Fundamental Analysis

Fundamental Analysis deals with the macro level analysis of the economy by which the prospective ness of the economy is analyzed. Before investing into any stock market Institutional investors are interested in the present and future growth prospects of that market. Therefore fundamental analysis or economic analysis serves a great purpose to the investors.

Relationship between Economic Fundamentals and Stock Market

Strong Economic Fundamentals More FIIs

Bullish Stock Market

1. Growth Rate-defined as the total market value of all

final goods and services produced within the country in a given period of time. Whereas Gross National Product is the market value of final products and earning from

abroad.
Year Growth Rate 1996 7.8 1997 4.8 1998 6.5 1999 6.1 2000 4.4 2001 5.8 2002 4.0 2003 8.5 2004 7.5 2005 8.1 2006 2007 9.0 9.5

9 8 7 6 5 4 3 2 1 0

GDP Growth Rate

97 98 99 00 01 02 03 04 05 06 96- 1997- 1998- 1999- 2000- 2001- 2002- 2003- 2004- 200519
Year

2. Per Capital Income-Per capita income means how much each individual receives, in monetary terms, of the yearly income that is generated in their country through productive activities. That is what each citizen would receive if the yearly income generated by a country from its productive activities were divided equally among everyone. 3. FII and FDI- Foreign institutional investment refers investment into financial securities like equities, mutual funds, derivatives, bonds. Whereas FDI refers to investment in real assets like plant, machinery etc.

4. Inflation Rate-the inflation rate is a measure of inflation, the rate of increase of a the price of basic goods which is calculated by some price index (usually some form of consumer price index). Equivalently, the rate of decrease in the purchasing power of money. A high inflation will discourage the foreign investment whereas a low inflation encourage the foreign investment.

Inflation

Stock Market

5. Interest Rate- The interest rate which is offered by banks over their deposits is also major determinate of foreign investment. A high interest rate will encourage investment in Debt Market, whereas a low interest rate will encourage the foreign investment in Capital Market.

Interest rate

Stock Market

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

80.00 60.00
Return

6666

10679 14451

17000

40.00 20.00 0.00 -20.00 -40.00

M M M M M M M M M M M ay ay ay ay ay ay ay ay ay ay a -9 -9 -9 -9 -0 -0 -0 -0 -0 -0 y-0 6 7 8 9 0 1 2 3 4 5 6

Year

Comparative Analysis of Difference Stock Markets

Market/Index South Korea KOSPI Thailand SET Indonesia JCI Malaysia KLCI Taiwan TWSE March 2006 10.86 9.97 21.68 15.33 14.62 Dec. 2006 12.21 9.40 25.10 17.35 20.85

BSE SENSEX
NSE S & NIFTY P

20.92
20.26

22.76
21.26

P/E Ratio and Future Scenario

A short Case
ABN Mutual Fund (FII) invested $100 million in Sensex portfolio on Jan,1, 2007. On that day Sensex closed at 14,000 and exchange rate was Re.45/1$. On 31 May, 2007 ABN Mutual Fund withdrew its total investment. On that day Sensex closed at 15000 points and exchange rate was Re. 40/$1. During the investment period ABN Mutual Fund got Rs. 10cr as dividends. Calculate the relative rate of return which ABN Mutual Fund got from Indian Stock market?

Comparative Analysis of Different Stock Exchanges*

Brazil 11.3 India 8.3 Thailand China Malaysia Pakistan 0.9 Singapore Taiwan 0.7 Argentina 1.5 Indonesia

Country Difference

In local Currency
21.7 4.7

In $ term
33 13

13.4 52.1 23.8 36.1 17.4 13.0

6.5

18.6 55.8 25.4 37.0 17.1 12.3

5.0

5.2 3.7 1.6 0.3

17.7

15.9

1.8

Growth Prospectus of Stock Returns

CAGR isn't the actual return in reality. It's an imaginary number that describes the rate at which an investment would have grown if it grew at a steady rate. You can think of CAGR as a way to smooth out the returns. S & P 500 Op Cl CAGR 1478 1523 0.4% CAGR for the Period 2000-2007 Hang Sang Kospi Sensex SSE Com. Index 15532 27812 8% 943 1897 10% 3972 20287 26% 1535 5261 19% Nikkei 227 8340 15307 12%

Return
Return end - of - period wealth -- beginning of - period wealth beginning of - period wealth -

V0

Initial value of investment Final value of investment

Return is
V V0 r 1 V0

V1

Or as a percentage

V1 V0 r 100 V0

 Example 1

Return
12500 10000 100 25% 10000

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
r

Example 2

An investment initially costs $5,000. Three months later, the investment is sold for $6,000. The return on the investment per three months is
6000 5000 r 100 20% 5000

Return and Risk

The risk inherent in holding a security is the variability, 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

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 their liabilities Some other countries have defaulted in the recent past Corporations vary even more in their creditworthiness. Eg.market exists for high return, high risk corporate bonds that are judged very likely to default

Return and Risk

3. Priority
Bond holders have the first claim on the assets of a liquidated firm Bond holders are also able to put the corporation into bankruptcy if it defaults on payment

4. Liquidity
Liquidity relates to how easy it is to sell an asset The existence of a highly developed and active secondary market raises liquidity A security's risk is raised if it is lacking liquidity

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 operating in high-technology sectors are on average more risky than those of large firms in traditional sectors

Return and Risk

The greater the risk of a security, the higher is expected return Return is the compensation that has to be paid to induce investors to accept risk Success in investing is about balancing risk and return to achieve an optimal combination The risk always remains because of unpredictable variability in the returns on assets