BM410: Investments

Macroeconomic
Analysis
Or understanding the critical economic
factors that affect your company

Objectives
A. Do you understand the global analysis
framework and the importance of
understanding global issues?
B. Do you understand the critical areas of that
global analysis framework, particularly
economic analysis?
C. Do you understand where to find key
international economic data?
D. Do you understand how to include economic
data in your company report?
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A. Understand the
Global Analysis Framework

I want you to change your thinking

You are not preparing to be a US analyst
You are preparing to be a global analyst with expertise
in the US
Why must you understand global issues?
Your competitors are likely to be global
They understand global issues
In order to compete, you must understand them as well
For in the future, international business will be just business
Prepare now and you wont be surprised later

Global Analysis Framework

What is our approach to company analysis?

Fundamental Analysis
Approach to Fundamental Analysis
Domestic and global economic analysis
Domestic and global industry analysis
Company analysis
Why use the top-down approach?
The return on a stock is a function of the
market
The return on a market is a function of the
economy
The return on an economy is a function of
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the world economy

Global Analysis Framework

Global Economic and Political Analysis
(what is the world doing?)
Country Economic and Political Analysis
(whats happening in my main markets?)
Global Industry Analysis
(what is the global industry doing?)
Country Industry Analysis
(whats happening in my main industry?)
Company Analysis
(whats happening with my company?)
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Questions
Any

questions on the global analysis

framework and why it is important?

B. Understand Critical Areas of the

Global Analysis Framework
Global Economic and Political Analysis
(what is the world doing?)
Country Economic and Political Analysis
(whats happening in my main markets?)
Global Industry Analysis
(what is the global industry doing?)
Country Industry Analysis
(whats happening in my main industry?)
Company Analysis
(whats happening with my company?)
7

Global Economic
and Political Analysis
Key Considerations

Performance in countries and regions is highly variable

Monitor it well
Political risk can change everything
Keep your hand on the countrys political pulse
Exchange rate risk is always there
Keep abreast and cover yourself if economically
feasible, i.e. sales, profits, stock returns

Country Economic
and Political Analysis
Key considerations?
1. Government Policy
Fiscal and Monetary Policy

2. Factors that impact the economy

Supply and demand shocks

3. Business cycles
Troughs and peaks

4. Forecasting
Tools to help

5. Key variables to watch

9

1. Government Policy

Fiscal Policy - government spending/taxing

actions as part of demand-side management
Direct policy to implement, but hard to decide on

Therefore difficult to use to fine-tune the

economy
Look at the governments surplus or deficit
This will show the governments spending
program
Monetary Policy - manipulation of the money supply
to influence economic activity, also a demand-side
activity
Easy to formulate, but takes a longer time to work
through the economy 10

Government Policy (continued)

Tools of monetary policy

Open-market operations

Adds/subtracts liquidity to the system

Discount rate
The ate banks can borrow short-term from the
Fed and indirectly the rate consumers pay for
borrowing
Reserve requirements

The amount that banks must keep in cash or on

reserve at the Fed
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2. Factors that Impact the Economy

Demand shocks
Affects the demand for goods and services
Tax cuts or rebates
Increases in government spending
Dramatic weather changes or political shocks
Supply shock
Affects the supply of good and services
Commodity price changes
Educational level of economic participants
Technology advances that improve production
or capacity
12

3. Business Cycles

How does the economy perform, and how

does the industry perform under various
economic conditions?
Business Cycle
Peak
Trough
Industry relationship to business cycles
Cyclical
Defensive
13

4. Forecasting Economic
and Industry Performance

Leading Indicators
Tend to rise and fall in advance of the economy
Examples: Avg. weekly hours of production
workers, stock prices, money supply (M2)
Coincident Indicators
Tend to change directly with the economy
Examples: industrial production, manufacturing and
trade sales, personal income less transfer payments,
Lagging Indicators
Tend to follow or lag economic performance
Examples: ratio of trade inventories to sales, ratio
of consumer installment, credit outstanding to
personal income, change
14 in index of labor costs

5. Economic Variables
to Watch
Key

variables

Gross domestic product

Unemployment rates
Interest rates & inflation
International Trade and Investment

measures
Consumer sentiment
Other

variables

Elections, Katrina and Rita, etc.

15

Problem
Why do you think the index of consumer
expectations is a useful leading indicator
of the macro-economy?

16

Answer
The

index of consumer expectations is a

useful leading economic indicator
because if consumers are optimistic
about the future they will be more
willing to spend money, especially on
consumer durables, which will increase
aggregate demand and stimulate the
economy.
17

Questions

Do you understand the critical areas

of this global analysis framework?

18

C. Key sources of international

Economic Data?
I. World Bank
Global Economic Prospects, published bi-annually
World Economic Indicators, published annually
II. Economist Publications
Economist magazine, published monthly
Economist Intelligent Unit, ongoing publication,
but available for a (very high) fee
III. Wall Street Journal
Economic and other forecasts are sporadic, but
available if you watch the table of contents closely
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I. World Bank:
Global Economic Prospects

20

II. Economist Publications

21

Economist Intelligence Unit:

Purchased Information

22

III. Wall Street Journal

Daily

publication

No specific ongoing economic analysis

It does have sporadic forecasts as part of

specific articles and sections

They do have a quarterly economic
forecasts section where various economic
forecasts are compared to actual results

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Questions

Any questions on the key sources of

international economic information?

24

D. Including Economic Forecasts

in Financial Analysis

Key issues?
What are your forecasts?
Where did they come from?
How do they come into your forecasts?
How do you document them?

25

Forecasts Used in this Class

This is not an economic forecasting class

As such, I will give you a recommended forecast
This forecast is on the Apple.xls spreadsheet

You can copy this directly to your spreadsheet

Note that my forecasts are from the World Bank
You can, however, change the forecasts consistent
with your own views
All I ask is that you document your changes in
views in the ratios section

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Where Economic Data is Used (continued)

Sales Growth
Compare how sales have grown historically within

the economic setting

Has sales growth increased even in difficult
times?
They may likely continue in the future
Has sales growth declined in difficult times?
This may also continue in the future

27

Where Economic Data is Used (continued)

Forecasting Interest Expense and Interest

Income
Generally, most interest rates are (loosely) tied to

LIBOR, the London Inter Bank Offered Rate

Keep your rate on interest income and interest
expense a consistent multiple over or under this
rate, i.e. interest income is + 30 bps over LIBOR
and interest expense is + 500 bps over LIBOR

28

Questions

Any questions on how to include your

economic data into your forecasts?

29

Review of Objectives
A.

Do you understand the global analysis

framework and the importance of understanding
global issues?
B. Do you understand the critical areas of that
global framework, particularly economic
analysis?
C. Can you find sources of data for your
international economic prospects?
D. Do you know how to write up the industry
report?
30

D. Understand How to Write Up the

Industry Report
Mandatory

Framework:

Key Information
Description and Summary
International Competitive Structure
SWOT Analysis/Positives and Negatives

Factors
Key Valuation Ratios
Key Items to Watch
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Key Information

Key Information

Industry Sub-sector
Major Industry
Country
Industry Type
Use the six types as discussed by Peter Lynch on
page 400: Slow Growers, Stalwarts, Fast
Growers, Cyclicals, Turnarounds, and Asset
Plays
Key Indices
Include which items are included in the index,
i.e. price, price earnings, dividends, etc.
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Description and Summary

This should include:

A brief description of the industry and what makes

is different. This could include how long it has

been around, the key areas of interest, key business
models, and any other information that you deem
relevant to the discussion.

33

International Competitive Structure

This section includes:

The structure of industry suppliers and
competition, i.e., fragmented, oligopolistic;
expansion opportunities; the importance of
capital, barriers to entry globally, impacts of
global regulation and trade, etc.

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Analysis

You can determine the type of analysis

Positive Factors and Negative Factors

Put these in the order of importance, most

important first
Strengths, Weaknesses, Opportunities, Threats
Clearly delineate which of these are most
important
Regardless of your type of analysis, make sure you
cover the industry clearly

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Key Things to Watch

Key Valuation Ratios to Watch

List the key ratios that are followed by analysts in
this industry.
A good start is to look at analysts reports from
Investex Plus in the library (see FR-1A
Finding Key Sources of Financial Information).
Key Items to Watch
These are the key economic and other statistics that
are key to performance for this industry. As you
read through your 10-k reports, you will get a
strong sense of the key variables to watch.
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Return Performance

This is the relative total return performance versus the market

and industry indices (see IR-2A Getting Industry Total
Returns)
Include your market index and industry index (note: your
industry index does not need to have PE data to be
included here. All it needs is total return data)
Excess is the difference between the industry return and
the market return
GDP Return is the GDP real growth rate for the year from FR2A Company Financials - AAPL Section 19)
By seeing how the industry and economy has performed
together, it will give you an indication of what might
happen in the future
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