BM410-13 Macroeconomic Analysis 10Oct05 - Marriott School

oppositemincedManagement

Oct 28, 2013 (3 years and 11 months ago)

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BM410: Investments

Macroeconomic

Analysis


Or understanding the critical economic
factors that affect your company

2

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?



3

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 won’t be surprised later


4


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

Global Analysis Framework

5

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?)

6

Questions


Any questions on the global analysis
framework and why it is important?

7

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?)


8

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

9

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



10

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

11

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


12

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

13

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

14

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

15

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.

16

Problem

Why do you think the index of consumer
expectations is a useful leading indicator
of the macro
-
economy?

17

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.


18

Questions


Do you understand the critical areas
of this global analysis framework?

19

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

20

I. World Bank:

Global Economic Prospects

21

II. Economist Publications

22

Economist Intelligence Unit:

Purchased Information


23

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

24

Questions


Any questions on the key sources of
international economic information?

25

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?

26

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

27

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

28

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

29

Questions


Any questions on how to include your
economic data into your forecasts?


30

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?



31

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

32

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.

33

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.

34

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.



35

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

36

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.

37

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 the future