Fina3080

Chapter 12 - Macroeconomic and Industry Analysis

CHAPTER TWELVE

MACROECONOMIC AND INDUSTRY ANALYSIS

CHAPTER OVERVIEW

This is the one of three chapters that covers fundamental security valuation. This chapter introduces a topdown approach to fundamental security analysis. It covers the first two components: macroeconomic and

industry analysis. The textbook begins with a global analysis, particularly with respect to how the

performance of domestic firms is influenced by international economic performance. The chapter’s main

focus however is on aspects of the U. S. economy that affect security returns, including fiscal and monetary

policy. In addition, a brief presentation of the determinants of interest rates is covered. The chapter

concludes with a discussion of industry analysis that includes classifications of industries, information

sources, the industrial life cycle and a Porter framework that can be used to analyze industry competition.

LEARNING OBJECTIVES

Upon reading this chapter, you should have a basic understanding of some of the macroeconomic factors that

affect security prices. That is, how fiscal and monetary policy affect interest rates and security prices. And

some industry groups are more affected by macroeconomic factors than others and the characteristics of an

industry that affect its competitiveness.

CHAPTER OUTLINE

The top-down approach to fundamental analysis begins with analyzing the economy. Expected economic

performance will influence the choice of industry and the specific firm chosen as an investment.

1. The Global Economy

A top-down analysis of a company begins with an examination of global economic prospects.

Risk Factors:

Political risk: This affects the economic environment that determines the industry performance.

Exchange-rate risk. Exchange-rate risk has several elements that are important to global economic

analysis. Unfavorable movements in exchange rates will affect a firm’s sales

and profits and can change relative...