Transcript BM410-13 Macroeconomic Analysis 10Oct05

BM410: Investments
Macroeconomic
Analysis
Or understanding the critical economic
factors that affect your company
Objectives
A. Do you understand the global analysis
framework and the importance of
understanding global issues?
B. Do you understand the critical areas of that
global analysis framework, particularly
economic analysis?
C. Do you understand where to find key
international economic data?
D. Do you understand how to include economic
data in your company report?
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A. Understand the
Global Analysis Framework
 I want you to change your thinking
• You are not preparing to be a US analyst
• You are preparing to be a global analyst with
expertise in the US
 Why must you understand global issues?
• Your competitors are likely to be global
• They understand global issues
• In order to compete, you must understand them
as well
 For in the future, international business will be just
business
• Prepare now and you
3 won’t be surprised later
Global Analysis Framework
 What is our approach to company analysis?
• Fundamental Analysis
• Approach to Fundamental Analysis
• Domestic and global economic analysis
• Domestic and global industry analysis
• Company analysis
• Why use the top-down approach?
• The return on a stock is a function of the
market
• The return on a market is a function of the
economy
• The return on an economy is a function of
the world economy
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Global Analysis Framework
Global Economic and Political Analysis
(what is the world doing?)
Country Economic and Political Analysis
(what’s happening in my main markets?)
Global Industry Analysis
(what is the global industry doing?)
Country Industry Analysis
(what’s happening in my main industry?)
Company Analysis
(what’s happening with my company?)
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Questions
Any questions on the global analysis
framework and why it is important?
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B. Understand Critical Areas of the
Global Analysis Framework
Global Economic and Political Analysis
(what is the world doing?)
Country Economic and Political Analysis
(what’s happening in my main markets?)
Global Industry Analysis
(what is the global industry doing?)
Country Industry Analysis
(what’s happening in my main industry?)
Company Analysis
(what’s happening with my company?)
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Global Economic
and Political Analysis
Key Considerations
 Performance in countries and regions is highly variable
• Monitor it well
 Political risk can change everything
• Keep your hand on the country’s political pulse
 Exchange rate risk is always there
• Keep abreast and cover yourself if economically
feasible, i.e. sales, profits, stock returns
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Country Economic
and Political Analysis
Key considerations?
 1. Government Policy
• Fiscal and Monetary Policy
 2. Factors that impact the economy
• Supply and demand shocks
 3. Business cycles
• Troughs and peaks
 4. Forecasting
• Tools to help
 5. Key variables to watch
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1. Government Policy
 Fiscal Policy - government spending/taxing
actions as part of “demand-side” management
• Direct policy to implement, but hard to decide on
• Therefore difficult to use to fine-tune the
economy
• Look at the governments surplus or deficit
• This will show the governments spending
program
 Monetary Policy - manipulation of the money supply to
influence economic activity, also a “demand-side”
activity
• Easy to formulate, but takes a longer time to work
through the economy
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Government Policy (continued)
 Tools of monetary policy
• Open-market operations
• Adds/subtracts liquidity to the system
• Discount rate
• The ate banks can borrow short-term from the
Fed and indirectly the rate consumers pay for
borrowing
• Reserve requirements
• The amount that banks must keep in cash or on
reserve at the Fed
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2. Factors that Impact the Economy
 Demand shocks
• Affects the demand for goods and services
• Tax cuts or rebates
• Increases in government spending
• Dramatic weather changes or political shocks
 Supply shock
• Affects the supply of good and services
• Commodity price changes
• Educational level of economic participants
• Technology advances that improve production
or capacity
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3. Business Cycles
 How does the economy perform, and how
does the industry perform under various
economic conditions?
• Business Cycle
• Peak
• Trough
• Industry relationship to business cycles
• Cyclical
• Defensive
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4. Forecasting Economic
and Industry Performance
 Leading Indicators
 Tend to rise and fall in advance of the economy
 Examples: Avg. weekly hours of production
workers, stock prices, money supply (M2)
 Coincident Indicators
 Tend to change directly with the economy
 Examples: industrial production, manufacturing and
trade sales, personal income less transfer payments,
 Lagging Indicators
 Tend to follow or lag economic performance
 Examples: ratio of trade inventories to sales, ratio of
consumer installment, credit outstanding to personal
income, change in index of labor costs
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5. Economic Variables
to Watch
Key variables
•
•
•
•
Gross domestic product
Unemployment rates
Interest rates & inflation
International Trade and Investment
measures
• Consumer sentiment
Other variables
• Elections, Katrina and Rita, etc.
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Problem
Why do you think the index of consumer
expectations is a useful leading indicator
of the macro-economy?
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Answer
The index of consumer expectations is a
useful leading economic indicator
because if consumers are optimistic
about the future they will be more
willing to spend money, especially on
consumer durables, which will increase
aggregate demand and stimulate the
economy.
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Questions
 Do you understand the critical areas
of this global analysis framework?
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C. Key sources of international
Economic Data?
I. World Bank
 Global Economic Prospects, published bi-annually
 World Economic Indicators, published annually
II. Economist Publications
 Economist magazine, published monthly
 Economist Intelligent Unit, ongoing publication, but
available for a (very high) fee
III. Wall Street Journal
 Economic and other forecasts are sporadic, but
available if you watch the table of contents closely
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I. World Bank:
Global Economic Prospects
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II. Economist Publications
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Economist Intelligence Unit:
Purchased Information
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III. Wall Street Journal
Daily publication
• No specific ongoing economic analysis
• It does have sporadic forecasts as part of
specific articles and sections
• They do have a quarterly economic forecasts
section where various economic forecasts
are compared to actual results
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Questions
 Any questions on the key sources of
international economic information?
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D. Including Economic Forecasts
in Financial Analysis
 Key issues?
 What are your forecasts?
 Where did they come from?
 How do they come into your forecasts?
 How do you document them?
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Forecasts Used in this Class
 This is not an economic forecasting class
• As such, I will give you a recommended forecast
• This forecast is on the Apple.xls spreadsheet
• You can copy this directly to your spreadsheet
• Note that my forecasts are from the World Bank
• You can, however, change the forecasts consistent
with your own views
• All I ask is that you document your changes in
views in the ratios section
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Where Economic Data is Used (continued)
 Sales Growth
• Compare how sales have grown historically within
the economic setting
• Has sales growth increased even in difficult
times?
• They may likely continue in the future
• Has sales growth declined in difficult times?
• This may also continue in the future
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Where Economic Data is Used (continued)
 Forecasting Interest Expense and Interest
Income
• Generally, most interest rates are (loosely) tied to
LIBOR, the London Inter Bank Offered Rate
• Keep your rate on interest income and interest
expense a consistent multiple over or under this
rate, i.e. interest income is + 30 bps over LIBOR
and interest expense is + 500 bps over LIBOR
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Questions
 Any questions on how to include your
economic data into your forecasts?
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Review of Objectives
A. Do you understand the global analysis
framework and the importance of understanding
global issues?
B. Do you understand the critical areas of that
global framework, particularly economic
analysis?
C. Can you find sources of data for your
international economic prospects?
D. Do you know how to write up the industry
report?
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D. Understand How to Write Up the
Industry Report
Mandatory Framework:
•
•
•
•
Key Information
Description and Summary
International Competitive Structure
SWOT Analysis/Positives and Negatives
Factors
• Key Valuation Ratios
• Key Items to Watch
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Key Information
 Key Information
•
•
•
•
Industry Sub-sector
Major Industry
Country
Industry Type
• Use the six types as discussed by Peter Lynch on
page 400: Slow Growers, Stalwarts, Fast
Growers, Cyclicals, Turnarounds, and Asset
Plays
• Key Indices
• Include which items are included in the index,
i.e. price, price earnings, dividends, etc.
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Description and Summary
 This should include:
• A brief description of the industry and what makes
is different. This could include how long it has
been around, the key areas of interest, key business
models, and any other information that you deem
relevant to the discussion.
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International Competitive Structure
 This section includes:
• The structure of industry suppliers and
competition, i.e., fragmented, oligopolistic;
expansion opportunities; the importance of
capital, barriers to entry globally, impacts of
global regulation and trade, etc.
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Analysis
 You can determine the type of analysis
• Positive Factors and Negative Factors
• Put these in the order of importance, most
important first
• Strengths, Weaknesses, Opportunities, Threats
• Clearly delineate which of these are most
important
 Regardless of your type of analysis, make sure you
cover the industry clearly
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Key Things to Watch
 Key Valuation Ratios to Watch
• List the key ratios that are followed by analysts in
this industry.
• A good start is to look at analysts reports from
Investex Plus in the library (see FR-1A –
Finding Key Sources of Financial Information).
 Key Items to Watch
• These are the key economic and other statistics that
are key to performance for this industry. As you
read through your 10-k reports, you will get a
strong sense of the key variables to watch.
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Return Performance
 This is the relative total return performance versus the
market and industry indices (see IR-2A Getting
Industry Total Returns)
• Include your market index and industry index (note:
your industry index does not need to have PE data
to be included here. All it needs is total return data)
• Excess is the difference between the industry return
and the market return
 GDP Return is the GDP real growth rate for the year
from FR-2A Company Financials - AAPL Section 19)
• By seeing how the industry and economy has
performed together, it will give you an indication of
what might happen in 37
the future