Page 120 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Unit 4: Fundamental Analysis

4.1.3 Economic Forecasting Notes

Still, it must be properly understood at this stage that economic forecasting is a must for making
investment decision. It has been mentioned earlier too, that the fortunes of specific industries
and the firm depends upon how the economy looks like in the future, both short-term and long-
term. Accordingly, forecasting techniques can also be divided and categories: Short-term
forecasting techniques are dealt with in detail; these terms should be clearly understood. Short-
term refers to a period up to three years. Sometimes, it can also refer to a much shorter period,
as a quarter or a few quarters. Intermediate period refers to a period of three to five years. Long-
term refers to the forecast made for more than five years. This may mean a period of ten years
or more.

Techniques used

1. Economic indicators
2. Diffusion index
3. Surveys
4. Economic Model Building

We shall discuss some short-term forecasting techniques in the following.
At the very outset, let it be mentioned that the central theme of economic forecasting is to
forecast national some with its various components. This is because it summarizes the receipts
and expenditures of all segments of the economy, be they government, business or households.
These macro-economic accounts describe economic activities over a period of time.
Not surprisingly, therefore, all the techniques focus on forecast national income and its various
components, particularly, those components that have bearing on an industry and the particular
industry and the company to be analysed.
GNP is a measure to quantify national income and is the total value of the final output of goods
and produced in the economy. It is an important indicator of the level and the rate of growth in
the economy, and is of central concern to analysts for forecasting overall as well as various
components during a certain period. Following are some of the techniques of short-term economic
forecasting.

Anticipatory Surveys

This is very simple method through which investors can form their opinion/expectations with
respect to the future state of the economy. As is generally understood, this is a survey of expert
opinions of those prominent in the government, business, trade and industry. Generally, it
incorporates expert opinion with construction activities, plant and machinery expenditure, level
of inventory etc. that are important economic activities. Anticipatory surveys can also incorporate
the opinion or future plans of consumers regarding their spending. So long as people plan and
budget their expenditure and implement their plans accordingly, such surveys should provide
valuable input, as a starting point.
Despite the valuable inputs provided by this method, care must be exercised in using the
information obtained through this method. Precautions are needed because:
1. Survey results cannot be regarded as forecasts per se. A consensus of opinion may be used
investor in forming his own forecasts.

2. There is no guarantee that the intentions surveyed would certainly materialize. To this
extent, they cannot rely solely on these.

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