Lecture 4: Fundamental Analysis - Top-down approach

Question 1

To determine a proper price for a firm’s stock, the security analyst must forecast the dividend and earnings that can be expected from the firm.
This is the heart of fundamental analysis—that is, the analysis of the determinants of value such as earnings prospects.

Answer 1

To determine a proper price for a firm’s stock, the security analyst must forecast the dividend and earnings that can be expected from the firm.
This is the heart of fundamental analysis—that is, the analysis of the determinants of value such as earnings prospects.

Question 2

3 approaches to Fundamental Analysis:

1. Top-down
2. Bottom-up
3. Value investing

Answer 2

3 approaches to Fundamental Analysis:

1. Top-down
2. Bottom-up
3. Value investing

Question 3

Top-down approach:

1. Global / Domestic macroeconomy
2. Industry
3. Company

Answer 3

Top-down approach:

1. Global / Domestic macroeconomy
2. Industry
3. Company

Question 4

Top-down approach:

1. Global / Domestic macroeconomy:
   e. g. export, price competition, profits from foreign investments, exchange rate risk, political risk exposure.

Answer 4

Top-down approach:

1. Global / Domestic macroeconomy:
   e. g. export, price competition, profits from foreign investments, exchange rate risk, political risk exposure.

Question 5

Top-down approach:

2. Industry:
   e. g. growth of GDP ~ industrial production, employment ~ capacity utilisation, inflation, interest rates, budget deficits, consumer & producer sentiment

Answer 5

Top-down approach:

2. Industry:
   e. g. growth of GDP ~ industrial production, employment ~ capacity utilisation, inflation, interest rates, budget deficits, consumer & producer sentiment

Question 6

Demand shocks: affect demand

e.g. changes in tax rates/ money supply/ gov spending

Answer 6

Demand shocks: affect demand

e.g. changes in tax rates/ money supply/ gov spending

Question 7

Supple shocks: affect production capacity & costs

• Natural events: e.g. flood/ drought -> destroy crops -> price rise
• Changes in educational level of workforce: long-term shock => growth in GDP & standard of living
• Changes in wage rates

Answer 7

Supple shocks: affect production capacity & costs

• Natural events: e.g. flood/ drought -> destroy crops -> price rise
• Changes in educational level of workforce: long-term shock => growth in GDP & standard of living
• Changes in wage rates

Question 8

Fundamental analysis requires Economic Forecasting on macroeco conditions:
e.g. strengths, weaknesses, threats and opportunities associated with your chosen country?

Answer 8

Fundamental analysis requires Economic Forecasting on macroeconomic conditions (no easy task):
e.g. strengths, weaknesses, threats and opportunities associated with your chosen country?

Question 9

Use a ? (?, ?, ? and ?) to examine the global economy or industry performance.

Answer 9

Use a SWOT (Strengths, Weaknesses, Opportunities and Threats) to examine the global economy or industry performance.