MACROECONOMIC AND INDUSTRY ANALYSIS
OUTLINE
The Economy-Industry-Company (E-I-C) Framework
The Global Economy Central Government Policy
Macroeconomic Analysis
Industry Analysis
E - I - C FRAMEWORK
RESEARCHERS HAVE FOUND THAT STOCK PRICE CHANGES CAN BE ATTRIBUTED TO THE FOLLOWING FACTORS: ECONOMY-WIDE FACTORS : 30-35 PERCENT INDUSTRY FACTORS : 15-20 PERCENT COMPANY FACTORS : 30-35 PERCENT OTHERS FACTORS : 15-25 PERCENT
BASED ON THE ABOVE EVIDENCE, A COMMONLY ADVOCATED PROCEDURE OF FUNDAMENTAL ANALYSIS INVOLVES A THREESTEP EXAMINATION, WHICH CALLS FOR: UNDERSTANDING OF THE MACRO-ECONOMIC ENVIRONMENT AND DEVELOPMENTS ANALYSING THE PROSPECTS OF THE INDUSTRY TO WHICH THE FIRM BELONGS ASSESSING THE PROJECTED PERFORMANCE OF THE COMPANY.
THE GLOBAL ECONOMY
IN A GLOBALISED BUSINESS ENVIRONMENT, THE TOP DOWN ANALYSIS OF THE PROSPECTS OF A FIRM MUST BEGIN WITH THE GLOBAL ECONOMY. THE GLOBAL ECONOMY HAS A BEARING ON THE EXPORT PROSPECTS
OF THE FIRM, THE COMPETITION IT FACES FROM
INTERNATIONAL COMPETITORS, AND THE PROFITABILITY OF ITS OVERSEAS INVESTORS.
THE GLOBAL ECONOMY
WHILE MONITORING THE GLOBAL ECONOMY BEAR IN MIND THE FOLLOWING: ALTHOUGH THE ECONOMIES OF MOST COUNTRIES ARE LINKED, ECONOMIC PERFORMANCE VARIES WIDELY ACROSS COUNTRIES AT ANY TIME. FROM TIME TO TIME COUNTRIES MAY EXPERIENCE TURMOIL DUE TO A COMPLEX INTERPLAY BETWEEN POLITICAL AND ECONOMIC FACTORS. THE EXCHANGE RATE IS A KEY FACTOR AFFECTING THE INTERNATIONAL COMPETITIVENESS OF A COUNTRYS INDUSTRIES.
THE GLOBAL ECONOMY
Countries US China Europe Japan India GDP (billion % of World Interest USD) Economy Rates 15685 8230 12195 5960 1842 23 7.9 20.9 8.17 2.09 0.25% 6% 0.25% 0% 7.75% Inflation 1% 3.00% 0.9% 1.10% 7.00%
Source: http://www.tradingeconomics.com/
MACROECONOMIC
Unemployment
ANALYSIS
Gross Domestic Product
Demographic factors
Current Account Interest Rate Exchange Rate Economic Reforms
Industrial Production
Infrastructure facilities Agricultural Production Monsoon Money supply
Inflation
Savings & Investments
MACROECONOMIC
Labour policies
ANALYSIS
Govt Policies like
Regulatory interventions
Tax regime International relations of Political philosophy Disaster mgmt
Industrial policy
Budget Deficit & Mgmt
Fiscal Policies Monetary Policies
Social and environment
cultural
Supply side policies
Legal policies
MACROECONOMIC ANALYSIS THE GOVERNMENT EMPLOYS TWO BROAD CLASSES OF MACROECONOMIC POLICIES, VIZ. DEMAND SIDE POLICIES AND SUPPLY SIDE POLICIES. TRADITIONALLY, THE FOCUS WAS MOSTLY ON FISCAL AND MONETARY POLICIES, THE TWO MAJOR TOOLS OF DEMAND-SIDE ECONOMICS. FROM 1980s ONWARD, HOWEVER, SUPPLY-SIDE ECONOMICS HAS RECEIVED A LOT OF ATTENTION.
FISCAL POLICY
FISCAL POLICY IS CONCERNED WITH THE SPENDING AND TAX INITIATIVES OF THE GOVERNMENT. IT IS THE MOST DIRECT TOOL TO STIMULATE OR DAMPEN THE ECONOMY.
AN INCREASE IN GOVERNMENT SPENDING STIMULATES THE DEMAND FOR GOODS AND SERVICES, WHEREAS A DECREASE DEFLATES THE DEMAND FOR GOODS AND SERVICES. BY THE SAME TOKEN, A DECREASE IN TAX RATES INCREASES THE CONSUMPTION OF GOODS AND SERVICES AND AN INCREASE IN TAX RATES DECREASES THE CONSUMPTION OF GOODS AND SERVICES.
MONETARY POLICY
MONETARY POLICY IS CONCERNED WITH THE MANIPULATION OF MONEY SUPPLY IN THE ECONOMY. MONETARY POLICY AFFECTS THE ECONOMY MAINLY THROUGH ITS IMPACT ON INTEREST RATES. THE MAIN TOOLS OF MONETARY POLICY ARE:
OPEN MARKET OPERATION
BANK RATE RESERVE REQUIREMENTS DIRECT CREDIT CONTROLS
MACRO ECONOMIC ANALYSIS
THE MACROECONOMY IS THE OVERALL ECONOMIC ENVIRONMENT IN WHICH ALL FIRMS OPERATE. THE KEY VARIABLES COMMONLY USED TO DESCRIBE THE STATE OF THE MACROECONOMY ARE : GROWTH RATE OF GROSS DOMESTIC PRODUCT INDUSTRIAL GROWTH RATE AGRICULTURE AND MONSOONS SAVINGS AND INVESTMENTS GOVERNMENT BUDGET AND DEFICIT PRICE LEVEL AND INFLATION INTEREST RATES BALANCE OF PAYMENT, FOREX RESERVES, AND EXCHANGE RATE INFRASTRUCTURAL FACILITIES AND ARRANGEMENTS SENTIMENTS
Reforms and effect
Curb on Gold Imports (imp duty hiked 10% & 15% on jewellery Fuel price hikes (IOC, HPCL & BPCL) 1 re increase in diesel cut their losses by Rs 4522 crore Increase in power tariff (NTPC & NHPC) also to equipment manufacturers like Bhel Increase in natural gas price (benefit to Relaince )
INDUSTRY ANALYSIS INDUSTRY ANALYSIS IS DIVIDED INTO FOUR PARTS 1. SENSITIVITY OF BUSINESS CYCLE 1. Cyclical Industries (Automobiles, washing m/c) 2. Defensive (food producer, pharma) 2. INDUSTRY LIFE CYCLE 1. Development stage (high exp,comptetion,adv & low sales,resources) 2. Expansion (need more working cap, high demand ) 3. Stagnation (maturity, shrinking profit, starts aquiring small firms, increase prod cap, start diversify) 4. Decline (floppy, b&w tv, luna)
INDUSTRY ANALYSIS STUDY OF STRUCTURE AND CHARACTERISTICS OF AN INDUSTRY PROFIT POTENTIAL OF INDUSTRIES: PORTER MODEL
SENSITIVITY OF BUSINESS CYCLE FACTORS
A) SENSITIVITY OF SALES B) OPERATING LEVERAGE C) FINANCIAL LEVERAGE
INDUSTRY ANALYSIS FACTORS AFFECTING INDUSTRIAL PERFORMANCE Demand supply Gap (power sector) Supply of Raw material (Australia coal eg 2011 flood) Gestation period Permanence Labour Conditions Govt attitude Industrial Growth
INDUSTRY ANALYSIS
INDUSTRY LIFE CYCLE ANALYSIS
PIONEERING STAGE RAPID GROWTH STAGE MATURITY & STABILIZN STAGE DECLINE STAGE STUDY OF STRUCTURE & CHARACTERISTICS OF AN INDUSTRY STRUCTURE OF THE INDUSTRY AND NATURE OF COMPETITION NATURE AND PROSPECTS OF DEMAND COST, EFFICIENCY AND PROFITABILITY TECHNOLOGY AND RESEARCH
INDUSTRY ANALYSIS
PROFIT POTENTIAL OF INDUSTRIES FORCES DRIVING COMPETITION PORTER MODEL
POTENTIAL ENTRANTS BARGAINING SUPPLIERS POWER OF SUPPLIERS
TREAT OF NEW ENTRANTS INDUSTRY BARGAINING RIVALRY BUYERS AMONG POWER OF FIRMS BUYERS
THREAT OF SUBSTITUTE PRODUCTS SUBSTITUTES
SUMMING UP
A commonly advocated procedure for fundamental analysis involves a 3 step analysis: macroeconomic analysis, industry analysis, and company analysis. In a globalised business environment, the top-down analysis of the prospects of a firm must begin with the global economy.
There are two broad classes of macroeconomic policies, viz. demand side policies and supply side policies. Fiscal and monetary policies are the two major tools of demand side economics. Fiscal policy is concerned with the spending and tax initiatives of the government.
Monetary policy is concerned with money supply and interest rates. The macroeconomy is the overall economic environment in which all firms operate. Almost every industry goes through a life cycle consisting of four stages viz., pioneering stage, rapid growth stage, maturity and stabilisation stage, and decline stage. Michael Porter has argued that the profit potential of an industry depends on the combined strength of five basic competitive forces.
