Chapter 3

CHAPTER 3
Macroeconomic and Industry

Analysis
INVESTMENTS | BODIE, KANE, MARCUS

McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
17-2
Fundamental Analysis
• A firm’s value comes from its
earnings prospects, which are
determined by:
– The global economic environment
– Economic factors affecting the
firm’s industry
– The position of the firm within its
industry

17-3
The Global Economy

• Stock markets around the world
responded in unison to the financial
crisis of 2008.
• Performance in countries and regions
can be highly variable.
• It is harder for businesses to succeed in
a contracting economy than in an
expanding one.

17-4
The Global Economy

• Political risk:
– The global environment may
present much greater risks than
normally found in U.S.-based
investments.
• Exchange rate risk:
– Changes the prices of imports and
exports.

17-5
Table 17.1 Economic Performance

17-6
The Domestic Macroeconomy

• Stock prices rise with earnings.
• P/E ratios are normally in the range of 12-
25.
• The first step in forecasting the
performance of the broad market is to
assess the status of the economy as a
whole.

17-7
Figure 17.2 S&P 500 Index versus Earnings

Per Share

17-8
The Domestic Macroeconomy:

Key Variables
• Gross domestic product
• Unemployment rates
• Inflation
• Interest rates
• Budget deficit
• Consumer sentiment

17-9
Demand and Supply Shocks
• Demand shock - an • Supply shock - an

event that affects event that influences
demand for goods production capacity or
and services in the production costs
economy

17-10
Demand-side Policy
• Fiscal policy – the government’s spending
and taxing actions
• Monetary policy – manipulation of the

money supply

17-11
Fiscal Policy
• Most direct way to stimulate or slow

the economy
• Formulation of fiscal policy is often a

slow, cumbersome political process

17-12
Fiscal Policy
• To summarize the net effect of fiscal
policy, look at the budget surplus or
deficit.
• Deficit stimulates the economy
because:
– it increases the demand for goods
(via spending) by more than it
reduces the demand for goods (via
taxes)
17-13
Monetary Policy
• Manipulation of the money supply to
influence economic activity.
• Increasing the money supply lowers
interest rates and stimulates the
economy.
• Less immediate effect than fiscal policy
• Tools of monetary policy include open
market operations, discount rate,
reserve requirements.
17-14
Supply-Side Policies
• Goal: To create an environment in
which workers and owners of capital
have the maximum incentive and
ability to produce and develop goods.
• Supply-siders focus on how tax policy

can be used to improve incentives to
work and invest.

17-15
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.

17-16
The Business Cycle

Cyclical Industries Defensive Industries
• Above-average sensitivity • Little sensitivity to the
to the state of the business cycle
economy. • Examples include food
• Examples include producers and
producers of consumer processors,
durables (e.g. autos) and pharmaceutical firms, and
capital goods (i.e. goods public utilities
used by other firms to • Low betas
produce their own
products.)
• High betas
17-17
Economic Indicators
• Leading indicators tend to rise and fall
in advance of the economy.
• Coincident indicators move with the
market.
• Lagging indicators change subsequent
to market movements.

17-18
Figure 17.4 Indexes of Leading,

Coincident, and Lagging Indicators

17-19
Table 17.4 Useful Economic Indicators

17-20
Economic Calendar
• Many sources, such as The Wall Street
Journal and Yahoo! Finance, publish the
public announcement dates of various
economic statistics.

17-21
Figure 17.5 Economic Calendar at Yahoo!

17-22
Industry Analysis
• It is unusual for a firm in a troubled
industry to perform well.
• Economic performance can vary

widely across industries.

17-23
Figure 17.6 Return on Equity, 2009

17-24
Figure 17.7 Industry Stock Price Performance,

2009

25
Industry Stock Price Performance, 2020
YTD returns (%) by sector

35.9 35.6
11.2
3.5
-1.3 -3.8 -5.7 -8.75 -11.5 -12.8 -16.2
Energy
Materials
Real Estate
Health Care
Consumer Staples
Financials
Utilities
Consumer Discretionary
Communication
Industrials
Information Technology

17-26
Defining an Industry
• North American Industry

Classification System, or NAICS
codes
• Firms with the same four-digit NAICS

codes are commonly taken to be in
the same industry.

17-27
Table 17.5 Examples of NAICS Industry Codes

17-28
Sensitivity to the Business Cycle
1. Sensitivity of sales:
• Three factors
• Necessities vs.
determine discretionary goods
how sensitive • Items that are not
a firm’s sensitive to income
earnings are levels (such as tobacco
to the and movies) vs. items
business that are, (such as
cycle. machine tools, steel,
autos)
17-29
Figure 17.9 Industry Cyclicality

30
IMF and WB: lower global growth forecasts
Global economic prospects 2020–2021 of IMF and WB

IMF WB
% YoY % YoY
World growth prospects 2018 2019 (updated as (updated as
June) June)
2020 2021 2020 2021
World 3.6 2.9 -4.9 5.4 -5.2 4.2
Developed economies 2.2 1.7 -8.0 4.8 -7.0 3.9
US 2.9 2.3 -8.0 4.5 -6.1 4.0
EU 1.9 1.3 -10.2 6.0 -9.1 4.5
Japan 0.3 0.7 -5.8 2.4 -6.1 2.5
South Korea 2.7 2.0 -2.1 3.0 N/A N/A
Developing economies 4.5 3.7 -3.0 5.9 -2.5 4.6
China 6.7 6.1 1.0 8.2 1.0 6.9
India 6.1 4.2 -4.5 6.0 -3.2 3.1
ASEAN-5 5.3 4.9 -2.0 6.2 N/A N/A
Vietnam 7.1 7.0 2.7 7.0 2.8 6.8
Thailand 4.2 2.4 -7.7 5.0 -5.0 4.1
Indonesia 5.2 5.0 -0.3 6.1 0.0 4.8
Philippines 6.3 6.0 -3.6 6.8 -1.9 6.2
Malaysia 4.7 4.3 -3.8 6.3 -3.1 6.9

17-31
2. Operating • Firms with low operating

leverage : leverage (less fixed assets)
the split are less sensitive to
between business conditions.
fixed and • Firms with high operating
variable leverage (more fixed
costs assets) are more sensitive
to the business cycle.

17-32
Table 17.6 Operating Leverage of Firms A and B

Throughout the Business Cycle

33
Degree of operating leverage

34
Degree of operating leverage

17-35
3. Financial • Interest is a fixed cost

leverage: that increases the
the use of sensitivity of profits to
borrowing the business cycle.

36
Figure 17.10 A Stylized Depiction of the

Business Cycle

37
Sector Rotation
• Portfolio is shifted into industries or
sectors that should outperform,
according to the stage of the business
cycle.
• Peaks – natural resource extraction
firms
• Contraction – defensive industries
such as pharmaceuticals and food

38
Sector Rotation
• Trough – capital goods industries
• Expansion – cyclical industries such as

consumer durables

39
Figure 17.11 Sector Rotation

40

What we learn from Covid-19 shock is:
FOCUS VIETNAM
How long to find the bottom and recover?
and to recover the before-crisis level?
S&P500 returns Days to recover the most recent peak
Source: Bloomberg Source: Bloomberg
❑ COVID-19 caused a sharp fall: in the first 23 days S&P 500 ❑ How long to come back the before-crisis level?
went down 34% ▪ 1929: 6,528 days
❑ US depression 1929: -44.6% in the first 42 days ▪ 2007: 1,428 days
❑ But how the index moved in the next 250 days is more ▪ 2020: how long? 180 days!
concerned!
41 |
INVESTMENTSMirae
| BODIE, KANE, MARCUS
Asset Securities (Vietnam) Research
42

Annual Returns: Vietnam and its peers
FOCUS VIETNAM
❑Vietnam: ❑Vietnam:
▪ Strong hit when Covid-19 came during Fed-March. ▪ Investment opportunities: room for up-side
▪ Modest recovery from April-August. ▪ Attractive P/E valuation.
Equity returns across countries in 2020 YTD (%) Equity returns across countries in 2020 YTD (%)
Vietnam Indonesia Philippines 11.6
7.1 6.1
Thailand Japan China
115
105
-3.3 -4.0 -4.3
95
-8.5 -9.8
85 -15.1 -16.2
75
-24.7
65
55
Jan Feb Mar Apr May Jun Jul Aug
VN-Index annual returns (%) Market valuation by countries (x)
56.8 37.1
P/E P/B
48.0 40
3.8
35
29.1 3.4
23.3 28.6
17.7 22.0 14.8
30
3.0
8.1 6.1 7.7 25
23.2 21.8 21.0 19.6 2.6
20 17.4
14.7 2.2
15 12.6
-2.0 10.6 1.8
-9.3 -8.5 10 1.4
-27.5 5 1.0
0 0.6
-66.0
2007 08 09 10 11 12 13 14 15 16 17 18 19 2020
43 | Source: Bloomberg, Mirae Asset Vietnam. Update: 29 Aug., 2020

YTD INVESTMENTSMirae
44

1H20 earnings review: FOCUS VIETNAM
❑ 924 listed firms, excluding banks and insurance firms

❑ Financial services show signals of recovery?
1H20 earnings review by industry
Industry (IBC) 1Q net revenue 2Q net revenue 1H net revenue 1Q NPATMI 2Q NPATMI 1H NPATMI
Automobiles and Parts -11.1% -10.5% -10.8% 31.0% 70.5% 51.3%
Basic Resources 3.3% 3.4% 3.4% 24.4% 8.4% 15.1%
Chemicals -13.1% -14.3% -13.7% -41.0% 12.2% -11.0%
Construction and Materials -10.0% -12.9% -11.6% -11.2% -4.0% -7.0%
Consumer Products and Services -3.0% -17.5% -10.3% -17.1% -44.8% -31.2%
Energy -8.5% -42.8% -27.3% -310.9% -137.8% -231.8%
Financial Services 16.9% 27.3% 22.5% -118.0% 162.3% 8.1%
Food, Beverage and Tobacco 9.5% 11.3% 10.4% -30.3% 9.9% -11.0%
Health Care 10.7% -15.2% -2.9% 16.5% -6.0% 4.6%
Industrial Goods and Services -5.1% -10.8% -8.1% -17.7% -48.7% -34.7%
Media -28.2% -32.8% -31.3% -52.5% 36.4% -12.7%
Real Estate -18.5% -32.1% -26.9% 20.3% -31.3% -13.1%
Retail 15.2% -1.5% 6.6% 3.0% -24.2% -11.1%
Technology 6.8% -4.1% 1.0% 17.5% 15.7% 16.5%
Telecommunications 22.9% 16.2% 19.4% 248.3% -81.2% 6.1%
Travel and Leisure -32.0% -69.3% -50.0% -209.7% -382.3% -256.4%
Utilities -0.9% -18.4% -10.2% -41.3% -12.8% -27.0%
Total -4.4% -18.2% -11.9% -41.4% -27.7% -34.0%
45 |
Source: Fiinpro, Mirae Asset Vietnam. Update: 29 Aug., 2020 INVESTMENTSMirae
1H20 earnings review: Breakdown impact FOCUS VIETNAM
1H20 net revenue growth (YoY) breakdown by industry 1H20 NPATMI (YoY) breakdown by industry
46 | Source: Fiinpro, Mirae Asset Vietnam. Update: 29 Aug., 2020

INVESTMENTSMirae
1H20 earnings review FOCUS VIETNAM
❑ Data included 307 on HOSE, 354 on HNX, and 263 on UPCOM.

❑ HSX:
▪ Less adverse effect
▪ Higher chance to recover
1H20 earnings review (YoY) Earnings review by quarter (YoY)
1H net revenue growth 1H gross profit growth 1H NPATMI growth

-11.9% -21.3% -34.0% 1Q net revenue 2Q net revenue
0% growth growth 1Q NPATMI growth 1Q NPATMI growth
-4.4% -18.2% -27.7%
-2.8% -41.4%
5% 4.2%
-5.7%
-7.0% 0.7%
-10%
-12.6% -5% -4.8% -5.7%
-13.7% -5.4%
-20% -15%
-21.0%
-19.2% -18.1%
-22.7%
-28.3% -25% -21.0%
-30% -29.2%
-35%
-36.7%
-40%
-45%
-50%
-55% -54.0%
Total HSX HNX UPCOM Total HSX HNX UPCOM

-58.6%
-60% -65% -64.1%
47 |
Source: Fiinpro, Mirae Asset Vietnam. Update: 29 Aug., 2020 INVESTMENTSMirae
1H20 earnings review FOCUS VIETNAM
❑ A 4-year cycle of EPS growth: 2008, 2012, 2016, and 2020!

❑ Investment opportunity: a boom of EPS growth in the following year?
Margins narrowing EPS decreasing: a 4-year cycle
Net revenue Gross margin (RHS) Operating margin (RHS)

(YoY) Net revenue growth EBIT growth EPS growth
120%
(VND/share) (%)
650 21
100%
600
19 80%
550
17 60%
500
450 15 40%
400 13 20%
350
11 0%
300
9 -20%
250
200 7 -40%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 1H20 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 1H20
48 |
Source: Bloomberg, Mirae Asset Vietnam. Update: 29 Aug., 2020 INVESTMENTSMirae
49

50

51

52
Industry Life Cycles

Stage Sales Growth
• Start-up • Rapid and
• Consolidation increasing
• Maturity • Stable
• Relative Decline • Slowing
• Minimal or
negative

53
Figure 17.12 The Industry Life Cycle

17-54
Which Life Cycle Stage is Most

Attractive?
• Quote from Peter Lynch in One Up on Wall
Street:
" Many people prefer to invest in a high-growth

industry, where there’s a lot of sound and
fury. Not me. I prefer to invest in a low-
growth industry. . . .

17-55
Which Life Cycle Stage is Most

Attractive?
…In a low-growth industry, especially one

that’s boring and upsets people [such as
funeral homes or the oil-drum retrieval
business], there’s no problem with
competition. You don’t have to protect your
flanks from potential rivals . . . and this gives
you the leeway to continue to grow.”
Peter Lynch in One Up on Wall Street INVESTMENTS | BODIE, KANE, MARCUS

17-56
Industry Structure and Performance:

Five Determinants of Competition
1. Threat of entry
2. Rivalry between existing competitors
3. Pressure from substitute products
4. Bargaining power of buyers
5. Bargaining power of suppliers

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Chapter 3 - Macro and Industry Analysis

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Macroeconomic and Industry

INVESTMENTS | BODIE, KANE, MARCUS

INVESTMENTS | BODIE, KANE, MARCUS

The Global Economy

INVESTMENTS | BODIE, KANE, MARCUS

The Global Economy

INVESTMENTS | BODIE, KANE, MARCUS

Table 17.1 Economic Performance

INVESTMENTS | BODIE, KANE, MARCUS

The Domestic Macroeconomy

INVESTMENTS | BODIE, KANE, MARCUS

Figure 17.2 S&P 500 Index versus Earnings

INVESTMENTS | BODIE, KANE, MARCUS

The Domestic Macroeconomy:

INVESTMENTS | BODIE, KANE, MARCUS

Demand and Supply Shocks

• Demand shock - an • Supply shock - an

INVESTMENTS | BODIE, KANE, MARCUS

• Monetary policy – manipulation of the

INVESTMENTS | BODIE, KANE, MARCUS

• Most direct way to stimulate or slow

• Formulation of fiscal policy is often a

INVESTMENTS | BODIE, KANE, MARCUS

• Supply-siders focus on how tax policy

INVESTMENTS | BODIE, KANE, MARCUS

INVESTMENTS | BODIE, KANE, MARCUS

The Business Cycle

INVESTMENTS | BODIE, KANE, MARCUS

Figure 17.4 Indexes of Leading,

INVESTMENTS | BODIE, KANE, MARCUS

Table 17.4 Useful Economic Indicators

INVESTMENTS | BODIE, KANE, MARCUS

INVESTMENTS | BODIE, KANE, MARCUS

Figure 17.5 Economic Calendar at Yahoo!

INVESTMENTS | BODIE, KANE, MARCUS

• Economic performance can vary

INVESTMENTS | BODIE, KANE, MARCUS

Figure 17.6 Return on Equity, 2009

INVESTMENTS | BODIE, KANE, MARCUS

Figure 17.7 Industry Stock Price Performance,

INVESTMENTS | BODIE, KANE, MARCUS

Industry Stock Price Performance, 2020

YTD returns (%) by sector

-1.3 -3.8 -5.7 -8.75 -11.5 -12.8 -16.2

INVESTMENTS | BODIE, KANE, MARCUS

• North American Industry

• Firms with the same four-digit NAICS

INVESTMENTS | BODIE, KANE, MARCUS

Table 17.5 Examples of NAICS Industry Codes

INVESTMENTS | BODIE, KANE, MARCUS

Sensitivity to the Business Cycle

Figure 17.9 Industry Cyclicality

INVESTMENTS | BODIE, KANE, MARCUS

IMF and WB: lower global growth forecasts

Global economic prospects 2020–2021 of IMF and WB

INVESTMENTS | BODIE, KANE, MARCUS

Sensitivity to the Business Cycle

2. Operating • Firms with low operating

INVESTMENTS | BODIE, KANE, MARCUS

Table 17.6 Operating Leverage of Firms A and B

INVESTMENTS | BODIE, KANE, MARCUS

Degree of operating leverage