1. 12 Macroeconomic and Industry Analysis Bodie, Kane and Marcus
Essentials of Investments 9th Global Edition

2. National Economic Environment Exchange Rate
12.1 Global Economy
National Economic Environment
Crucial determinant of industry performance
Exchange Rate
Rate at which domestic currency can be converted into foreign currency

3. Table 12.1 Economic Performance
2011 Stock Market Return (%)
In Local Currency
In U.S. Dollars
Forecasted Growth in GDP, 2012 (%)
Brazil
-22.9
-28.9
3.5
Britain
-3.9
-4.2
0.2
Canada
-9.1
-10.9
2.0
China
-22.7
-19.1
8.2
France
-16.1
-19.2
-0.3
Germany
-11.6
-14.9
0.1
Greece
-53.2
-54.9
-7.5
India
-22.6
-34.6
7.8
Italy
-24.0
-26.9
-1.1
Japan
-16.3
1.7
Mexico
-3.0
-12.9
3.1
Russia
-15.4
-19.0
3.7
Singapore
-15.0
-15.5
4.0
South Korea
-9.0
-10.1
3.8
Thailand
0.3
U.S.
1.6
Source: The Economist, January 7, 2012

4. Figure 12.1 Change in Real Exchange Rate

5. Figure 12.2 S&P 500 Index versus Earnings per Share

6. 12.2 The Domestic Macroeconomy
Gross Domestic Product (GDP)
Market value of goods and services produced over period of time
Unemployment Rate
Ratio of number of unemployed to total labor force
Inflation
Rate at which general level of prices for goods and services is rising

7. 12.2 The Domestic Macroeconomy
Interest Rates
High interest rates reduce present value of future cash flows
Budget Deficit
Government spending in excess of government revenues
Sentiment
Consumer optimism/pessimism are determinants of economic performance

8. 12.3 Interest Rates Fundamental Factors of Interest Rates
Supply of funds from savers
Demand for funds from borrowers
Government’s net supply/demand for funds, modified by Federal Reserve
Expected rate of inflation

9. Figure 12.3 Determination of Equilibrium Real Rate of Interest

10. 12.4 Demand and Supply Shocks
Demand Shock
Event that affects demand for goods and services in economy
Supply Shock
Event that influences production capacity and costs in economy

11. 12.4 Demand and Supply Shocks
The price of imported oil fell dramatically in late What sort of macroeconomic shock would this be considered?

12. 12.5 Government Policy Fiscal Policy Monetary Policy
Use of government spending and taxing for stabilizing economy
Monetary Policy
Actions taken by the central bank to influence money supply or interest rates
Supply-Side Policies
Address productive capacity of economy, goal is to induce workers/owners to produce goods

13. 12.6 Business Cycles Business Cycles Peak Trough
Recurring cycles of recession and recovery
Peak
Transition from end of expansion to start of contraction
Trough
Transition point between recession and recovery

14. 12.6 Business Cycles Cyclical Industries Defensive Industries
Industries with above-average sensitivity to state of economy
Defensive Industries
Industries with below-average sensitivity to state of economy

15. Figure 12.4 Cyclical Indicators

16. Figure 12.4 Cyclical Indicators

17. 12.6 Business Cycles Stock-market-price index Money supply
Leading Economic Indicators
Economic series that tend to rise or fall in advance of rest of economy
Stock-market-price index
Money supply
Manufacturers’ orders

18. Table 12.2 Indexes of Economic Indicators

19. Figure 12.5 Indexes of Leading, Coincident, and Lagging Factors

21. 12.7 Industry Analysis
Defining an Industry
NAICS codes in the US
Classification of firms into industry groups using numerical codes to identify industries
KSE sectors

22. Figure 12.7 Return on Equity, 2011

23. Figure 12.7 Return on Equity, KSE

24. Figure 12.8 Industry Stock Price Performance, 2011

25. Figure 12.8 Industry Stock Price Performance, 2011

26. Figure 12.9 ROE of Application Software Firms

27. Table 12.5 Examples of NAICS Industry Codes

28. Figure 12.10 Industry Cyclicality

29. 12.7 Industry Analysis Sensitivity of sales Operating leverage
Sensitivity to the Business Cycle
Sensitivity of sales
Necessary product or luxury?
Low sensitivity to income
Operating leverage
Financial leverage

30. 12.7 Industry Analysis

31. Figure 12.11 Stylized Depiction of Business Cycle

32. 12.7 Industry Analysis
Sector Rotation
Shifting portfolio into industry sectors expected to outperform others based on macroeconomic forecasts
Near peak, invest in natural resource extraction and processing firms
After peak, defensive industries often better performers
In trough, capital goods industries often better performers
In expansion, cyclical industries often better

33. Figure 12.12 Sector Rotation

34. 12.7 Industry Analysis

35. 12.7 Industry Analysis
Industry Life Cycles: Stages Firms Pass Through to Maturity
Start-up stage: Often characterized by new technology/product
Consolidation stage: Industry leaders begin to emerge
Maturity stage: Product has reached potential for use by consumers
Relative decline: May grow less than rest of economy or shrink

36. Figure 12.13 Industry Life Cycle

37. Figure 12.13 Industry Life Cycle

44. At what stage in the life cycle of an industry is investment most attractive and lucrative?

45. Peter Lynch’s Industry Classification
Stage
Characteristic
Slow Growers
Cash cow
Stalwarts
Cash cows with a bit higher growth (e.g. Coca-Cola)
Fast Growers
High growth rates
Cyclicals
Moves with the economy
Turnarounds
In bankruptcy or heading to it and can reover
Asset Play
Valuable assets not reflect in the stock price

46. 12.7 Industry Analysis Industry Structure and Performance
Threat of entry: New entrants to industry pressure price/profits
Rivalry between existing competitors: Market share competition pressures price/profits
Pressure from substitute products: Firms in related industries can threaten market share

47. 12.7 Industry Analysis
Industry Structure and Performance
Bargaining power of buyers
Large-scale buyers have considerable bargaining power
Bargaining power of suppliers
Large-scale suppliers have considerable bargaining power

48. My Problems Basic Intermediate (6 problems) CFA Problems (2 problems)
4 effect of policy on business conditions (1)
Intermediate (6 problems)
17 industry sensitivity (3)
19 industry sensitivity (3)
21 industry life cycle (4)
24 effect of policy on business conditions (1)
CFA Problems (2 problems)
2 industry life cycle (4)
4 industry life cycle (4)
Webmaster 1