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Security Analysis and Portfolio Management
Notes 4.4 Summary
A commonly advocated procedure for fundamental analysis involves a 3-step analysis:
macro-economic analysis, industry analysis, and company analysis.
In a globalised business environment, the top-down analysis of the prospects of a firm
must begin with the global economy.
There are two broad classes of macroeconomic policies, viz. demand side policies and
supply side policies.
Fiscal and monetary policies are the two major tools of demand side economics.
Fiscal policy is concerned with the spending and tax initiatives of the government.
Monetary policy is concerned with money supply and interest rates.
The macro-economy is the overall economic environment in which all firms operate.
After conducting analysis of the economy and identifying the direction, it is likely to take
in the short intermediate and long term, the analyst must look into various sectors of the
economy in terms of various industries. An industry is a homogenous group of companies.
That is, companies with the similar characteristics can be divided in to one industrial
group.
There are many bases on which grouping of companies can be done.
The securities analyst will take into consideration the following factors into account in
assessing the industry potential in making investments.
Post-sales and earnings performance, the government's attitude towards industry, labour
conditions and competitive conditions are the various factors that are to be taken into
account while conducting industry analysis.
For earning profits, investors apply a simple and common sense decision rule, that is,
maximization.
A careful examination of the company quantitative and qualitative fundamentals is,
therefore, very essential.
As Fischer and Jordan have aptly put it: “If the economic outlook suggests purchase at the
time, the economic analysis of the industry analysis will aid the investor selecting their
proper industry in which to invest. Nonetheless, when to invest and in which industry is
not enough. It is also necessary to know which companies industries should be selected”.
4.5 Keywords
Cyclical Industry: In this category of the industry, the firms included are those that move
closely with the rate of industrial growth of the economy and fluctuate cyclically as the economy
fluctuates.
Defensive Industry: It is a grouping that includes firms, which move steadily with the economy
and less than the average decline of the economy in a cyclical downturn.
End Use and Regression Analysis: It is the process whereby the analyst or investor attempts to
dial the factor that determines the demand for the output of the industry. This is also known as
end-use demand analysis.
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