwacha (first half of
      • the year);
      • decline in export demand; and
      • continued stiff competition from cheaper imports
      • 2.Tourism:
      • Fall in the number of foreign tourists, in view of the
      • global financial crisis.
    • Inflation and Monetary Developments
      • Inflation declined to 11.5% in Nov. 2009 from 16.6% in Dec.2008.
      • Higher inflation in 2008 due to:
      • Higher international fuel and food prices ;
      • Depreciation of the Kwacha;
      • Higher transport costs; and
      • Electricity load-shedding.
      • Fall in inflation in 2009 due to:
      • decline in food prices;
      • Relatively strengthening of exchange rate; and
      • Stability in domestic fuel prices and transport costs.
      • Lending rates trending downwards ( 23.1% in Oct. 2009)
    • External Sector Performance
      • Current Account deficit projected to narrow to US $483.9 mn in 2009 (US $1,049.5 mn in 2008);
      • Metal exports projected to increase by 9.6% (As at Oct 2009: 557,750mt (Oct 2008: 463,280.52 mt);
      • Gross International Reserves of US $1,887.1 mn on 30th Nov 2009 equivalent t to 5 months of import cover. (First time in last thirty-eight years)
    • Financial and Equity Market Performance
      • Financial Sector has Remained Resilient:
      • Overall financial condition of the banking sector satisfactory with adequate capital.
      • However, NPLs increased to12.9% at Oct 2009 (Dec. 2008: 7.2%)
      • Five new commercial banks granted licenses in 2009 to operate.
      • First National Bank Zambia Ltd
      • United Bank for Africa Zambia Ltd
      • Ecobank Zambia Ltd
      • International Commercial Bank Zambia Ltd
      • Access Bank Zambia Ltd
      • Performance of NBFI sector also satisfactory
      • Performance of LuSE All-share index showing recovery
    • 2010 and Medium Term Economic Outlook
      • Inflation projected to fall to single digit levels;
      • The economy to continue growing above 6.0%;
      • Interest rates are expected to continue trending downwards;
      • Satisfactory liquidity as more forex flows in due to the
      • increase in earnings from the NTEs and mining sector revenues