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Macro Economic Analysis Macro Economic Analysis

The document provides an overview of macroeconomic analysis for evaluating business and stock market prospects. It discusses how approximately 2/3 of stock price variation is due to overall economic forces. It also outlines several key macroeconomic variables that impact corporate profits and security prices, such as GDP, inflation, interest rates, and government policies. The document emphasizes using a top-down "economic-industry-company" approach and analyzing business cycles, sector rotations, and industry characteristics and life cycles.

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Kanav Gupta
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81 views

Macro Economic Analysis Macro Economic Analysis

The document provides an overview of macroeconomic analysis for evaluating business and stock market prospects. It discusses how approximately 2/3 of stock price variation is due to overall economic forces. It also outlines several key macroeconomic variables that impact corporate profits and security prices, such as GDP, inflation, interest rates, and government policies. The document emphasizes using a top-down "economic-industry-company" approach and analyzing business cycles, sector rotations, and industry characteristics and life cycles.

Uploaded by

Kanav Gupta
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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MACRO ECONOMIC ANALYSIS

Macroeconomic Analysis
The prospects of a business are tied to those of the broader
economy.
Studies show that about 2/3rd variation in the prices of
stock results due to forces operating in the overall
economy and the particular industry.
The course of the national economy affects corporate
profits, investors attitudes and expectations, and
ultimately security prices.
Profits of companies are based on key economic factors
such as cost of raw material, national income, savings etc.
Macroeconomic Analysis
A systematic approach called the economic-industry-
company (E-I-C) approach is , therefore, followed to
predict the expected dividends from stocks and price
changes.

This approach is sometimes also referred to as a top-


down method of analysis.
Effect of International Economy
The international economy may affect :
A firms export prospects
Its price competition
Its profits from investment abroad

A key factor that affects international competitiveness of a


countrys industries is the Exchange Rate.
Key Variables in Domestic
Economy
GDP
Industry Capacity Utilization
Inflation
Interest Rates
Budget Deficits
Sentiment
Weather
Government Macroeconomic
Policy
Some government policies affect the demand for goods
while others affect the supply.
Demand side policies relate to government spending,
interest and tax levels.
These include the Fiscal Policy and the Monetary Policy
Supply side policies aim at increasing the productive
capacity of the economy.
These relate to provision of incentives to work, innovate
and take risks through the system of taxation.
These also include policies on education, infrastructure
and research.
Business Cycles
Business cycles are recurring patterns of recession and
recovery in the economy.
The transition points across cycles are called Peaks and
Troughs.
A Peak is the transition from the end of the expansion to
the start of a contraction.
A Trough occurs at the bottom of a recession just as the
economy enters a recovery.
Different stages of business cycles affect the relative
performance of different industry groups such as cyclical
industries and defensive industries
Business Cycles
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
Sector Rotation
Economic Indicators of Business
Cycles
Leading Indicators tend to rise and fall in advance of the
economy : Stock index, Monetary policy, New orders for
plant and equipment.
Coincident Indicators tend to change directly with the
economy : Industrial production, trade sales, personal
incomes.
Lagging Indicators tend to follow the economic
performance : Outstanding loans, Level of inventories in
relation to sales, Average interest rate charged by banks
Industry Analysis
The performance of a firm is closely linked to the
performance of the industry.
Industry analysis should be interlinked with economic
analysis.
An economic forecast helps select industries to invest in
both during periods of prosperity and recession
Small investors can take positions in industry performance
by using mutual funds with industry focus (e.g. an
infrastructure fund)
Key Characteristics of Industry
Analysis
Past Sales and earning performance
Sensitivity to business cycle
Sensitivity of sales
Operating leverage
Financial leverage
Industry life-cycle stage
Competitive environment and performance
Threat of entry
Rivalry among existing competitors
Pressure from substitute products
Bargaining power of buyers and suppliers
Industry Life Cycle
Stage Sales Growth
Start-up Rapid & Increasing
Consolidation Stable
Maturity Slowing
Relative Decline Minimal or Negative
Industry Life Cycle
Peter Lynchs Classification
Slow Growers
Stalwarts
Fast Growers
Cyclicals
Turnarounds
Asset Plays

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