FUndamental analysis : economy ananlysis

1. CHAPTER NO: 04
FUNDAMENTAL
ANALYSIS: ECONOMY
ANALYSIS
By: Ms. Paras Channar

2. Lecture outline
 Fundamental Analysis Introduction
 Economy analysis
 Industry Analysis
 Company Analysis
 Forecasting Techniques

3. Fundamental analysis
introduction
 An investor who would like to be rational and
scientific in his investment activity has to
evaluate a lot information past performance
and future expected performance of
companies, industries and the economy as a
whole before taking the investment decision.

4. ECONOMY- INDUSTRY-
COMPANY Analysis Framework
Industry
Analysis
Economy
Analysis
Company
Analysis
EIC Analysis Framework

5. ECONOMY- INDUSTRY-
COMPANY Analysis Framework
 In the era of globalization, forth circle of
international economy can be added.
 The logic of this three tier analysis is that
company performance depends not only on its
own efforts, but also on general industries and
economy factors.

6. 1: Economy Analysis
 The first step to this type of analysis includes
looking at the macroeconomic situation.
 Like: GDP
 Growth Rate
 Inflation
 Interest rates
 Government Revenue, Expenditures, and Deficit
 Exchange rates
 Productivity
 Energy Prices

7. Growth Rates of National
Income:
 Gross Domestic Product GDP, Gross National
Product GNP, Net National Product NNP different
measures, which indicate the total income, and
growth rate of the economy.
 The estimate growth rate of the economy would
be a pointer towards the prosperity of the
economy, which typically passes from different
phases called business cycle, consist of phases;
 Depression Phase
 Recovery Phase
 Boom Phase
 Recession Phase

8. Inflation:
 Higher the inflation rate upset business plan, lead
to different cost, lower the demand for product.
 Inflation is measured in both terms, wholesale
prices through wholesale prices index WPI, and
consumer price index CPI, show result on weekly
and monthly basis.
 Types of inflation:
 Demand Pull: arise when economy is trying to spend
beyond the capacity to produce.
 Cost Push: arise when their increase in nominal
wages and in the prices of non wage inputs such as
raw material and energy.

9. Interest Rates:
 The low interest rate stimulates investment by
making credit available easily and cheaply, it
increase the companies profitability and
demand for product.
 Interest rate direct and immediate affect on
currency market, when a country rise the
interest rate, its currency will strengthen in
relation to others currencies around the world.

10. Government Revenue, expenditure
and deficit
 Expenditure by the government stimulates the
economy by creating jobs and generating
demand. However, when government
expenditure exceeds its revenue, there occurs
a deficit. This deficits is known as budget
deficit.

11. Exchange Rates
 The performance and profitability if industries and
companies that are major importers and exporters
are considerably affected by the exchange rates
of rupee against major currencies of the world.
 Exchange rates of the rupee are influenced by the
balance of trade deficit, the balance of payments
deficit and also the foreign exchange reserves of
the country.
 The excess the imports over exports is called
balanced of trade deficit.
 If deficit increase there is possibility that the rupee
may depreciate in value.

12. 2: Industry Analysis
 Industry wide factors such as
 demand and supply gap in the industry.
 The emergence of substitute product.
 Changes in government policy relating to the industry
etc,
 These factors only affecting companies belonging to a
specific industry.

13. 3: Company Analysis
 Company wide factors such as
 The age if plant.
 The quality of management
 Brand image of its product.
 Its labor management relations
These factors are likely to make a company’s
performance quite different from that of its competitors
in the same industry.

14. Economic Forecasting
 Analysis of historical performance of the economy,
by forecasting of national income, the investor are
future oriented, expecting future performance of
overall economy and its various segments.
 Economic forecasting is the process of making
predictions about the economy. Forecasts can be
carried out at a high level of aggregation—for
example for GDP, inflation,unemployment or
the fiscal deficit—or at a more disaggregated
level, for specific sectors of the economy or even
specific firms.

15. Purpose
 Forecasts are used for a variety of purposes.
Governments and businesses use economic
forecasts to help them determine
their strategy, multi-year plans, and budgets
for the upcoming year. Stock market analysts
use forecasts to help them determine the
proper valuation of a company and its stock.

16. Forecasting Techniques
 Anticipatory Survey.
 Barometric or Indicator Approach
 Econometric Model Building
 Opportunistic Model Building

17. a) Anticipatory Surveys:
 Anticipatory Survey are the surveys of intentions
of people in government, business, trade and
industry regarding their construction activities,
plants, machinery expenditures, level of inventory,
etc. such surveys may also include the future
plans of consumers with regard to their spending
on durables and non durables. Based on the
result of these survey, the analyst can form his
own forecast of the future state of the economy.
The greatest shortcoming of the anticipatory
survey is that there is no guarantee that the
intentions survey will certainly materialize. The
survey is valid when intention translated into
action.

18. b) Barometric or Indicator
Approach
 This approach to economic forecasting,
various type of indicators are studied to find
out how the economy is likely to perform in the
future.
 Leading Indicators: are those time series data
that reach their high points (Peaks) or their low
Points (Trough) in advance.
 Coincidental Indicators: reach their peaks and
troughs at approximately the same time as the
economy.
 Lagging Indicators: reach their turning points
after the economy has already reached its own

19. c) Econometric Model Building:
 This technique makes use of Econometrics, which
is a discipline that applies mathematical and
statistical techniques to economic theory. The
analyst is forced to define clearly and precisely
the interrelationships between the economic
variables. The accuracy of the forecast derived
from the technique would depend on the
validation of the assumptions made by analyst
regarding economic interrelationships and quality
of input data. Vast amount of data are required to
be collected and process for the solution of model.
This may cause delay in making the result
avaibale.

20. d) Opportunistic Model Building:
 This technique also known as GNP Model building or
sectoral analysis. Initially, an analyst estimates the
total income or GNP for the forecast period. This initial
estimate takes into consideration the prevailing
economic environment such as existing tax rates,
Interest rates, rate of inflation and other economic and
fiscal policies of the government. After this initial
forecast is arrived at, the analyst now begins building
up a forecast of the GNP figure by estimating the level
of various components of GNP. For this he collects the
figures of consumption expenditure, gross private
domestic investment, government purchase of goods
and services and net profits. Final he add up all
figures to reach at GNP Forecast.

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22. “THE END”