Contents

GROUP ASSIGNMENT ONE...................................................................................................................................1

CHAPTER TWO: Review of Regulations and Administration of Investments in Ethiopia......................................2
2.1. Definition and Nature of Regulation..........................................................................................................2
2.2. Principles of Good regulation in investment.............................................................................................3
2.3. The Need to Regulate Investment.............................................................................................................4
2.3.1. Regulation of Investment in Ethiopia.........................................................................................5

2.3.2. Constitutional Framework Investment in Ethiopia....................................................................7

2.3.3. Economic Policy of Ethiopia.......................................................................................................7

2.3.4. Areas of Investment Reserved for Domestic Investors..............................................................9

2.3.5. Sectors Open to Ethiopian Nationals.........................................................................................9

2.3.6. Sectors Open to the state........................................................................................................10

2.3.7. Investment Procedures............................................................................................................11

2.3.8. Business License......................................................................................................................12

2.3.9. Restrictions on Foreign Direct Investment...............................................................................13

2.4 Accounting entries and implications on reporting (general purpose and for tax purpose).....................13
Summary.............................................................................................................................................................15
Group Assignment Two......................................................................................................................................16
CHAPTER FIVE: FUNDAMENTAL AND TECHNICAL ANALYSIS.............................................................................17
5. Introduction....................................................................................................................................................17
5.1 Fundamental analysis...............................................................................................................................17
5.1.1 Economy analysis......................................................................................................................19

5.1.2 Industry analysis.......................................................................................................................20

5.1.3 Company analysis.....................................................................................................................22

5.2 Technical analysis.....................................................................................................................................23

Summery.............................................................................................................................................................25
Reference............................................................................................................................................................26
 GROUP ASSIGNMENT
ONE
CHAPTER 2: REVIEW OF REGULATION AND
ADMINISTRATIONOF INVESTMENT IN ETHIOPIA

1
CHAPTER TWO: Review of Regulations and Administration of Investments

in Ethiopia

2. Introduction

The review of regulations and management of investments in Ethiopia involves a thorough

evaluation of the legal structure, regulatory climate, and administrative processes governing
investments within the nation. This examination includes a detailed review of the laws,
regulations, and policies affecting both local and international investments in Ethiopia. Important
elements of this assessment encompass a review of investment legislation, licensing
prerequisites, industry-specific rules, tax benefits, and mechanisms for resolving disputes.
Having a comprehensive understanding of the regulatory environment is crucial for investors to
successfully navigate the investment landscape, adhere to legal requirements, and enhance their
investment approaches.

2.1. Definition and Nature of Regulation

Regulation is a normative standard that should be obeyed, and a violator must be forced to
comply where there is non-compliance. Investment regulation may be defined as control of the
government on investment. There are three types of regulation: market regulation; industry
regulation; and government regulation. Each type of regulation has its own advantages and
drawbacks.
Market regulation is aimed at guaranteeing efficiency, flexibility, and low costs. However,
market regulation provides uncertainty and instability for participants, notwithstanding that they
are producers, employees, or consumers. Thus, market regulation has a drawback of instability
and uncertainty because it is the market, which leads the sector.
Industry regulation may be cooperative or imposed by dominant enterprises. Industrial regulation
has the advantage to eliminate the instability for both the business organizations and the
employee. However, this could be achieved at the cost higher than necessary profits and

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inefficient allocations of a product. On top of that, there is no guarantee that the products’ quality
will be kept high.

Governmental regulation aims at fairness, non-discrimination, consumer protection and quality

maintenance. The problem with government regulation is that it may be inflexible in
guaranteeing efficient allocation. There should be governmental machineries that are necessary
to provide regulation and to monitor compliance with appropriate budgetary allocation to run
them. Thus, it is necessary to have qualified personnel in sufficient number to make
governmental regulation effectively functional. These personnel must be salaried; they need on
the job trainings and so on. The industry being regulated also needs to set up personnel and
procedures to guarantee compliance with government regulation, which involves additional
costs. Therefore, government regulation is costly.
Nowadays there is a need to regulate business due to failure of various businesses because of
incompetent management, or fraud or a mixture of both or any other reason. Thus, it is essential
to regulate the business in general and the investment in particular.

2.2. Principles of Good regulation in investment

The principles of good regulation in investment aim to create a framework that protects
investors, ensures market integrity, and promotes confidence in the financial system. Here are
key principles with specific details:

 Transparency: Regulations should ensure that investment products and services

are transparent. This means clear, accurate, and timely disclosure of information,
including risks, costs, and past performance, enabling investors to make informed
decisions.

 Proportionality: Regulatory requirements should be proportionate to the benefits

that are expected to result. They should not be excessively burdensome and
should take into account the size of the entities and the complexity of the
products.

 Accountability: Regulators should be accountable for the effectiveness and

efficiency of their actions. This includes having clear objectives, reporting on
their activities, and being subject to scrutiny.

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  Consistency: Regulation should provide certainty to market participants. This
means that rules should be stable over time and coherent with other regulations.
Cross-border consistency is also important to prevent regulatory arbitrage.

 Fairness and Integrity: The regulatory system should promote fairness in

markets, preventing fraudulent and manipulative practices and ensuring that
conflicts of interest are managed effectively.

 Responsiveness: Regulations should be flexible enough to respond to market

developments and innovations. They should allow for a timely reaction to new
risks and challenges.

 Effectiveness and Efficiency: Regulation should achieve its objectives in a cost-

effective manner without imposing unnecessary burdens on market participants.
The costs of regulation should be justified by the benefits.

 No Market Distortion: Regulations should avoid distorting market behavior and

should not hinder competition unless necessary to achieve consumer protection or
market integrity.

 Complementarity with Market Discipline: Regulation should complement and

not replace market discipline. It should support the role of the board of directors
and the use of audits, credit rating agencies, and other market-based assessments
of risk.

 Protection of Client Assets: Investment regulations should ensure that client

assets are safeguarded, including clear rules on segregation and protection in the
event.

2.3. The Need to Regulate Investment

There are several reasons why regulating investment is essential. Here are some key points
highlighting the need for investment regulation:
1. Investor Protection: One of the primary reasons for investment regulation is to protect the
rights and interests of investors. Regulations can establish safeguards against fraudulent

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activities, market manipulation, and unethical practices, ensuring that investors are treated fairly
and their investments are secure.

2. Market Stability: Investment regulation plays a crucial role in maintaining market stability.
By establishing rules and oversight mechanisms, regulators can help prevent excessive
speculation, market volatility, and systemic risks that could harm the overall economy.
3. Fair Competition: Regulations help promote fair competition in the investment sector. By
setting standards and guidelines, regulators can ensure a level playing field for all market
participants, preventing monopolistic practices and encouraging healthy competition among
investors.

4. Confidence and Trust: Well-regulated investment markets inspire confidence and trust
among investors. When investors have faith in the regulatory framework, they are more likely to
invest, which contributes to the growth and development of the economy.
5. Fairness and Efficiency: Ensuring a level playing field for all participants and promoting the
efficient allocation of resources.

6. Economic Development: Effective investment regulation supports economic development by

attracting both domestic and foreign investments. It provides a stable and predictable
environment for investors, stimulates capital inflows, and encourages long-term investments that
contribute to job creation, infrastructure development, and overall economic growth.

7. Preventing Crime: To deter and detect illegal activities like money laundering, insider
trading, and market manipulation.
8. Innovation and Growth: Proper regulation can encourage innovation and ensure that growth
is sustainable and inclusive.

9. Risk Mitigation: Regulations help mitigate risks associated with investments. By enforcing
disclosure requirements and setting prudential standards, regulators can ensure that investors
have access to accurate and transparent information, enabling them to make informed decisions
and manage risks effectively.
By implementing sound investment regulations, Ethiopia can create an environment that fosters
investor confidence, promotes sustainable economic growth, and protects the interests of all
stakeholders.

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2.3.1. Regulation of Investment in Ethiopia
Investment regulation in Ethiopia is governed by various legal frameworks and institutions, with
the aim of encouraging investment and ensuring that it contributes to the country's economic
development while protecting national interests and complying with international standards.

Key aspects of investment regulation in Ethiopia include:

 Investment Proclamation: Ethiopia has enacted investment proclamations, such

as Proclamation No. 1180/2020, to provide the legal framework for both domestic
and foreign investment. These proclamations outline the types of investments that
are encouraged, sectors reserved for domestic investors or the government, and
the conditions under which foreign investment is permitted.

 Ethiopian Investment Commission (EIC): The EIC is the primary government

institution responsible for promoting investments and facilitating the investment
process. It provides services such as investment licensing, registration, and
granting of investment incentives.

 Sector-Specific Regulations: Certain sectors have additional specific regulations,

such as banking, telecommunications, and mining, which are overseen by the
respective regulatory bodies.

 Incentives and Guarantees: Ethiopia offers various incentives to investors,

including tax holidays, custom duty exemptions, and guarantees against
expropriation.

 Investment Administration: The regulation also covers the administration of

investments, detailing the rights and obligations of investors, land lease terms, and
provisions for the repatriation of profits and dividends.

 Compliance with International Standards: Ethiopia is a member of the

Multilateral Investment Guarantee Agency (MIGA) and the World Bank's
International Centre for Settlement of Investment Disputes (ICSID), signaling its
adherence to international standards for investment dispute resolutions.

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The legal and regulatory framework for investment in Ethiopia is designed to be competitive and
attractive for investment while safeguarding the country's strategic interests. Investors looking to
engage in the Ethiopian market must navigate these regulations carefully to ensure compliance
and successful operation.

2.3.2. Constitutional Framework Investment in Ethiopia

In the United States of America, the Commercial Clause of the Constitution grants Congress the
power to regulate foreign commercial transaction and among the several states. The clause is
intended to foster the development of national market and free trade among the states. According
to 18 of the US Constitution, the Federal Government has the power to regulate interstate
investment. The modern rule allows the federal government to regulate investment activities that
affect interstate. Pursuant to this, the regulated activity does not itself have to be in interstate.
Therefore, any local activity that has an effect on interstate incitement is subject to federal
regulation. Coming to Ethiopia, the Federal Government is duty bound to ensure that all
Ethiopians are given equal opportunity to improve their economic conditions and to promote
equitable distribution of wealth among them. The Government is granted the right to own land
and other natural resources on behalf of the people and to deploy them for their common
development and benefit. Thus, the federal government is required to regulate land and other
natural resources use for investment. Without regulation, these natural resources could not be
used effectively and efficiently to bring the development of the people. The Federal Government
is also duty bound to formulate policies, which ensure that all Ethiopians can benefit from the
legacy of intellectual and material resources of Ethiopia. This indicates the power of the
government to regulate investment activities that enable people to use the intellectual and
material resources.
The FDRE Constitution grants the House of Peoples’ Representatives the power to legislate law
on the utilization of land and other natural resources. The Constitution further grants power to
the Federal Government to enact law on interstate commerce and foreign trade under Article
55(2) (b). The Commercial Clause, of the United States of America discussed above, seems to be
incorporated in our Constitution. Therefore, it would be safe to conclude that the Federal
Government has the power to regulate inter-state commerce in general and investment in
particular. The Constitution also grants the power to regulate foreign trade. The Constitution

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further grants power to the Federal Government to enact law on interstate. Commerce what is
more, the federal government has the power to enact Commercial code.

2.3.3. Economic Policy of Ethiopia

The term economic policy is coined from two concepts: economy and policy. Policy is defined as
“the general principles by which a government is guided in its management of public affairs”.
Economy means “the management or administration of the wealth and resources of a
community”. Combining the meanings given to the terms, economic policy may be defined as
the general principles by which a government is guided in the management or administration of
the wealth and resource of a country. In other worlds, economic policy embraces the principles
by which a given government is guided to administer the resource of a country. Simply stated,
economic policy is a set of rules that may lead to some desired end of the society. Economic
policy has three main parts: objectives of the economy; economic instruments; and economic
models. Policy makers and governments always speak about economic objectives and
instruments; they do not often economic models.
Ethiopia has implemented several economic policies to drive its development and address
various challenges. One such policy is the Growth and Transformation Plan (GTP), which
focuses on achieving sustainable economic growth and reducing poverty.

Under the GTP, Ethiopia has prioritized investments in infrastructure development, such as
roads, railways, and energy projects. These initiatives aim to enhance connectivity, boost trade,
and attract foreign direct investment. For example, the Grand Ethiopian Renaissance Dam is a
significant project that aims to increase energy production and create opportunities for industrial
growth.
Furthermore, the Ethiopian government has implemented policies to promote agricultural
transformation. This includes initiatives to improve irrigation systems, increase access to credit
for farmers, and enhance agricultural productivity through modern farming techniques.

In terms of industrialization, Ethiopia has established industrial parks across the country to
attract both domestic and foreign investors. These parks provide various incentives such as tax
breaks, streamlined administrative procedures, and reliable infrastructure, encouraging
investment and promoting job creation.
To support the growth of small and medium-sized enterprises (SMEs), the government has

8
implemented policies that provide financial support, access to markets, and capacity-building
programs. These initiatives aim to foster entrepreneurship, create employment opportunities, and
promote inclusive economic growth.
Additionally, Ethiopia has implemented social protection programs to address poverty and
inequality. The Productive Safety Net Program (PSNP) is one such initiative that provides cash
transfers and food assistance to vulnerable households, helping to alleviate poverty and improve
livelihoods.
Overall, Ethiopia's economic policies aim to drive sustainable development, reduce poverty, and
foster inclusive growth across various sectors of the economy.

2.3.4. Areas of Investment Reserved for Domestic Investors

In Ethiopia, there are specific areas of investment that are reserved exclusively for domestic
investors. The Ethiopian Investment Commission (EIC) provides guidance on these reserved
sectors, which are outlined in the Investment Proclamation No. 769/2012.
According to the proclamation, the following sectors are exclusively reserved for domestic
investors:

1. Retail trade businesses, including wholesale trade of locally produced goods and import export
trade activities with a capital investment of less than 20 million Ethiopian Birr (ETB).

2. Supply of locally produced goods, excluding the supply of goods to the Government or public
enterprises.

3. Advertising and printing services with a capital investment of less than 50 million ETB.
4. Maintenance, repair, and installation services with a capital investment of less than 1 million
ETB.

5. Rental services for construction machinery and equipment with a capital investment of less
than 10 million ETB.
It is important to note that these sectors are reserved for domestic investors to promote local
entrepreneurship, job creation, and economic empowerment. However, foreign investors are
encouraged to participate in joint ventures or partnerships with domestic investors in these
sectors.

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2.3.5. Sectors Open to Ethiopian Nationals
It is observable that foreign investors are not allowed to invest in economic sectors. In Ethiopia,
there are specific sectors that are designated for investment and operation by Ethiopian nationals
or Ethiopian-owned businesses. These sectors provide opportunities for local investors to
participate in economic activities and contribute to the country's development. Here are some
sectors commonly open to Ethiopian nationals, along with a reference book that may provide
insights into sector-specific regulations and guidelines:

Sectors Open to Ethiopian Nationals:

 Agriculture and Agribusiness: Ethiopian nationals have opportunities to invest

in agriculture, including crop production, livestock farming, agro-processing, and
agricultural exports.

 Retail and Wholesale Trade: Ethiopian nationals can engage in retail and
wholesale trade activities, including operating shops, markets, distribution
networks, and trading in goods.

 Construction and Real Estate: Ethiopian nationals can participate in the

construction industry, real estate development, property management, and related
construction services.

 Healthcare Services: Ethiopian nationals are encouraged to invest in healthcare

facilities, clinics, pharmacies, medical services, and healthcare infrastructure.

 Education and Training: Ethiopian nationals can establish educational

institutions, including schools, colleges, vocational training centers, and skill
development programs. and regulations in Ethiopia.

2.3.6. Sectors Open to the state

In Ethiopia, certain sectors are designated for state ownership or exclusive operation by
state-owned enterprises. These sectors are considered strategic and vital for national
development, security, or public welfare. Sectors Open to the State in Ethiopia:

10
  Telecommunications Sector: Historically a state monopoly, the
telecommunications sector in Ethiopia has seen limited privatization but
retains a significant stake through government-owned Ethio-Telecom. The
state has control over key telecommunications infrastructure and services.

 Electricity Generation and Distribution: State ownership prevails in the

electricity sector, where Ethiopian Electric Power (EEP), a state utility, plays
a central role in power generation, transmission, and distribution. The
government has made investments to expand power infrastructure and
improve access to electricity.

 Transportation Infrastructure: Major transportation infrastructure such as

railways, airports, and ports are often under state control. State-owned entities
like Ethiopian Airlines and the Ethiopian Railways Corporation operate in the
transportation sector, overseeing critical transport networks and services.

 Postal services: Only our government is allowed to invest on postal services.

However, courier postal services are excluded. Therefore, such a sector is
open to other investors. The security is probably the reason for the exclusion
of others.

2.3.7. Investment Procedures

In Ethiopia, investment procedures involve several steps and processes that investors need to
follow to establish and operate a business in the country. Apart from the Investment
Proclamation and related laws, there are guidelines and publications that outline the investment
procedures and regulatory requirements for investors.
Investment Procedures in Ethiopia:
1. Investment Registration: Investors need to register their investment with the Ethiopian
Investment Commission (EIC) or a relevant regional investment office. Registration provides
legal recognition and access to incentives and protections.
2. Business Licensing: Following investment registration, businesses need to obtain the
necessary business licenses from the appropriate regulatory authorities. Different sectors may
have specific licensing requirements.

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3. Sector-Specific Approvals: Certain sectors may require additional approvals or permits from
sectoral regulators. For example, industries like telecommunications, banking, and healthcare
have specific licensing and approval processes.
4. Tax Registration: Investors must register for taxation purposes with the Ethiopian Revenue
and Customs Authority. Understanding tax obligations and incentives is essential for
compliance.

5. Land and Property Acquisition: Depending on the nature of the investment, acquiring land
or property may be required. Procedures for lease agreements or land ownership should be
followed, complying with relevant laws.

2.3.8. Business License

The regulation will be made effective through granting or refusing a license to carry on the
functions of a particular investment. Licensing investors means issuing of a license by the
authorized government body to the person (whether an individual or a business organization) to
undertake in the investment.
The principle is that everybody who needs to carry out trading must have a valid business
license. A business license may be defined as a permission issued for a trader to carry out a
particular business.
Obtaining a business license is a crucial step for entrepreneurs looking to establish a legal entity
and operate a business in any jurisdiction. In Ethiopia, the process of obtaining a business license
involves compliance with specific regulations and requirements set by regulatory authorities.

Business License Process in Ethiopia:

1. Business Registration: The first step is to register the business entity with the appropriate
authorities, such as the Ministry of Trade and Industry or regional trade bureaus, depending on
the location of the business.

2. License Application: Once the business is registered, entrepreneurs can apply for the
necessary business license. The type of license required can vary based on the nature of the
business, industry sector, and location.
3. Document Submission: Applicants typically need to submit various documents, including the
business registration certificate, identification documents, lease agreements, tax identification

12
numbers, and other relevant paperwork.
4. Inspections and Approvals: Some business activities may require inspections by regulatory
authorities to ensure compliance with safety, health, and industry-specific standards. Approvals
are granted upon successful inspections.

5. License Issuance: After fulfilling all requirements and approvals, the business license is
issued to the applicant. The license specifies the permitted activities, operating conditions, and
duration of validity.

2.3.9. Restrictions on Foreign Direct Investment

As of my last update in January 2022, Ethiopia has implemented various regulations and
restrictions on foreign direct investment (FDI). Some of the key restrictions include:

 Restricted Sectors: Certain sectors, such as telecommunications, banking, insurance, and

retail trade, may have restrictions on foreign ownership or participation. In some cases,
foreign investors may be required to enter into joint ventures with local partners or obtain
special permits.

 Limits on Ownership: In sectors where foreign investment is allowed, there may be

limits on the maximum percentage of foreign ownership permitted in companies. For
example, in banking and insurance, there are caps on foreign ownership.

 Investment Permit Requirements: Foreign investors are typically required to obtain an

investment permit from the Ethiopian Investment Commission (EIC) or the relevant
regional investment authorities before establishing a business or making significant
investments in Ethiopia.

It's important for foreign investors to conduct thorough due diligence and seek professional legal
advice to understand the specific regulations and restrictions applicable to their proposed
investments in Ethiopia. Regulations may vary based on factors such as the industry sector,
investment size, and location. Additionally, government policies and regulations are subject to
change, so staying updated on developments is essential for investors.

2.4 Accounting entries and implications on reporting (general purpose and for tax purpose)

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Accounting Entries and Reporting Implications:
1. General Purpose Financial Reporting:

 Investment Valuation: Restrictions may influence the valuation of foreign

investments, requiring adjustments to reflect market restrictions or control
measures.

 Disclosure Requirements: Companies must disclose FDI restrictions in financial

statements to provide transparency and a clear understanding of potential risks to
investors.

 Impairment Assessments: Restrictions affecting the recoverability of

investments may trigger impairment tests to assess and account for potential
losses accurately.

2. Tax Reporting:

 Tax Implications: FDI restrictions can influence the tax treatment of foreign
investments, leading to changes in taxable income, deductions, and tax liabilities.

 Transfer Pricing Considerations: Transfer pricing regulations may need

adjustments to account for FDI restrictions affecting the allocation of profits
among related entities in different jurisdictions.

 Withholding Taxes: Restrictions on repatriation of profits due to FDI limitations

can result in withholding taxes influencing cash flows and tax planning strategies.

3. Implications for Reporting:

 Financial Statement Presentation: Clear disclosure of FDI restrictions' impact

on financial performance and position is necessary to provide stakeholders with a
comprehensive understanding of risks and opportunities.

 Risk Disclosure: Detailed risk disclosures are essential to highlight the potential
effects of FDI restrictions on operations, financial results, and cash flows.

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  Compliance Obligations: Compliance with local regulations and reporting
requirements concerning FDI restrictions is crucial for accurate and transparent
reporting practices.

 Tax Planning Adjustments: Proactive tax planning strategies may be required to

navigate the tax implications resulting from FDI restrictions and optimize the
overall tax position within legal boundaries.

Summary
In Ethiopia, regulations and administration of investments are essential to ensure a conducive
and predictable investment climate, promoting economic growth and protecting investors'
interests. Good regulation principles focus on transparency, fairness, and stability to attract both
domestic and foreign investors. The constitutional framework outlines rights and obligations for
investors, while the economic policy emphasizes investment, industrialization, and job creation
for sustainable development. Certain sectors are reserved for domestic investors, with
opportunities open to Ethiopian nationals and potential state participation. Clear investment
procedures, business licensing requirements, and restrictions on foreign direct investment are in
place to support compliance and operational transparency. Proper accounting entries are crucial
for financial reporting, serving general purposes and tax compliance to ensure accountability.

15
Group Assignment Two
CHAPTER 5: FUNDAMENTAL AND TECHNICAL ANALYSIS

16
CHAPTER FIVE: FUNDAMENTAL AND TECHNICAL ANALYSIS

5. Introduction
In the realm of financial analysis, there exist several key methodologies that analysts employ to
evaluate investment opportunities and guide decision-making processes. These methodologies
encompass fundamental analysis, economic analysis, industry analysis, company analysis, and
technical analysis. Each of these analytical approaches plays a crucial role in providing insights
into the various factors that can influence the performance and value of investments.

Fundamental analysis involves a comprehensive examination of a company's financial

statements, market positioning, and management team to ascertain its intrinsic value. Economic
analysis, on the other hand, focuses on macroeconomic indicators such as interest rates, inflation
rates, and GDP growth to assess the broader economic landscape. Industry analysis involves a
detailed study of specific sectors to understand trends, competitive dynamics, and regulatory
factors that may impact companies operating within those industries.

Company analysis delves into the intricate details of individual companies, including their
business models, competitive advantages, and growth prospects. In contrast, technical analysis
relies on historical price and volume data to identify patterns and trends in stock prices for
making informed investment decisions.

By leveraging these diverse analytical methodologies, investors can develop a holistic

understanding of the investment environment and make well-informed decisions. This
assignment will explore each of these analytical approaches in detail, shedding light on their
strengths, limitations, and practical applications in the field of financial analysis.

17
5.1 Fundamental analysis
Fundamental analysis is not free from criticism. It is pertinent to mention that doubts are
expressed about the utility of this approach in the context of efficient stock market, which
already incorporates the information about the economy, industry and company in the share
price. It is claimed that stock market incorporates such information in the share price rather
instantaneously. The result of this assumption is that price prevailing at the market place can be
taken to represent the price of the share justified by its fundamental i.e., intrinsic value (IV). The
equality of MP and IV makes the fundamental analysis or any other analysis useless or
redundant. The above given view about share market efficiency implies that no one would be
able to make abnormal gains given such a set up. Some research studies in the literature also
support the above view. Practitioners, however, do not agree to such conclusions of empirical
nature.
Once again let us clear at this stage that the truth lies in between these two extreme position-
denouncing security analysis as totally redundant to the one that would bring us profits. In fact,
stock market is not efficient to the extent the researchers proclaim. There are many operational
inefficiencies and structural deficiencies in stock market. Though the market is fairly efficient in
the long run in a sense that only information leads price changes, operational and structural
inefficiencies cause time lag between arrival of information and its impact on the security prices.
In this context, analysis still has an important role to play. It is paradoxical but correct to say that
one has to assume that stock market is inefficient to make it efficient. It is only then the
processing of information relating to economy-industry company would take place that would
allow the stock market to reflect the information in the price quickly if not instantaneously. It is a
fact of life that earning abnormal profits is not the only and final goal for most of the investors.
Rather, it has been observed that earning the normal returns, (i.e., the return commensurate with
risk prevalent in the market) is a worthwhile objective to pursue, which most of the investors are
not even able to achieve. In nutshell, fundamental analysis has an important role to play for
making investment decisions in an efficient set up, too.

ECONOMY-INDUSTRY-COMPANY (EIC) FRAMEWORK

The analysis of economy, industry and company fundamentals are the main ingredient of
fundamental approach. The analysis should take into account all the three constituents which

18
form different but crucial steps in making investment decision. These can be looked at as
different stage in the investment decision making process and are depicted graphically with three
concentric circles as shown in figure 5.1. The process of investment analysis starts with an
evaluation of economic outlook. After getting some confidence on economic outlook, the
analysis is moved to industry specific to identify industries, which are worth for further analysis
to pick up good stocks. The last stage is identifying specific stocks from selected industry.
Operationally, to base the investment decision on various fundamentals, all the three stages must
be taken into account.

5.1.1 Economy analysis

All investment decisions are made within the economic environment after taking into account the
economic prospect of the country. This environment varies as the economy goes through stages
of prosperity. Why economy fails to have prosperity forever? There are several reasons. Often,
when the economy is booming, companies after invest in projects and create excess capacity and
thus lead-to slow down of the economy. Further, government policies and external pressures also
create complications to the economy. For instance, increase in oil prices on account of ukraine
war or war with neighboring countries creates pressures to the domestic economy. Government
also can create problems to the economy by following wrong policies or failure to adopt right
policies like failure in meeting disinvestment target. Different stages of economic prosperity are
also referred to as the business cycle. The term cycle doesn’t mean that there is some orderliness
in the economic sequence such as the seasons of the year. The economy doesn’t follow a
regularly repeated sequence of events. It simply means how economic output and growth moves

19
from period one to next periods. If the initial period is a period of rapid growth, it peaks out at
some point of time and a recession sets in subsequently. After some point of slow growth, the
economy bottoms out but by then, new demand accrues and fresh activities emerge. The
economy now sets into recovery mode and then gets into expansion. The cycle moves on without
any definite length of time between the stages because government and other agencies would like
to extend the expansion stage while trying to cut down the recession or speed up the recovery
phase.

Starting from a point of neutrality (t1), the economy expands and reaches peak (t2). The
economy then declines, reaching a trough at t3 and subsequently starts to rebound to repeat the
pattern. As mentioned earlier, economists all over the world have developed a fair amount of
understanding on factors leading to different phases of the economy and also developed
necessary monetary and fiscal policies to speed up the process of recovery and extend the period
of expansion. Despite such efforts, the government fails to achieve desired results because of
new factors emerging in the economy and ever changing social and political events.

5.1.2 Industry analysis

Industry analysis is the process of examining the current and future trends and conditions of a
particular industry to identify opportunities and potential challenges. This analysis typically
includes studying the competitive landscape, market trends, customer preferences, and regulatory
factors that may impact the industry’s growth and profitability. There are several approaches to
conducting industry analysis, including the following

1. Porter’s Five Forces Analysis: This framework examines the competitive forces that
shape an industry, including the threat of new entrants, the bargaining power of suppliers
and buyers, the threat of substitute products or services, and the intensity of rivalry
among existing competitors.

20
 2. SWOT Analysis: This analysis looks at the strengths, weaknesses, opportunities, and
threats facing an industry. This can help companies identify areas where they can
improve and leverage their strengths to gain a competitive advantage.

3. PEST Analysis: This framework looks at the political, economic, social, and
technological factors that impact an industry. This can help companies anticipate changes
in the business environment and adjust their strategies accordingly.

Industry analysis is important for companies to understand their industry’s competitive

dynamics, identify potential opportunities for growth, and make informed business decisions. It
plays an important role in security analysis for decision making. We know that security analysis
involves analyzing and evaluating various securities, such as stocks, bonds, and mutual funds, to
determine their investment potential. In the context of security analysis, industry analysis is used
to assess the performance of the industry in which the security operates.
By conducting an industry analysis, security analysts can gain a better understanding of the
industry’s growth prospects, competitive framework, and regulatory environment. This
information can be used to evaluate the potential risks and opportunities associated with
investing in a particular security. For example, if an industry is experiencing strong growth due
to favorable market conditions and increasing demand, the securities of companies operating in
that industry may have higher investment potential.

On the other hand, if an industry is facing challenges, such as increasing competition or

regulatory changes, the securities of companies operating in that industry may be riskier
investments.
In addition to evaluating individual securities, industry analysis can also be used to construct a
diversified investment portfolio. By investing in securities from different industries with varying
growth prospects, an investor can spread their risk and potentially improve their investment
returns. Industry analysis is an important tool for security analysts to make informed investment
decisions and manage risk in their investment portfolios.

Steps in Industry Analysis

Industry analysis is a systematic examination of the factors that influence an industry’s
performance and prospects. It is an important tool for businesses to understand their industry’s

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competitive dynamics, identify potential opportunities for growth, and make informed business
decisions. An industry analysis typically involves the following steps:
1. Defining the Industry: The first step in industry analysis is to define the industry being
analyzed. This involves identifying the products or services produced by the industry, the target
market for these products or services, and the key players in the industry.
2. Gathering Industry Data: The next step is to gather data about the industry. This includes
information about market size, growth rates, industry trends, and the competitive landscape. This
data can be gathered from a variety of sources, including industry reports, government statistics,
and company filings.
3. Analyzing Industry Trends: Once the data has been gathered, it is important to analyze
industry trends. This involves identifying patterns and changes in the industry over time, such as
shifts in consumer preferences or changes in government regulations.
4. Conducting Competitive Analysis: Competitive analysis involves assessing the strengths and
weaknesses of the industry’s key players, as well as their strategies and positioning in the
market. This can help businesses identify potential competitors and opportunities for
differentiation.

5. Assessing Opportunities and Threats: Based on the data and analysis conducted, it is
important to assess the opportunities and threats facing the industry. This includes identifying
potential risks, such as changes in consumer behavior or technological disruptions, as well as
potential growth opportunities.
6. Making Informed Business Decisions: The final step in industry analysis is to use the
information gathered to make informed business decisions. This may involve identifying areas
for investment or divestment, adjusting marketing strategies, or developing new products or
services.

It is an important tool for businesses to gain a deeper understanding of their industry and make
informed decisions about their strategy and operations. By conducting a thorough industry
analysis, businesses can identify potential opportunities and risks and position themselves for
long-term success.

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5.1.3 Company analysis
Company analysis is the process of evaluating a company’s financial and operational
performance to determine its strengths, weaknesses, opportunities, and threats and is like
structural analysis. This analysis helps investors, financial analysts, and other stakeholders make
informed decisions about the company.
There are several aspects of a company that can be analyzed, including:
1. Financial performance: This includes evaluating a company’s revenue, profitability, cash
flow, and financial ratios such as the debt-to-equity ratio, return on equity, and current ratio.
2. Competitive positioning: This involves analyzing a company’s market share, its competitors,
and its ability to compete in the industry.
3. Management team: This includes evaluating the leadership team’s track record, experience,
and ability to execute the company’s strategy.
4. Industry trends: This involves understanding the trends in the industry in which the company
operates, including technological advancements, regulatory changes, and customer behavior.
5. Growth potential: This involves assessing the company’s potential for growth, including its
expansion plans, new product offerings, and potential for market penetration.
6. Corporate governance: This includes evaluating the company’s board of directors, executive
compensation, and shareholder rights.
By analyzing these aspects of a company, stakeholders can gain a better understanding of the
company’s overall health and potential for future success.

5.2 Technical analysis

Technical Analysis is concerned with a critical study of the daily or weekly price and volume
data of the Index comprising several shares, like Bombay Stock Exchange Sensitive Index
(SENSEX), or of a particular Stock. The objective of the technical analysis is to predict or
forecast the short, intermediate and long term price movements. It uses only the data generated
from the market. Such market generated data includes price, volume, number of trades, 52-week
high or low price, intra-day spread, dealers buy-sell quote spread, number of advances and
declines, number of Stocks hitting the new high and low, open interest, etc. Some of the basic
assumptions of the technical analysis are:

1. Market value is determined solely by the interaction of supply and demand.

2. Supply and demand is governed by numerous factors, both rational and irrational.

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3. Stock prices tend to move in trends, which persists for an appreciable length of time.
4. Changes in trend are caused by shifts in demand and supply.
5. Shifts in demand and supply can be detected through chart analysis and some chart patterns
repeat themselves.
To appreciate technical analysis, one has to understand the above assumptions clearly. Technical
analysis assumes that there is a sufficient lag between the arrival of information and its ultimate
impact on the Stock prices. The analysis fails if the information is never incorporated in the
prices (inefficient market) or instantaneously reflected in the prices (efficient market). The
perfect setup is temporarily inefficient such that initially a few investors or analysts are able to
understand the impact of information on prices and entering into the Stock. Subsequently, more
and more people are entering into the Stock.
Technical analysts believe that charts will give them a clue about entry of more and more
investors into the Stock and hence they can also enter into the Stock without doing such analysis.
They are primarily moving with the crowd and exit from the market the moment the Stock prices
started moving down.
As such they are no long-term investors in a particular Stock though they invest in the market for
a longer period. They move from one security to another security.

DIFFERENCE BETWEEN TECHNICAL AND FUNDAMENTAL ANALYSIS

Technical Analysis Fundamental Analysis

Focus on timing and likely price changes; Not Focus on valuation of intrinsic value and
bothered about the intrinsic value. through such value, identifying stocks which
are underpriced or overpriced.

Focus on internal factors that are available in Focus on external factors - factors that are
the market (price, volume etc.). outside the market (annual reports, industry
report, economic estimates, etc.).

Focus is generally on near (short) term changes Focus is on long-term expected price.
in the prices though intermediate and long term Typically follows buy-hold-sell strategy once
forecasts also done. the stock is identified and investment period is

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 defined.

Focus is more on price direction than price Focus is on price target; bothered for short-
target or forecast. term price changes.

Easier and faster voluminous data. Requires considerable time for analyzing.

Simultaneously applied to many stocks. Difficult to apply for a large number of stocks
unless a big analyst’s team is set up.

Technical analysis is often criticized as a blind and irrational method of investment whereas
fundamental analysis is more scientific and systematic. In a way, it is true that there is no strong
theoretical basis for technical analysis. It doesn’t mean that it is irrational. It uses a simple
philosophy that the market is a place where a large number of investors of different kind buy and
sell securities and it believes that it is possible to find some pattern in their trading and can be
exploited for buying and selling stocks. Thus, it is difficult for anyone to read a textbook on
technical analysis and then start doing it. It requires considerable exposure to market and
understanding of how a typical crowd behaves when an important information about the
company is released. They also read the type of price reaction when the insiders enter into the
stock. Technical analysts on the contrary never complain against fundamental analysts. They
simply believe that is time consuming and too costly affair.

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Summery

Fundamental Analysis involves examining a company's financial statements, management team,

business model, and competitive position to determine its intrinsic value and potential for future
growth. Economic analysis focuses on assessing macroeconomic factors such as interest rates,
inflation, GDP growth, and consumer confidence to understand the overall economic
environment and its impact on investment decisions. Industry analysis involves evaluating the
specific industry in which a company operates, including factors such as market trends,
competition, regulatory environment, and technological developments that may affect the
company's performance. Company analysis involves studying a particular company's financial
performance, management team, products or services, market share, and growth prospects to
assess its investment potential. These different types of analyses provide investors with a
comprehensive framework for evaluating investment opportunities by considering both internal
and external factors that may impact the performance of a company or security.

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Reference
 Ethiopia investment commission (2008). Investment proclamation and business setup in
Ethiopia

 https://www.investopedia.com/terms/f/fundamentalanalysis.asp

 https://www.icicidrect.com/ilearn/technical-analysis/articles/difference-between-
fundamental-and-technical-analysis

 Investment Proclamation No.769/2012

 MMPF-004 Security analysis and portfolio management. Indira Gandhi national Open
University school of management studies.

 TESFAYE A. (2009). Investment law teaching material (113-138)

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