Macroeconomic and Industry Analysis

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 THREE-
STEP 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 COUNTRY’S INDUSTRIES.
THE GLOBAL ECONOMY
Countries GDP % of World Interest Inflation

(billion Economy Rates
USD)
US 15685 23 0.25% 1%
China 8230 7.9 6% 3.00%
Europe 12195 20.9 0.25% 0.9%
Japan 5960 8.17 0% 1.10%
India 1842 2.09 7.75% 7.00%
Source: http://www.tradingeconomics.com/
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 & STABILIZ’N 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
TREAT OF NEW ENTRANTS
BARGAINING INDUSTRY BARGAINING
SUPPLIERS RIVALRY BUYERS
POWER OF AMONG POWER OF
SUPPLIERS 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.

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MACROECONOMIC AND

• The Economy-Industry-Company (E-I-C) Framework

• The Global Economy

• Central Government Policy

 ECONOMY-WIDE FACTORS : 30-35 PERCENT

BASED ON THE ABOVE EVIDENCE, A COMMONLY ADVOCATED

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.

WHILE MONITORING THE GLOBAL ECONOMY BEAR IN

Countries GDP % of World Interest Inflation

China 8230 7.9 6% 3.00%

Europe 12195 20.9 0.25% 0.9%

Japan 5960 8.17 0% 1.10%

India 1842 2.09 7.75% 7.00%

• THE GOVERNMENT EMPLOYS TWO BROAD

• TRADITIONALLY, THE FOCUS WAS MOSTLY ON

• FISCAL POLICY IS CONCERNED WITH THE SPENDING

• AN INCREASE IN GOVERNMENT SPENDING STIMULATES

• BY THE SAME TOKEN, A DECREASE IN TAX RATES

MONETARY POLICY IS CONCERNED WITH THE

THE MAIN TOOLS OF MONETARY POLICY ARE:

 GROWTH RATE OF GROSS DOMESTIC PRODUCT

INDUSTRY ANALYSIS IS DIVIDED INTO FOUR PARTS

STUDY OF STRUCTURE AND CHARACTERISTICS OF AN

FACTORS AFFECTING INDUSTRIAL PERFORMANCE

 INDUSTRY LIFE CYCLE ANALYSIS

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