CORRELATION ANALYSIS

FUNDAMENTAL ANALYSIS

FUNDAMENTAL ANALYSISAn investor who would like to be rational and scientific in his investment activity has to evaluate a lot of information about the past performance and the expected future performance of companies, industries and the economy as a whole before taking the investment decision. Such evaluation or analysis is called fundamental analysisIt involves three steps;ECONOMIC ANALYSISINDUSTRY ANALYSISCOMPANY ANALYSIS

ECONOMIC ANALYSISThe performance of the company depends upon the performance of the economy

The level of economic activity has an impact on investment in many ways:If the economy grows rapidly, the industry can also be expected to show rapid growth and vice versa.

ContinuesThe level of economic activity is low, the sock prices are low..The level of economic activity is high, stock prices are high

Commonly analyzed macro economic factors:Growth rate of National Income(GDP,GNP.NNP)Rate of growth of the economyAggregate value of goods and services produced..Personal consumption expenditure, gross private domestic investment, govt. expenditure on goods and services and net export of goods and services.

Continues..Annual basisThe higher growth rate is more favorable to the stock market..

Savings and investmentStock market is a channelDistributed over various assets like equity shares, deposits, mutual fund units, real estate and bullion.

Inflation Mild level of inflation, it is good to the stock market but high rate of inflation is harmful to the stock market.

Interest RatesAffects the cost of financing to the firms.Decrease in interest rate implies lower cost of finance for firms and more profitability.Availability of cheap fund encourages speculation and rise in the price of shares.

Budget Provides elaborate account of the govt. revenues and expenditure.A deficit budget may lead to high rate of inflation and adversely affect the cost of production.Surplus budget may result in deflation.

The tax structureTax reliefs given to savings encourage savings.The Minimum Alternative Tax(MAT) levied by the finance minister in 1996 adversely affect the stock market.The type of tax exemption has impact on the profitability of the industries.

The balance of payment(exchange rate)Recorded of a countrys money receipts from and payments abroad.The differences between receipts and payments may be surplus or deficit.Is a measure of the strength of rupee on external account.

Monsoon and agricultureAgriculture is directly and indirectly linked with the industries.Sugar, cotton, textile and food processing industries depend upon agriculture for raw material.A good monsoon leads to higher demand for input and result in bumper crop.

Infrastructure facilitiesEssential for the growth of the industries.Wide network of communication, regular supply of power, banking and financing etc..It affect the stock market favorably.

Demographic factorsIt provides details about the population by age, occupation, literacy, and geographic location.Forecast the demand for the consumer goods.

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Industry analysisAn evaluation of the relative strength and weakness

Some industries which are fast growing

Some industries are stagnating or declining

The returns will be based on the particular industry

So selection of the industry is very important. 1710/16/2014

Concept of industryAs a homogeneous group of companies

Industry defined as a group of firms producing reasonably similar products which serve the same needs of a common set of buyers.

Industries are classified on the basis of products

eg:cement industry, steel industry, tyre industry

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I. Industry Life CyclesAll industries are in different stages of development!You must determine at which stage your industry is in currentlyRemember that technological innovation may have the effect of changing the life cycle of the industryStageSales GrowthStart-upRapid & IncreasingExpansion StableStagnation SlowingRelative DeclineMinimal or Negative

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Continue..Pioneering stage

Technology and products are relatively new

Not reached a state of perfection

This stage is characterized by rapid growth in demand

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2. Expansion stage

Also known as growth stage

The existing players try to become stronger

Each players finds a market for itself

And develop its own strategies to sell

And maintain its position in the industry

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3.Stagnation stage

The growth of the industry stabilizes

Industry to grow appears to be grim..

Perhaps sales may be increasing but the growth rate may be far below than the economy grows

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4.Decay stage

Stagnation stage to decay stage

This happens when the products are longer in demand

Introduction of new products and technologies to the market

Changes of customer habits, style and liking

Industry becomes obsolete and gradually get vanished

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Industry Life Cycles Stage 1 Stage 2 Stage 3 Stage 4 Start-up Expansion Maturity Decline

Beginning Rapid Stabilization and Deceleration Development Growth Market Maturity of Growth

Factors to be considered

Growth of the industryCost structure and profitabilityNature of the productNature of the competitionGovernment policyLabourResearch and development

Classification of industries

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Industry characteristicsDemand supply gap

Competitive condition in the industry

Permanence

Labour conditions

Attitude of government

Supply of raw material

Cost structure

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Thank you2910/16/2014