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Macroeconomic
and Industry
Analysis
12
Bodie, Kane and Marcus
Essentials of Investments
9th Global Edition
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
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
-11.6
1.7
Mexico
-3.0
-12.9
3.1
Russia
-15.4
-19.0
3.7
Singapore
-15.0
-15.5
4.0
-9.0
-10.1
3.8
Thailand
0.3
-3.9
3.1
U.S.
1.6
1.6
2.0
South Korea
Source: The Economist, January 7, 2012
FIGURE 12.1 CHANGE IN REAL
EXCHANGE RATE
U.S. dollar versus major currencies,
1999-2010
U.K.
4.3%
Euro
-13.4%
Japan
Canada
-35%
2.7%
-28.9%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
FIGURE 12.2 S&P 500 INDEX VERSUS
EARNINGS PER SHARE
2500
2000
S&P 500
EPS x 12
EPS x 18
EPS x 25
1500
1000
500
2011
2007
2003
1999
1995
1991
1987
1983
1979
1975
1971
1967
1963
1959
1955
0
12.2 THE DOMESTIC MACROECONOMY

Gross Domestic Product (GDP)


Unemployment Rate


Market value of goods and services produced over period of
time
Ratio of number of unemployed to total labor force
Inflation

Rate at which general level of prices for goods and services
is rising
12.2 THE DOMESTIC MACROECONOMY

Interest Rates


Budget Deficit


High interest rates reduce present value of future cash
flows
Government spending in excess of government revenues
Sentiment

Consumer optimism/pessimism are determinants of
economic performance
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

FIGURE 12.3 DETERMINATION OF
EQUILIBRIUM REAL RATE OF INTEREST
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
12.4 DEMAND AND SUPPLY SHOCKS
The price of imported oil fell dramatically in late
2008. What sort of macroeconomic shock would
this be considered?
12.5 GOVERNMENT POLICY

Fiscal Policy


Monetary Policy


Use of government spending and taxing for stabilizing
economy
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
12.6 BUSINESS CYCLES

Business Cycles


Peak


Recurring cycles of recession and recovery
Transition from end of expansion to start of contraction
Trough

Transition point between recession and recovery
12.6 BUSINESS CYCLES

Cyclical Industries


Industries with above-average sensitivity to state of
economy
Defensive Industries

Industries with below-average sensitivity to state of
economy
FIGURE 12.4 CYCLICAL INDICATORS
FIGURE 12.4 CYCLICAL INDICATORS
12.6 BUSINESS CYCLES

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

TABLE 12.2 INDEXES OF ECONOMIC
INDICATORS
FIGURE 12.5 INDEXES OF LEADING, COINCIDENT,
AND LAGGING FACTORS
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
FIGURE 12.7 RETURN ON EQUITY, 2011
Computer systems
Restaurants
Application…
Industrial metals
Chemical products
Integrated oil & gas
Health care plans
Aerospace/defense
Pharmaceuticals
Home improvement
Telecom services
Business software
Asset management
Food products
Biotech
Trucking
Auto manufacturers
Electric utilities
Heavy construction
Money center banks
0.0
36.4
29.6
24.9
24.6
19.6
18.1
17.2
17.1
15.8
15.6
14.1
11.4
10.3
9.0
8.7
8.5
7.9
7.1
7.0
6.7
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
FIGURE 12.7 RETURN ON EQUITY, KSE
FIGURE 12.8 INDUSTRY STOCK PRICE
PERFORMANCE, 2011
Computer systems
Restaurants
Application software
Industrial metals
Chemical products
Integrated oil & gas
Health care plans
Aerospace/defense
Pharmaceuticals
Home improvement
Telecom services
Business software
Asset management
Food products
Biotech
Trucking
Auto manufacturers
Electric utilities
Heavy construction
Money center banks
-40.0
16.3
27.8
-8.6
-21.2
-4.6
13.4
10.5
5.5
14.7
12.9
-9.1
-8.6
-20.1
11.3
5.5
-7.7
-33.2
13.1
-17.1
-25.3
-30.0
-20.0
-10.0
0.0
Rate of return (%)
10.0
20.0
30.0
FIGURE 12.8 INDUSTRY STOCK PRICE
PERFORMANCE, 2011
Sector Return % 2012
-30
KSE
Oil & Gas
Basic Materials
Industrials
Consumer Goods
Health Care
Consumer Services
Telecommunications
Banks
Insurance
Real Estate
Financial Services
Technology
Parallel
-25
-20
-15
-10
-5
0
5
10
15
20
25
FIGURE 12.9 ROE OF APPLICATION
SOFTWARE FIRMS
Adobe
15.2
CA (Computer Assoc)
15.5
Oracle
24.3
Intuit
25.7
SAP
26.0
Microsoft
44.2
0
5
10
15
20
25
ROE (%)
30
35
40
45
50
TABLE 12.5 EXAMPLES OF NAICS
INDUSTRY CODES
FIGURE 12.10 INDUSTRY CYCLICALITY
15%
Grocery
Jewelry
Annual sales growth (%)
10%
5%
0%
-5%
-10%
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
-15%
12.7 INDUSTRY ANALYSIS

Sensitivity to the Business Cycle

Sensitivity of sales
Necessary product or luxury?
 Low sensitivity to income

Operating leverage
Financial leverage

12.7 INDUSTRY ANALYSIS
FIGURE 12.11 STYLIZED DEPICTION OF
BUSINESS CYCLE
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

FIGURE 12.12 SECTOR ROTATION
12.7 INDUSTRY ANALYSIS
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
FIGURE 12.13 INDUSTRY LIFE CYCLE
FIGURE 12.13 INDUSTRY LIFE CYCLE
At what stage in the life cycle of an
industry is investment most
attractive and lucrative?
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
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

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

MY PROBLEMS
 Basic

4 effect of policy on business conditions (1)
 Intermediate




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

(6 problems)
1