SECURITY ANALYSIS SECURITY ANALYSIS
SECURITY SECURITY ANALYSISANALYSIS
Objectives of security analysis
• To estimate the risk and return related to security.
• To find out the intrinsic value of the security. To identify the under valued securities to buy or over valued securities to sell.
• To analyze the stock market trends to understand the market pattern and behavior.
• To forecast the future earnings & dividends along with the price of the securities.
• To analyze and point out the position of economy, industry and the company with a view to select the best possible company for investment.
Need For Securities Analysis
• To estimate the stock price changes by studying the forces operating in the overall economy, as well as influences peculiar to industries.
• To predict the national economy because economic activity affects the corporate profit, investor attitudes and expectation and ultimately security prices.
• To establish linkages between economic activity and stock market,
• To select the right time and right securities for the investment.
FUNDAMENTAL ANALYSIS
• procedure • Understanding of the macro-economic
environment and developments (Economic Analysis)
• Analyzing the prospects of the industry to which the form belongs, (Industry Analysis)
• Assessing the projected performance of the company (Company Analysis)
APPROACHES– Top-down
Approach– Bottom-up
Approach
ECONOMIC ANALYSIS• Gross National product • Savings and investments.• Price level and inflation• Agriculture and monsoons• Fiscal and monetary framework.• Infrastructural facilities and
arrangements.• Sentiments of Market.• General Business Conditions.
1.Gross National product• To determine-where the economy is?-where it has been?-where it is going?• Indian economy-1991 scenario-V
shape growth• Check sector wise growth
SECTOR GROWTH RATE
97-98 98-99 99-00 01-02 2006 2007 08AGRICULTUR
E-2.4 6.2 0.3 5.7 - -
-INDUSTRY 3.0 3.2 4.1 3.2 12 10.63%
SERVICES 9.9 8.1 9.9 6.5 - 11.18%
GDP 4.8 6.5 6.1 5.6 9% 7.6% 7.5%
SECTOR 1950 1960 1970 1980 1990 2000-01 2002-03 2006-07
AGRICULTURE AND ALLIED
56.1 47.8 42.8 36.4 29.1 23.8 22.1 18
INDUSTRY 11.7 15.1 16.9 19.5 21.9 22.0 21.8 29
SERVICES 32.6 37.3 40.3 44 49 54.1 56.1 53
GDP 100 100 100 100 100 100 100 100
SECTOR COMPOSITION OF REAL GDP
2.Savings and investments.
COUNTRY GROSS DOMESTIC SAVINGS
GROSS DOMESTIC INVESTMENT
CHINA 39.2 38.0HONGKONG 32.2 27.5
INDIA 23.5 24.0INDONESIA 24.1 17.5
KOREA 31.5 27.1MALAYSIA 44.7 27.5
PHILIPPINES 20.8 18.3SINGAPORE 47.7 29.3THAILAND 31.8 24.1
(PERCENTAGE OF GDP 1997-2003)
Interrelationship of savings and investments by
-Household sector-private corporate sector-government sector
Gross Domestic Savings and Investments
(% of GDP)
Sr. No.
Variable 1991-92 1997-98 2001-02
1. GDS (2+3+4) 22.0 23.1 24.02. Household Sector 17.0 17.6 22.53. Private Corporate
Sector3.1 4.2 4.0
4. Public Sector 2.0 1.3 -2.55. GDC (6+7+8) 21.9 22.6 22.46. Household Sector 7.4 8.0 11.37. Private Corporate
Sector5.7 8.0 14.8
8. Public Sector 8.8 6.6 6.3
3. Price level and inflation
• Stable rates are favourable• Higher rates are unfavourable• Effect of inflation on corporates
tends to be uneven• PRESENT INFLATION: 12.44%
4. Agriculture and monsoonsSECTOR 1950 1960 1970 1980 1990 2000-01 2002-03 2006-07
AGRICULTURE AND ALLIED
56.1 47.8 42.8 36.4 29.1 23.8 22.1 23
INDUSTRY 11.7 15.1 16.9 19.5 21.9 22.0 21.8 19
SERVICES 32.6 37.3 40.3 44 49 54.1 56.1 58
GDP 100 100 100 100 100 100 100 100
SECTOR COMPOSITION OF REAL GDP
-Agriculture is major sector of our economy
-Changes in agriculture directly impact industries using agricultural raw material
-Monsoon affect agricultural production and generation of hydroelectric power
Fiscal and monetary framework.
• a) The Government Budget and Deficit (The government is the biggest investor and spender)
• b) Balance of payments position forex reserves and exchange rate (influence on economy)
• c) The interest rate structure and credit policy (A rise in interest rates depresses corporate profitability)
• the total outstanding loan on the Indian government is worth 41.57 billion US dollars.
• India-9th in 2001 and 29th indebted country in 2006-7
6. Infrastructural facilities and arrangements. Electric Power Transportation Communication System Assured supply of basic raw material Responsive financial support for fixed assets
and working capital
7. Sentiments of Market. Consumers Businessmen
8. General Business Conditions
*Business Cycles*Level of Business Activities
Some economic indicators and their possible impact
Sr. No. Economic Indicators Impact on Stock Market1. GNP-Growth
-Decline-Favourable
-Unfavourable2. Price Conditions-Stable
-Inflation--Favourable
-Unfavourable
3. Economy-Boom-Depression
-Favourable-Unfavourable
4. Housing Construction Activity-Increase in Activity-Decrease in Activity
-Favourable-Unfavourable
5. Employment-Increase-Decrease
-Favourable-Unfavourable
Some economic indicators and their possible impact
Sr. No. Economic Indicators Impact on Stock Market
6. Accumulation of Inventories-inflation-deflation
-Favourable-Unfavourable
7. Personal Disposable Income-Increase-Decrease
--Favourable-Unfavourable
8. Personal Savings-increase-Decrease
-Favourable-Unfavourable
9. Interest Rates-Low-High
-Favourable-Unfavourable
Some economic indicators and their possible impact
Sr. No.
Economic Indicators Impact on Stock Market
10 Balance of Trade-PositiveNegative
-Favourable-Unfavourable
11 Strength of Rupee in Forex Market-Strong-Weak
-Favourable-Unfavourable
12. Corporate Taxation(Direct & Indirect)
-Low-High
-Favourable-Unfavourable
Significance of economic analysis
1. Affects corporate profits, investor attitudes and expectations and ultimately security prices. An outlook of sagging economic growth can lead to lower corporate profits, and consequently investor pessimism and lower security prices.
2. In a positive and healthy economic environment the corporate sector will flourish over time and investors holding period return will rise thus favorably affecting the overall stock market index.
3. Future prospects of many specific industries and firms are tied to future developments in specific economic series, because profits are based on key economic factors eg.– Labour intensive industries will be affected
by labour cost and conditions.– Firms involved in manufacturing products
will be affected by raw material costs.– Savings and advances will be affected by
the course of Interest rates and the demand for mortgages.
– Leisure products will be affected by the availability of leisure time and consumer disposable income.
4. Economic analysis is important in order to determine the state of the economic environment in which we invest so as to get investment perspective.
The current condition of the economy, its future direction and the implications for investment decision must be determined. Such an economic analysis allows us to:
• Select the sectors of the economy that appear to offer profitable opportunities.
• Determine which type of investment to undertake among real assets, risk less investments, intermediate or long term bonds, or common stocks.
5.To know prosperity of economy: A strong and prosperous economy is favourable for the stock market. and hence an investment in equity of any company is likely to be more profitable. On the other hand if the national economy is expected to decline than it would be advisable to invest in fixed income investments because they provide more safety than equity.
6.The growth of the national economy can be used to forecast the growth of an industry or a company and thus to determine the industries and companies that appear to offer attractive opportunities.
Forecasting Techniques used in Economic Analysis
• 1. Anticipatory Surveys• 2. Barometric or Indicator approach• 3. Diffusion Indexes• 4. Econometric Model Building• 5. Opportunistic Model Building
(GNP Model Building / Sectoral Analysis
1. Anticipatory Surveys• Surveys of business in which one is interested.
• Through personal contacts or questionnaire
• Not accurate method-involves beliefs, intentions and future budgeting and external factors (govt. policies) can change intentions
• Useful for short term forcasting in department of government and industry w.r.t. construction, plant and equipment.
2. Barometric or Indicator approach
• Gives indication of economic process through cyclical timings i.e. depression or prosperity. Three indicators:
• 1. Lead Indicators• 2. Coincident Indicator• 3. Lagging IndicatorLead Indicators Coincident Indicator Lagging IndicatorUtilisation of mfging capacity
Employees on Payroll
Average duration of employment
Average weekly hours of mfging workers
Personal Income Loans outstanding
Contracts and orders of plant and machinery
Industrial Production
Ratio of consumer loan installment outstanding to personal income
Number of new building permits issued
Index of manufacturing and trade sales
Ratio of inventory to sales
General level of stock prices
Change in consumer price index to sales
Corporate ProfitsMoney Supply
3. Diffusion Indexes• Combines the lead, coincidental
and the lagging factors together, summarize them and then draw out and find a particular composite answer.
• Stated in percentage form. If 5 out of 10 indicators rises the diffusion index will be 50%
4. Econometric Model Building
• Applies mathematical and statistical techniques to economic theory
• Can be used only by trained technicians`
5. Opportunistic Model Building (GNP Model Building / Sectoral Analysis
Steps Particulars Assumptions
I Hypothesize total demand and total income
Environmental variable-war or peace-political relationships
II forecast GNP figure Budgets estimates of Central and State Government, private agencies and field data
III Test forecasting Test for consistency
• CMIE ups 07/08 GDP forecast to 9 pct• By Reuters• Tuesday August 14, 12:59 PM • The Centre for Monitoring Indian Economy, an independent think-tank,
has revised upwards India's growth forecast to 9 percent in the 2007/08 fiscal year from 8.5 percent earlier, citing robust services and industry.
• CMIE's forecast is higher than Reserve Bank of India's estimate of 8.5%• In its monthly review, CMIE said it expects industry to rise 9.6 percent and
services sector to grow 10.7 percent in the fiscal year that began in April. • CMIE said the pace of expansion in industrial growth was sustainable as it
was broadbased, covering not only capital goods and consumer durables but also intermediate goods.
• CMIE said demand for capital goods continued to remain buoyant, with investments worth 47 trillion rupees on hand as at end June.
• "The prevailing high interest rate has not hampered the implementation of these projects,"
• CMIE also revised upwards its agriculture output growth estimate to 3.1 percent from 3 percent, as the area under cultivation has risen sharply and the progress of monsoon was satisfactory.
• The think-tank said wholesale price inflation would remain steady or may even decline a tad in the coming months.
• The appreciation of the rupee against the dollar could also offset the increase in global crude prices, CMIE said.
• India's wholesale price inflation was at 4.45 percent on July 28, below the central bank's aim of containing it close to 5.0 percent in 2007/08.
THE HINDU
Monday, Aug 20, 2007• The Economic Outlook from the Prime
Minister’s Economic Advisory Council is a comprehensive analysis of India’s key macro economic issues of the day. The country’s gross domestic product (GDP) growth for 2007-08 is estimated at 9 per cent, based on a projected growth of agriculture at 2.5 per cent and the industrial and services sectors at 10.6 and 10.4 per cent, respectively. The projections for all the three sectors are marginally lower than in 2006-07 when, according to the Central Statistical Organisation’s revised estimates, the GDP grew by a whopping 9.4 per cent. The EAC expects inflation to be contained at below four per cent
• If the EAC’s forecast for the year comes true, it would be for the third time in a row that the economy would have grown by nine per cent or more. There are some important caveats however. The possibility of the southwest monsoon not matching expectations, both in regard to quantum and spatial coverage, is one of them. Rising global crude oil prices is another. Domestic consumers of petroleum products, for long insulated from the vagaries of the oil market, may not have the luxury Indefinitely. A price hike in the retail prices of petrol, diesel and possibly LPG is bound to happen, with its attendant impact on inflation.
• Which is the actual growth driver for the economy — consumption or investment? Which one of these two has had a greater role in the recent robust economic growth? The EAC points out that over a four-year period beginning 2002-03, the economy was first led by consumption demand but more recently the role of investment has become pronounced. In fact the two — consumption and investment — have had complementary roles. Economic growth might have suffered if investments had not picked up and created new capacities in several key sectors such as cement.
Country Name 2007 2008
Japan 2.3 1Hong Kong SAR 5.5 5.0
Korea 4.4 4.4 Singapore 5.5 5.7 China 10.0 9.5 India 8.4 7.8 Indonesia 6.0 6.3 Malaysia 5.5 5.8 Philippines 5.8 5.8 Thailand 4.5 4.8 Vietnam 8.0 7.8
Source: IMF, WEO Database