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Comprehensive Framework for Macroeconomic and Industry Analysis

This chapter offers a detailed framework for understanding macroeconomic and industry analysis through fundamental analysis. Explore the significance of domestic and global economic evaluations, industry and company analyses, and the utility of the top-down approach. Examine key economic variables, including GDP, unemployment rates, interest rates, and inflation, alongside insights into fiscal and monetary policies. Understand the impact of demand and supply shocks, business cycles, and industry cycles on financial performance and investment strategies.

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Comprehensive Framework for Macroeconomic and Industry Analysis

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  1. Macroeconomic and Industry Analysis Chapter 17

  2. Framework of Analysis • Fundamental Analysis • Approach to Fundamental Analysis: • Domestic and global economic analysis • Industry analysis • Company analysis • Why use the top-down approach?

  3. Global Economic Considerations • Performance in countries and regions is highly variable. • Political risk • Exchange rate risk • Sales • Profits • Stock returns

  4. Key Economic Variables • Gross domestic product • Unemployment rates • Interest rates & inflation • International measures • Consumer sentiment

  5. Federal Government Policy • Fiscal Policy - government spending and taxing actions. • Direct policy • Slowly implemented

  6. Federal Government Policy (cont’d) • Monetary Policy - manipulation of the money supply to influence economic activity. • Initial & feedback effects • Tools of monetary policy • Open market operations • Discount rate • Reserve requirements

  7. Demand Shocks • Demand shock - an event that affects demand for goods and services in the economy. • Tax rate cut • Increases in government spending

  8. Supply Shocks • Supply shock - an event that influences production capacity or production costs. • Commodity price changes • Educational level of economic participants

  9. Business Cycles • Business Cycle • Peak • Trough • Industry relationship to business cycles • Cyclical • Defensive

  10. NBER Cyclical Indicators: Leading Leading Indicators - tend to rise and fall in advance of the economy. Examples: • Avg. weekly hours of production workers • Stock Prices

  11. NBER Cyclical Indicators: Coincident Coincident Indicators - indicators that tend to change directly with the economy. Examples: • Industrial production • Manufacturing and trade sales

  12. NBER Cyclical Indicators: Lagging Lagging Indicators - indicators that tend to follow the lag economic performance. Examples: • Ratio of trade inventories to sales • Ratio of consumer installment credit outstanding to personal income

  13. Industry Analysis • Sensitivity to business cycles • Factors affecting sensitivity of earnings to business cycles: • Sensitivity of sales of the firm’s product to the business cycles • Operating leverage • Financial leverage • Industry life cycles

  14. Industry Life Cycles StageSales Growth Start-up Rapid & Increasing Consolidation Stable Maturity Slowing Relative Decline Minimal or Negative

  15. Sector Rotation • Portfolio is adjusted by selecting companies that should perform well for the stage of the business cycle • Peaks – natural resource extraction firms • Contraction – defensive industries such as pharmaceuticals and food • Trough – capital goods industries • Expansion – cyclical industries such as consumer durables

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