FINANCIAL FORECASTING

Wiljadi Tan
November 2020
Hotel Ibis Tamarin – Wahid Hasyim
Topics to be Covered

Session 1
▪ Introduction
▪ Forecasting Stage (input - process - output)

Session 2 and Session 3

▪ Input (Macro, Micro, Internal Company Analysis)
▪ Process (Forecasting Methodology)
▪ Output (Valuation, Analysis, Decision Making)

Session 4 and Session 5

▪ Case Study
FINANCIAL FORECASTING
Session 1 – Introduction
Session 1

Introduction

What is to be Forecasted:
Numbers vs. BI rate, GDP growth, inflation, IHSG, forex, etc.
Values

Weather Rainy, cloudy, windy, natural disasters (e.g. Tsunami), etc.

Future-ability Health, luck, success, match, etc.

Politics Conducive, chaos, etc.

Others Product planning, supply chain management, transport planning, etc.

Session 1
Introduction
Pros
Empirical evidence shows that security prices do
indeed follow particular trends that can be
predicted with a fair degree of accuracy
Note: investors and academics disagree on how
well the model works
Cons
Random Walk Theory
▪ Security prices are completely unpredictable,
especially in the short term. Both fundamental and
technical analyses are a waste of time. The theory holds
that it is impossible to outperform the market by
choosing the ‘correct’ securities; it is only possible to do
so by taking on additional risk
Efficient Market Hypothesis (“EMH”)
▪ A controversial model on how markets work, which states
that the market efficiently deals with all information on
a given security and reflects it in the price
immediately. Technical analysis, fundamental analysis,
and any speculative investing based on them are useless
▪ Weak efficiency: technical analysis is ineffective
▪ Semi-strong efficiency: fundamental analysis is ineffective
▪ Strong efficiency: insider information is reflected in
security prices
Session 1

Introduction

Forecasting:
1, 4, 9, 16, 25, …, …
19, 16, 13, 10, …, …
69, 70, 72, 75, …, …

1, 3, 4, 6, 8, 9, 10
6, 18, 24, 36, 48, …, …

1, 5, 12, 29, 49, …, ...

FINANCIAL FORECASTING
Session 2 and 3 - Forecasting Stage
Sessions 2 and 3

Forecasting Stages

Reports
Output
Inputs Calculations and
Results
Summaries

Input Information:
1. Macro Economic data Macro Economic Data:
2. Micro Economy (Industry) Model and Data
3. Internal company data 1. Real sector (GDP, inflation, etc.),
2. Financial sector (foreign exchange,
interest rates, etc.),
3. Fiscal and monetary policies and the
relationship of both sectors (IS/LM)
Sessions 2 and 3

Forecasting Stages:
Technology
The External Environment

Culture Social
New Entrants

Customers
Customers
Suppliers

Substitutes

Economics Politics
Sessions 2 and 3

Forecasting Stages

Pendapatan Pasar untuk faktor- Pembayaran faktor

faktor produksi

Tabungan swasta
Pasar keuangan

Rumah tangga Defisit pemerintah Perusahaan

Pemerintah
Pajak

Investasi
Pembelian pemerintah

Konsumsi Penerimaan perusahaan

Pasar untuk barang
dan jasa
Sessions 2 and 3

Forecasting Stages:
IS/LM Curve
Sessions 2 and 3

Forecasting Stages

Micro Economic Model and Data:

▪ Porter’s Five Forces

▪ Business Life Cycle

▪ Market Structure, etc.

Sessions 2 and 3

Forecasting Stages:
Porter’s Five Forces Analysis

New Entrants
▪ Times and cost of entry
▪ Regulation
▪ Technology and knowledge
▪ Economies of scale
▪ Number and
▪ Number of size of
Suppliers

size of customers

Buyers
suppliers ▪ Number of competitors ▪ Differences
▪ Uniqueness ▪ Quality differences between
of services ▪ Industry growth competitors
▪ Cost of ▪ Price
changing sensitivity

▪ Substitute performance (price and

availability
▪ Cost of changes

Substitutes
Sessions 2 and 3

Forecasting Stages:
Business Cycle

Start-Up Growth Maturity Decline

Sessions 2 and 3

Forecasting Stages:
Conceptual Framework for
Investment requirements
Business Analysis

People,
Markets and
Culture and
Opportunities
Incentives

Structure and Products and

Governance Services

Infrastructure
and Customers
Technology

Operations

Risk Profile
Sessions 2 and 3

Forecasting Stages:
Market Structure

Number and Product Condition of Availability of Examples

Size of Characteristics Entrance to the Market
Company Market Condition
Perfect Big Number of All Companies Companies are Information is Stock Market,
Competition Small Manufacturing fee to enter or available for all Food Market etc
Companies the Standard leave the market the companies
Products
Monopoly Big Number of Differentiated No boundaries to There are some The market of
Competition Small Product enter the market limitations Cosmetics,
Companies Perfumes,
Shoes, Clothes
Oligopoly Small Number of Standard or Companies have Limitation of Car
Companies, Differentiated issues to enter information Manufacturing,
Existence of Big Product the market Tobacco Industry
Firms etc
Monopoly One Company Unique Product Solid Boundaries Limitation of Energy
without to enter the information Company, Water
Substitution market Station, Phone
Company
Sessions 2 and 3

Forecasting Stages:

Internal Company Data

▪ Value Chain

▪ Corporate Finance

▪ Historical Performance
Sessions 2 and 3

Forecasting Stages:
Value Chain
Sessions 2 and 3

Forecasting Stages

Growth and Profitability

Product Market Strategies Financial Market Policies

Operating Investment Financing

Dividend Policy
Management Management Decisions

Managing
Managing Managing
working Managing
revenue liabilities
capital payout
and and equity
and fixed
expenses
assets
Sessions 2 and 3

Forecasting Stages

Process Forecasting Method

▪ Causal Relationship
- Linear Regression
- Multiple Regression
▪ Time Series - Past
- Trend Analysis
o Point-to-point
o Average point-to-point
- Moving Average
- Exponential Smoothing
- Seasonality
- Box Jenkins
▪ Qualitative - Judgmental
- Case History
- Executives Judgment
- Committees
- Artificial Intelligence
- Best Guess
Sessions 2 and 3

Forecasting Stages

IN REGRESSION WE TRUST
Orley Ashenfelter Wine Quality = 12.145 + 0.00117 winter rainfall + 0.0614 average growing season
temperature - 0.00386 harvest rainfall
E-Harmony Variable: compatibility
Causal: 29 emotional, social, and cognitive attributes
Harrah’s Casino “Paint Point”

Garry Kasparov vs. 700,000 GM

Deep Blue IBM
Computer

Farecast.com Lowest current fare

Zillow.com Real estate sites on the net

Inrix’s “Dust
Network” Half million data speed to predict traffic jams

Amazon.com Referrals
FINANCIAL FORECASTING
Session 4 and 5 - Case Study