FUNDAMENTAL ANALYSIS

ECONOMIC ANALYSIS
INDUSTRY ANALYSIS
COMPANY ANALYSIS
SHARE VALUATION

FUNDAMENTAL ANALYSIS
Fundamental analysis:
An approach of analysing and evaluating a stock in order to measure its intrinsic value (fair value).
The analysis of economy, industry and company variables.
Objective: to compare the intrinsic value with the market price in order to make investment decision.

FUNDAMENTAL ANALYSIS
SECURITY ANALYSIS
The process of gathering and organizing information and then
using it to determine the intrinsic value* of a share of common
stock.
*the underlying value of a stock as determined through fundamental analysis

What is worth to buy?

Assist in identifying attractive equity investments.
A top-down analysis: starting with the big picture and moving to
the individual company.

FUNDAMENTAL ANALYSIS

ECONOMIC ANALYSIS

It is a study of general economic conditions that is used in the

valuation of common stock.

The global economy and the domestic macro-economy.

Global economy: price competition from foreign competitors,

political developments, trade policy, exchange rate

Domestic economy: GDP, Industrial production, unemployment rate,

inflation, interest rates, budget deficit.

The behavior of the economy is captured in the business cycle.

BUSINESS CYCLE
Business cycles, according to the International Encyclopedia of
Economics, refer to time periods of rising prices, employment, and
output that are followed by declines in these macroeconomic
quantities.

BUSINESS CYCLE
Phases of the Business Cycle:
The curves on the diagram look almost like rolling hills, and are meant to
represent the business cycles phases. They go in the following order:

Expansion One This first trip up the hill, occurs when growth begins.
Peak This is the highest point of the GDP before it enters into a contraction
period. It is the top of the hill.
Contraction The curve begins to head downward to signify slowed and
eventually negative growth.
Trough This is the valley where the curve evens out again. It is where the
GDP hits its lowest point.
Expansion Two Growth increases again, and the line heads back
upward. Then the cycle repeats itself

BUSINESS CYCLE
A trough represents the end of a recession and the beginning of an
expansion.
A peak represents the end of an expansion and the beginning of a
recession.
Each business cycle is unique; no two cycles are alike.
Not all industries or segments of the economy are equally affected by
business cycles.
Industries where the underlying demand for the product is consumer
oriented will quite likely be sensitive to short-term swings in the business
cycle.

KEY ECONOMIC FACTORS

Government Fiscal Policy

Taxes
Government Spending
Debt Management

Monetary Policy
Money Supply
Interest rates

Other factors

Inflation
Consumer spending
Business investments
Foreign Trade and Foreign Exchange Rates

INDUSTRY ANALYSIS
The 2nd step in the top-down approach and focuses on
industry life cycles and industry structure.
Industries can be affected by:
government regulation,
foreign and domestic competition
economic business cycle

A starting point for industry analysis is by determining

where an industrys current position is in the industry life
cycle.

INDUSTRY LIFE CYCLE

INDUSTRY ANALYSIS
STAGE 1: INITIAL DEVELOPMENT (INTRODUCTION)

Investment opportunities are usually not available to most investors.

The industry is new and untried, and the risk is very high.

STAGE 2: RAPID EXPANSION (GROWTH)

Economic and financial variables have little to do with the industrys overall performance.
Investors will be interested in investing almost regardless of the economic climate.

STAGE 3: MATURITY

Most influenced by economic developments

Expansion comes from growth of the economy
Long-term nature of the industry becomes apparent
E.g industry like food and apparel

STAGE 4: DECLINE

Demand for the industrys products is diminishing and companies are leaving the industry.
Investment opportunities almost nonexistent unless we are seeking only dividend income.