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Fundamental Analysis

Sony Thomas

Economic Analysis

EIC Analysis
Fundamental Analysis
Approach to Fundamental Analysis:
Domestic and global economic analysis
Industry analysis
Company analysis
Why use the top-down approach?

Global Economic Considerations


Performance in countries and regions is highly
variable
Political risk
Exchange rate risk
Sales
Profits
Stock returns

Economic Performance in Selected Emerging


Markets

Change in Real Exchange Rate: U.S. Dollar


versus Major Currencies, 19992006

Key Economic Variables

Gross domestic product


Unemployment rates
Interest rates & inflation
Budget deficit
Consumer sentiment

Demand Shocks
Demand shock - an event that affects demand
for goods and services in the economy

Supply Shocks
Supply shock - an event that influences production
capacity or production costs

Federal Government Policy


Fiscal Policy: Demand-side management
Tax rate cut
Increases in government spending
Liquidity Management

Federal Government Policy Continued


Fiscal Policy: Supply-side management
Incentive or marginal taxes
National policies on education, infrastructure,
and research are important elements

Business Cycles
The transition points across cycles are called
peaks and troughs
A peak is the transition from the end of an
expansion to the start of a contraction
A trough occurs at the bottom of a
recession just as the economy enters a
recovery

Inflation, Interest Rates, and


Security Prices
Inflation and interest rates
generally move together
investors are not good at predicting inflation

Inflation rates and bond prices


negative relationship
more effect on longer term bonds

Inflation, Interest rates and stock prices


not direct and not consistent
effect varies over time

US Economic Calendar

Indian Economic Scenario

Economic Survey - Yearly


Union Budget Yearly
Credit Policy or Monetary Policy Quarterly
Inflation Data - Monthly

Industry Analysis

Industry Analysis
Sensitivity to business cycles
Factors affecting sensitivity of earnings to
business cycles:

Sensitivity of sales of the firms product to


the business cycles
Operating leverage
Financial leverage

Industry life cycles

Defining an Industry in US
North American Industry Classification
System, or NAICS codes
Codes assigned to group firms for statistical
analysis

Examples of NAICS Industry Codes

Defining an Industry in India


National Industrial Classification 1987

Agriculture & Mining


Manufacturing
Electricity
Construction
Trade & Hotel
Transport & Telecom
Business Services
Community Services
Misc

A Stylized Depiction of the Business Cycle

Sector Rotation
Portfolio is adjusted by selecting companies
that should perform well for the stage of
the business cycle
Peaks natural resource extraction firms
Contraction defensive industries such as
pharmaceuticals and food
Trough capital goods industries
Expansion cyclical industries such as
consumer durables

Sector Rotation

The Industry Life Cycle

Industry Structure and Performance

Threat of entry
Rivalry between existing competitors
Pressure from substitute products
Bargaining power of buyers
Bargaining power of suppliers