Lesson 5:

Economic and
industry analysis
Economic analysis

• Studying the underlying conditions of the economy and the impact it might have on share
price behaviour
• Economic performance has significant impact on the performance and profitability of most
companies

Business cycle
• Series of alternating contractions and expansions of the economy that reflect economic
activity over time
• Two measures
• GDP – market value of all goods and services produced in a country
• Industrial production – total output produced by industrial companies
• GDP and industrial production move up and down with the business cycle
Economic analysis

• Study of the underlying state of the economy and the potential impact on share price
behaviour
Economic analysis

Key economic factors

Government fiscal policy

• Taxes
• Government spending
• Debt management

Monetary policy
• Money supply
• Interest rates

Other factors
• Inflation
• Consumer spending
• Business investment
• Foreign trade and exchange rates
Industry analysis

To analyse an industry, consider the following…

• Its makeup and basic characteristics
• Key economic and operating variables that drive performance
• Its outlook

Step 1 – Establish the competitive position of a particular industry relative to other industries

Step 2 – Identify companies within the industry that have strong ‘potential’
• Market position, pricing leadership, economies of scale, etc.
Industry analysis

Key issues

• What is the nature of the industry?

• Is the industry regulated?
• What is the role of labour?
• How important are technological developments?
• Which economic forces are especially important to the industry?
• What are important financial and operating conditions?
Industry analysis

The growth cycle

• an industry’s growth cycle reflects its activity over time

Initial development
• Industry is new
• High risk

Rapid expansion
• Product acceptance is growing
• Investors become interested

Mature growth
• Expansion comes from wider economic growth

Stability or decline
• Demand for the industry’s products is falling
• Companies are leaving the industry