Essentials of Investments: Chapter 12 - Macroeconomic and Industry Analysis includes Fundamental Analysis, The Global Econom, The Domestic Macroeconom, The Domestic Macroeconomy, Demand and Supply Shocks, Fiscal Polic.
CHAPTER 12 Macroeconomic and Industry Analysis INVESTMENTS | BODIE, KANE, MARCUS McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc All rights reserved 17-2 Fundamental Analysis • A firm’s value comes from its earnings prospects, which are determined by: – The global economic environment – Economic factors affecting the firm’s industry – The position of the firm within its industry INVESTMENTS | BODIE, KANE, MARCUS 17-3 The Global Economy • Stock markets around the world responded in unison to the financial crisis of 2008 • Performance in countries and regions can be highly variable • It is harder for businesses to succeed in a contracting economy than in an expanding one INVESTMENTS | BODIE, KANE, MARCUS 17-4 The Global Economy • Political risk: – The global environment may present much greater risks than normally found in U.S.-based investments • Exchange rate risk: – Changes the prices of imports and exports INVESTMENTS | BODIE, KANE, MARCUS 17-5 Table 17.1 Economic Performance INVESTMENTS | BODIE, KANE, MARCUS 17-6 The Domestic Macroeconomy • Stock prices rise with earnings • P/E ratios are normally in the range of 1225 • The first step in forecasting the performance of the broad market is to assess the status of the economy as a whole INVESTMENTS | BODIE, KANE, MARCUS 17-7 Figure 17.2 S&P 500 Index versus Earnings Per Share INVESTMENTS | BODIE, KANE, MARCUS 17-8 The Domestic Macroeconomy: Key Variables • • • • • • Gross domestic product Unemployment rates Inflation Interest rates Budget deficit Consumer sentiment INVESTMENTS | BODIE, KANE, MARCUS 17-9 Demand and Supply Shocks • Demand shock - an event that affects demand for goods and services in the economy • Supply shock - an event that influences production capacity or production costs INVESTMENTS | BODIE, KANE, MARCUS 17-10 Demand-side Policy • Fiscal policy – the government’s spending and taxing actions • Monetary policy – manipulation of the money supply INVESTMENTS | BODIE, KANE, MARCUS 17-26 Table 17.5 Examples of NAICS Industry Codes INVESTMENTS | BODIE, KANE, MARCUS 17-27 Sensitivity to the Business Cycle • Three factors determine how sensitive a firm’s earnings are to the business cycle Sensitivity of sales: • Necessities vs discretionary goods • Items that are not sensitive to income levels (such as tobacco and movies) vs items that are, (such as machine tools, steel, autos) INVESTMENTS | BODIE, KANE, MARCUS 17-28 Figure 17.9 Industry Cyclicality INVESTMENTS | BODIE, KANE, MARCUS 17-29 Sensitivity to the Business Cycle Operating leverage : the split between fixed and variable costs • • Firms with low operating leverage (less fixed assets) are less sensitive to business conditions Firms with high operating leverage (more fixed assets) are more sensitive to the business cycle INVESTMENTS | BODIE, KANE, MARCUS 17-30 Table 17.6 Operating Leverage of Firms A and B Throughout the Business Cycle INVESTMENTS | BODIE, KANE, MARCUS 17-31 Sensitivity to the Business Cycle Financial leverage: the use of borrowing • Interest is a fixed cost that increases the sensitivity of profits to the business cycle INVESTMENTS | BODIE, KANE, MARCUS 17-32 Figure 17.10 A Stylized Depiction of the Business Cycle INVESTMENTS | BODIE, KANE, MARCUS 17-33 Sector Rotation • Portfolio is shifted into industries or sectors that should outperform, according to the stage of the business cycle • Peaks – natural resource extraction firms • Contraction – defensive industries such as pharmaceuticals and food INVESTMENTS | BODIE, KANE, MARCUS 17-34 Sector Rotation • Trough – capital goods industries • Expansion – cyclical industries such as consumer durables INVESTMENTS | BODIE, KANE, MARCUS 17-35 Figure 17.11 Sector Rotation INVESTMENTS | BODIE, KANE, MARCUS 17-36 Industry Life Cycles Stage • Start-up • Consolidation • Maturity • Relative Decline Sales Growth • Rapid and increasing • Stable • Slowing • Minimal or negative INVESTMENTS | BODIE, KANE, MARCUS 17-37 Figure 17.12 The Industry Life Cycle INVESTMENTS | BODIE, KANE, MARCUS 17-38 Which Life Cycle Stage is Most Attractive? • Quote from Peter Lynch in One Up on Wall Street: " Many people prefer to invest in a high-growth industry, where there’s a lot of sound and fury Not me I prefer to invest in a lowgrowth industry INVESTMENTS | BODIE, KANE, MARCUS 17-39 Which Life Cycle Stage is Most Attractive? …In a low-growth industry, especially one that’s boring and upsets people [such as funeral homes or the oil-drum retrieval business], there’s no problem with competition You don’t have to protect your flanks from potential rivals and this gives you the leeway to continue to grow.” Peter Lynch in One Up on Wall Street INVESTMENTS | BODIE, KANE, MARCUS 17-40 Industry Structure and Performance: Five Determinants of Competition Threat of entry Rivalry between existing competitors Pressure from substitute products Bargaining power of buyers Bargaining power of suppliers INVESTMENTS | BODIE, KANE, MARCUS ... INVESTMENTS | BODIE, KANE, MARCUS 1 7-9 Demand and Supply Shocks • Demand shock - an event that affects demand for goods and services in the economy • Supply shock - an event that influences production... MARCUS 1 7-1 4 Supply-Side Policies • Goal: To create an environment in which workers and owners of capital have the maximum incentive and ability to produce and develop goods • Supply-siders focus... MARCUS 1 7-1 0 Demand-side Policy • Fiscal policy – the government’s spending and taxing actions • Monetary policy – manipulation of the money supply INVESTMENTS | BODIE, KANE, MARCUS 1 7-1 1 Fiscal