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FUNDAMENTAL ANALYSIS

FUNDAMENTAL ANALYSIS. VGTU -2009. Fundamental Analysis. To estimate the influence of state economy for securities’ market To evaluate perspective of each industry sector Analyze companies To pick up the best companies form the top sectors, based on forecast of the state macro economy.

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FUNDAMENTAL ANALYSIS

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  1. FUNDAMENTAL ANALYSIS VGTU -2009 Assoc.Prof.Dr.Daiva Jurevičienė

  2. Fundamental Analysis • To estimate the influence of state economy for securities’ market • To evaluate perspective of each industry sector • Analyze companies • To pick up the best companies form the top sectors, based on forecast of the state macro economy Assoc.Prof.Dr.Daiva Jurevičienė

  3. Technical Analysis • Expectation of market participants • Psychology of market participants Assoc.Prof.Dr.Daiva Jurevičienė

  4. Stages of Fundamental Analysis • Country’s analysis • Sector’s analysis • Company’s analysis Assoc.Prof.Dr.Daiva Jurevičienė

  5. Country’s Analysis Assoc.Prof.Dr.Daiva Jurevičienė

  6. Country’s Analysis • GDP • Unemployment • Inflation • Interest rates • Budget deficit • Sentiment Assoc.Prof.Dr.Daiva Jurevičienė

  7. GNP • The flow of final goods and services • The sum of the elements of overall expenses C + I + G + (X-M) • The sum of the elements of overall income Assoc.Prof.Dr.Daiva Jurevičienė

  8. Real and Potential GNP • Real GDP - the sum in comparable (basic period) prices • Potential GDP– Real GDP, produced in case of full employment (natural unemployment rate) Assoc.Prof.Dr.Daiva Jurevičienė

  9. GDP • The value of goods produced in side the country, including the valueproduced inside the country by foreignness, but excludinginvestment income, received by citizens of a country abroad Assoc.Prof.Dr.Daiva Jurevičienė

  10. Assoc.Prof.Dr.Daiva Jurevičienė

  11. Annual Change of Real GDP in Lithuania (%) SEB Nordic Outlook 2009 February In brackets SEB projections Assoc.Prof.Dr.Daiva Jurevičienė

  12. Assoc.Prof.Dr.Daiva Jurevičienė

  13. Financial Assets • Indicate only the owner, • Not included in GDP (or GNP) • Do not create the real assets; • Note only the change of the owner Assoc.Prof.Dr.Daiva Jurevičienė

  14. Financial Assets • Aggregating balance sheets of all companies and individuals and cancelling out the claims, only real assets as the net wealth of the economy is left • Profit or loss of financial assets fully depends on the income generated by real asset Assoc.Prof.Dr.Daiva Jurevičienė

  15. Inflation and Unemployment • Governments expect to stimulate economy’s to obtain full employment, and avoid inflation processes Assoc.Prof.Dr.Daiva Jurevičienė

  16. Interest Rates • High interest rates reduce the present value of future cash flows, thereby reducing the attractiveness of investment opportunities Assoc.Prof.Dr.Daiva Jurevičienė

  17. Budget Deficit • Large amounts of government borrowing can force up interest rates by increasing the total demand for credit in the economy • Excessive borrowing will “crowd out” private borrowing and investing by forcing up interest rates and choking off business investment Assoc.Prof.Dr.Daiva Jurevičienė

  18. Sentiment • Consumers will be more willing to spend on big-ticket items • Business will increase production and inventory levels Assoc.Prof.Dr.Daiva Jurevičienė

  19. Concept An economy with dominant automobile production industry People increase the length of time using their cars before replacing them Describe the effects on: • GDP • unemployment • The government budget deficit • Interest rates Assoc.Prof.Dr.Daiva Jurevičienė

  20. INTEREST RATES Fundamental factors: • The supply of funds • The demand for funds • The government’s net supply or demand • The expected rate of inflation Assoc.Prof.Dr.Daiva Jurevičienė

  21. INTEREST RATES Interest rate supply E’ E demand Funds Assoc.Prof.Dr.Daiva Jurevičienė

  22. INTEREST RATES • nominal interest rate = inflation rate + equilibrium real rate of interest. • The inflation premium is necessary for investors to maintain a given real rate of return on their investments Assoc.Prof.Dr.Daiva Jurevičienė

  23. DEMAND SHOCKS • Positive demand shocks: Assoc.Prof.Dr.Daiva Jurevičienė

  24. DEMAND SHOCKS • Positive demand shocks: • reduction in tax rates • increase in money supply • increase in government spending • increase in foreign export demand Assoc.Prof.Dr.Daiva Jurevičienė

  25. SUPPLY SHOCKS Assoc.Prof.Dr.Daiva Jurevičienė

  26. SUPPLY SHOCKS -   changes in the price of imported oil - freezes, floods, etc. that might destroy large quantities of agricultural crops -   changes in the educational level of an economy’s workforce -  changes in the wage rates at which the workforce is willing to work Assoc.Prof.Dr.Daiva Jurevičienė

  27. Macroeconomics predictions are notoriously unreliable Any investment advantage you have will be a result only of better analysis – not better information Assoc.Prof.Dr.Daiva Jurevičienė

  28. Tools of Government Policy Assoc.Prof.Dr.Daiva Jurevičienė

  29. Tools of Government Policy • Demand: • Fiscal policy • Monetary policy • Supply: • Stimulate to work • Innovations • Changes in taxes • Educational programs • Scientific research Assoc.Prof.Dr.Daiva Jurevičienė

  30. Tools of Government Policy • Fiscal policy • Monetary policy Assoc.Prof.Dr.Daiva Jurevičienė

  31. Tools of Fiscal Policy Assoc.Prof.Dr.Daiva Jurevičienė

  32. Tools of Fiscal Policy Stimulating policy (decline) Stemming policy (trough) • Decrease of expenses • Increase of taxes • Both • Increase of expenses • Decrease of taxes • Both Assoc.Prof.Dr.Daiva Jurevičienė

  33. Consequences (of stimulating) • Increase of deficit • Increase of demand • Decrease of unemployment Debt increases Money emission Interest rate increases Compete with private • Investments decreases • Consumption decreases Government expenditures do not effect investments and consumption Assoc.Prof.Dr.Daiva Jurevičienė

  34. Consequences (of stimulating) • Increase of deficit • Increase of demand • Decrease of unemployment Debt increases Money emission Interest rate increases Compete with private Government expenditures do not effect investments and consumption • Investments decreases • Consumption decreases bad good Assoc.Prof.Dr.Daiva Jurevičienė

  35. Consequences (of stemming) • Decrease of deficit • Decrease of demand • Increase of unemployment Debt decreases Freeze of budget surplus Surplus returns to the market Surplus do not return to the market Inflation decreases Inflation increases Assoc.Prof.Dr.Daiva Jurevičienė

  36. Consequences (of stemming) • Decrease of deficit • Decrease of demand • Increase of unemployment Debt decreases Freeze of budget surplus Surplus returns to the market Surplus do not return to the market Inflation decreases Inflation increases bad good Assoc.Prof.Dr.Daiva Jurevičienė

  37. Monetary policy Assoc.Prof.Dr.Daiva Jurevičienė

  38. Monetary policy • Works through its impact on interest rate • Increases in the money supply lower short-term interest rates • Encourages investment and consumption demand • Over longer periods does not have a permanent effect on economic activities • Expansionary monetary policy will lower interest rates and thereby stimulate investment and some consumption demand in the short run, but will lead to higher prices Assoc.Prof.Dr.Daiva Jurevičienė

  39. Tools of Monetary Policy • Open market operations • Discount rate • Reserve requirements Assoc.Prof.Dr.Daiva Jurevičienė

  40. bank new deposit new loan reserves Banking multiplicator First bank 1000,00 800,00 200,00 Second bank 800,00 640,00 160,00 Third bank 640,00 512,00 128,00 Fourth bank 512,00 409,60 102,40 Fifth bank 409,60 327,68 81,92 Sixth bank 327,68 262,14 65,54 Seventh bank 262,14 209,72 52,42 Eighth bank 209,72 167,77 41,95 Ninth bank 167,77 134,22 33,55 Tenth bank 134,22 107,37 26,85 In total first 10 banks 4463,13 3570,50 892,63 Amount of other banks 536,87 429,50 107,37 Total in banking sector 5000,00 4000,00 1000,00 Assoc.Prof.Dr.Daiva Jurevičienė

  41. Case Suppose the government wants to stimulate the economy without increasing interest rates. What combination of fiscal and monetary policy might accomplish this goal? Assoc.Prof.Dr.Daiva Jurevičienė

  42. Business cycle peak GDP peak contraction expansion trough (depression) time Assoc.Prof.Dr.Daiva Jurevičienė

  43. Reasons of cyclical fluctuations • Changes in consumption • Government expenses • Changes in export • Investments Assoc.Prof.Dr.Daiva Jurevičienė

  44. Industry Analysis Assoc.Prof.Dr.Daiva Jurevičienė

  45. Industry Analysis • Cyclical sectors • Defensive sectors Assoc.Prof.Dr.Daiva Jurevičienė

  46. Estimates of earnings growth rates Assoc.Prof.Dr.Daiva Jurevičienė

  47. The stock price performance of industries in 2001 2001 m. akcijų kainos Assoc.Prof.Dr.Daiva Jurevičienė

  48. Estimates of Earnings Growth in 2002 for Finance Firms Assoc.Prof.Dr.Daiva Jurevičienė

  49. Factors, determining sensitivity of a firm’s earnings to the business cycle • Sensitivity of sales • Operating leverage • Financial leverage Assoc.Prof.Dr.Daiva Jurevičienė

  50. sector rotation peak GDP peak contraction expansion trough (depression) time Assoc.Prof.Dr.Daiva Jurevičienė

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