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Fundamental AnalysisFundamental Analysis deals with the macro level analysisof the economy by which the prospective ness of theeconomy is analyzed.
Before investing into any stock market Institutionalinvestors are interested in the present and futuregrowth prospects of that market.Therefore fundamental analysis or economic analysis
serves a great purpose to the investors.
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Relationship betweenEconomic Fundamentals and
Stock Market
BullishStock Market
Strong EconomicFundamentals
More FIIs
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1.Growth Rate-defined as the total market value of allfinal goods and services produced within the country in agiven period of time. Whereas Gross National Product isthe market value of final products and earning from
abroad.
0
1
2
3
4
56
7
8
9
1996-9
7
1997-9
8
1998-9
9
1999-0
0
2000-0
1
2001-0
2
2002-0
3
2003-0
4
2004-0
5
2005-0
6
Year
GDPGrowthR
ate
Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Growth Rate 7.8 4.8 6.5 6.1 4.4 5.8 4.0 8.5 7.5 8.1 9.0 9.5
http://en.wikipedia.org/wiki/Market_valuehttp://en.wikipedia.org/wiki/Market_value8/4/2019 Fundamental Analysis2
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2. Per Capital Income-Per capita income means how mucheach individual receives, in monetary terms, of the yearly
income that is generated in their country throughproductive activities. That is what each citizen wouldreceive if the yearly income generated by a country fromits productive activities were divided equally amongeveryone.
3. FII and FDI- Foreign institutional investment refersinvestment into financial securities like equities, mutualfunds, derivatives, bonds. Whereas FDI refers toinvestment in real assets like plant, machinery etc.
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4. Inflation Rate-the inflation rate is a measure of inflation, therate of increase of a the price of basic goods which iscalculated by some price index (usually some form of
consumer price index). Equivalently, the rate of decrease inthe purchasing power of money. A high inflation willdiscourage the foreign investment whereas a low inflationencourage the foreign investment.
Inflation Stock Market
http://en.wikipedia.org/wiki/Price_indexhttp://en.wikipedia.org/wiki/Consumer_price_indexhttp://en.wikipedia.org/wiki/Purchasing_powerhttp://en.wikipedia.org/wiki/Purchasing_powerhttp://en.wikipedia.org/wiki/Consumer_price_indexhttp://en.wikipedia.org/wiki/Price_index8/4/2019 Fundamental Analysis2
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5. Interest Rate- The interest rate which isoffered by banks over their deposits is alsomajor determinate of foreign investment. A
high interest rate will encourage investment
in Debt Market, whereas a low interest ratewill en
courage the foreign investment in
Capital Market.
Interest rate Stock Market
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-40.00
-20.00
0.00
20.00
40.00
60.00
80.00
May-96
May-97
May-98
May-99
May-00
May-01
May-02
May-03
May-04
May-05
May-06
Year
Return
6. Capital Market Analysis- Movement of Sensex
May-96 May-97 May-98 May-99 May-00 May-01 May-02
3709 3724 3673 3835 4434 3623 3136
May-03 May-04 May-05 May-06 May-07 May-08
3172 4760 6666 10679 14451 17000
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Comparative Analysis of
Difference Stock MarketsMarket/Index March 2006 Dec. 2006South Korea
KOSPI10.86 12.21
Thailand SET 9.97 9.40Indonesia JCI 21.68 25.10
Malaysia KLCI 15.33 17.35
Taiwan TWSE 14.62 20.85BSE SENSEX 20.92 22.76
NSE S & P
NIFTY20.26 21.26
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Scenario
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A short CaseABN Mutual Fund (FII) invested $100 million inSensex portfolio on Jan,1, 2007. On that daySensex closed at 14,000 and exchange rate wasRe.45/1$. On 31 May, 2007 ABN Mutual Fund
withdrew its total investment. On that daySensex closed at 15000 points and exchange ratewas Re. 40/$1. During the investment period ABNMutual Fund got Rs. 10cr as dividends. Calculatethe relative rate of return which ABN MutualFund got from Indian Stock market?
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omparat ve na ys s oDifferent Stock
Exchanges*Country In local Currency In $ termDifference
Brazil 21.7 3311.3
India 4.7 138.3 Thailand 13.4 18.6 5.2 China 52.1 55.8 3.7 Malaysia 23.8 25.4 1.6 Pakistan 36.1 37.0
0.9 Singapore 17.4 17.1 0.3 Taiwan 13.0 12.3
0.7 Argentina 6.5 5.0
1.5 Indonesia 17.7 15.9 1.8
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Growth Prospectus of Stock Returns
S & P 500 Hang Sang Kospi Sensex SSE Com. Index Nikkei 227
Op 1478 15532 943 3972 1535 8340
Cl 1523 27812 1897 20287 5261 15307
CAGR for the Period 2000-2007
CAGR 0.4% 8% 10% 26% 19% 12%
CAGR isn't the actual return in reality. It's an imaginary number that describes therate at which an investment would have grown if it grew at a steady rate. You canthink of CAGR as a way to smooth out the returns.
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Returnwealthperiod-of-beginning
wealthperiod-of-beginningwealthperiod-of-endReturn
--
0V
1V
Initial value of investment
Final value of investment
0
01
V
VVr
Return is
Or as a percentage 1000
01
V
VVr
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Return Example 1 An initial investment is made of $10,000. One year
later, the value of the investment has risen to$12,500. The return on the investment is
Example 2 An investment initially costs $5,000. Three months
later, the investment is sold for $6,000. Thereturn on the investment per three months is
%2510010000
1000012500 r
%201005000
50006000
r
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Return and Risk
The risk inherent in holding a security is thevariability, or the uncertainty, of its return
Factors that affect risk are
1. Maturity Underlying factors have more chance to change
over a longer horizon
Maturity value of the security may be eroded by
inflation or currency fluctuations Increased chance of the issuer defaulting the
longer is the time horizon
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Return and Risk
2. Creditworthiness The governments of the developed countries
are all judged as safe since they have no
history of default in the payment of theirliabilities Some other countries have defaulted in the
recent past Corporations vary even more in their
creditworthiness. Eg.market exists for highreturn, high risk corporate bonds that arejudged very likely to default
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Return and Risk 3. Priority
Bond holders have the first claim on the assetsof a liquidated firm
Bond holders are also able to put thecorporation into bankruptcy if it defaults onpayment
4. Liquidity
Liquidity relates to how easy it is to sell anasset
The existence of a highly developed and activesecondary market raises liquidity
A security's risk is raised if it is lackingliquidity
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Risk and Return
5. Underlying Activities The economic activities of the issuer of the
security can affect how risky it is
Stock in small firms and in firms operatingin high-technology sectors are on averagemore risky than those of large firms intraditional sectors
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Return and Risk
The greater the risk of a security, thehigher is expected return
Return is the compensation that has to bepaid to induce investors to accept risk
Success in investing is about balancing riskand return to achieve an optimal
combination The risk always remains because of
unpredictable variability in the returns onassets