Portfolio Management

Prepared By:

Noorulhadi QureshiLecturer Govt College of Management

Sciences Peshawar

LECTURE TWO

Fundamental Analysis

Fundamental Analysis

Fundamental Analysis is to evaluate a lot 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 analysis.

Fundamental Analysis (con’t)Fundamental analysis is really a logical and systematic

approach to estimating the future dividends and share price.

Fundamental analysis is performed on historical and present data, but with the goal of making financial forecasts. There are several possible objectives:

• To conduct a company stock valuation and predict its probable price evolution,

• to make a projection on its business performance,• to evaluate its management and make internal

business decisions,• to calculate its risk.

Fundamental analysis includes:

• Economic analysis

• Industry analysis

• Company analysis

Fundamental Analysis

Economy Analysis

Industry analysis

Company Analysis The Analysis of economy, industry and company constitute the main activity in the fundamental approach to security analysis. And can be viewed as different stages in investment decision making process. Three tier analysis depict

that company performance dependent not only on its own effort but also on the general industry and economy factor.

Economy Analysis

Boom Economy:Income rise and demand for goods will increase the industries

and companies in general tend to be prosperous.

Recession Economy:Income decline and demand for goods will decrease the industries

and companies in general tend to be bad performance

Economy analysis (con’t)

Growth rates of national income(GRNI)

GRNI is an important variable can be calculated by GDP, NNP, and GDP to analysis the growth rate of economy.

Four stages of economy or economic cycle i.e depression, recovery, boom and recovery of economy of nation also impact on security performance.

• Depression: At this stage demand is low and declining inflation often high and so are interest rate, companies usually reduce activities and securities performance is poor.

• Recovery: Economy begin to revive after depression, demand pick up leading, production and activities increase.

• Boom: High demand with high investment and production, companies earn more profit

• Recession: Companies slowly begins downturn in demand, production and employment, profits are also decline.

Inflation:

Inflation prevailing significant impact on company performance. High inflation upset company plan. Demand goes down because purchasing power fall, high inflation impact company performance adversely. Inflation is measured both in

WPI (Wholesale price index)

CPI (Consumer price index)

Interest RateInterest rates determine the cost and

availability of credit for companies operating in an economy.

Low interest rate=> easily and cheaply available credit.

=> lower cost of finance

=> high profitability

High interest rate => higher cost of production

=>lower profitability

=>Lower demand

Government revenue, expenditure and deficit

• Government is the largest investor in economy of any country thus revenue, expenditure and deficit have significance impact on the performance of industries and companies.

• Expenditure stimulate demand and creates job.

• The excess of expenditure over revenue is deficit, (budget deficit), most expenditure are spent on infrastructure, and deficit financing fuel inflation.

Exchange rate• The balance of trade in import and export

determine the rate of exchange rate.

• Depreciation of local currency improve the competitive position in foreign market the performance of exported product but it would also make the imported product more expensive.

• A foreign Exchange reserves is needed to meet several commitments such as payment for import and servicing of foreign depts.

Infrastructure.• Development of a economy depends very much

on the infrastructure available. Industry needs electricity for its manufacturing activities road and railways to transport raw material and finished good. Communication channels help supplier and customers.

• Good infrastructure is symptoms of development.• Bad infrastructure lead to inefficiencies, low

productivity wastages and delay. • Investors should analysis the infrastructure of any

economy.

Seasonal impact• Pakistani economy depends on agriculture

sectors, the economy is also depend the performance of agriculture, optimistic forecasting of weather condition will prosper the economy condition.

• Weather forecasting becomes a matter of great concern for investor in the economy of agricultural country.