CHAPTER 17 Macroeconomic and Industry Analysis

CHAPTER 17Macroeconomic and Industry Analysis

Magda Saracindy FTantri Widya SA firms value comes from its earnings prospects, which are determined by:The global economic environmentEconomic factors affecting the firms industry The position of the firm within its industryFundamental AnalysisThe top-down analysis of a firm's prospects must start with the global economyPerformance in countries and regions can be highly variable.It is harder for businesses to succeed in a contracting economy than in an expanding one.The Global EconomyPolitical 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.

The Global EconomyTable 17.1 Economic Performance

The Domestic MacroeconomyThe macroeconomy is the environment in which all firms operate. Stock prices rise with earnings.P/E ratios are normally in the range of 12-25.The first step in forecasting the performance of the broad market is to assess the status of the economy as a whole.

Figure 17.2 S&P 500 Index versus Earnings Per Share

Gross domestic product : the measure of the economys total production of goods and services. Rapidly growing GDP indicates an expanding economy with ample opportunity for a Firm to increase salesUnemployment rates:the percentage of the total labor force yet to find work and measures the extent to which the economy is operating at full capacity. Inflation : the rate at which the general level of prices is risingThe Domestic Macroeconomy:Key VariablesThe Domestic Macroeconomy:Key Variables contd Interest rates : High interest rates reduces the percent value of future cash flows, thereby reducing the attractiveness of investment opportunities Budget deficit : The budget deficit of the federal government is the difference between government spending and revenues. Any budgetary shortfall must be offset by government borrowing Consumer sentiment : Consumers* and producers* optimism or pessimism concerning the economy is an important determinant of economic performance.

Demand and Supply ShocksDemand shock - an event that affects demand for goods and services in the economy.Demand shocks are usually characterized by aggregate output moving in the same direction as interest rates and inflationSupply shock - an event that influences production capacity or production costs.Supply Shocks are usually characterized by aggregate output moving in the opposite direction of inflation and interest rate.

Demand-side PolicyFiscal policy the governments spending and taxing actions

Monetary policy manipulation of the money supplyFiscal PolicyMost direct way to stimulate or slow the economy

Formulation of fiscal policy is often a slow, cumbersome political process

Fiscal PolicyTo summarize the net effect of fiscal policy, look at the budget surplus or deficit.Deficit stimulates the economy because: it increases the demand for goods (via spending) by more than it reduces the demand for goods (via taxes)

Monetary PolicyManipulation of the money supply to influence economic activity.Increasing the money supply lowers interest rates and stimulates the economy.Less immediate effect than fiscal policyTools of monetary policy include open market operations, discount rate, reserve requirements.

Supply-Side PoliciesGoal: 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 on how tax policy can be used to improve incentives to work and invest.