Macroeconomics
& Microeconomics of Stock Market
How do the business cycle, structural issues, the industry life cycle, and competitive forces impact an industry? What's the difference between growth
company and growth stock?
What is the relationship between stock prices and the economy as represented by GDP? What are
leading economic indicators? How do interest rates impact stock prices?
B D 2 0 4 0 3 I n v e s t m e n t A n a l y s i s D r I z a a n J a m i l , F P E P U M S
Microanalysis Macroanalysis
W e b s i t e : W e b s i t e :
https://itel.ums.edu.my/ https://ums.edu.my/v5/
WHICH
MARKET?
The first stage of analysis is to examine the attractiveness of a particular markets.
It's crucial to understand that stock prices reflect investors' expectations of future economic events.
As the economy grows, profits
grow.
As the value of goods and services produced in a country increases, companies increase their income.
Companies earn more money, they are worth more.
Economic growth leads to greater profits, and greater profits lead to higher stock
prices.
Can we use GDP to forecast stock prices?
Preliminary GDP data is released
approximately one month after each quarter ends. This means that it is not timely.
The preliminary GDP data will be revised.
Often times, the revision are meaningful.
The stock market moves ahead of the economy.
Investors are anticipating future cash flows.
Its hard to identify stocks by examining old economic data that may need to be revised significantly.
POSSIBLE REASONS ON WHY STOCK
PRICES LEAD THE ECONOMY.
1. Stock prices reflect expectations earnings, dividends, and interest rates.
2. As investors attempt to estimate these futures variables, their stock price decisions reflect
expectations for future economic activity, not past or
current activity.
POSSIBLE REASONS ON WHY STOCK PRICES LEAD THE ECONOMY.
3. Stock market reacts to various leading indicator series, the most important being corporate earnings, corporate profit margins, and interest rates.
4. Because these series tend to lead the economy,
when investors adjust stock prices to reflect these
leading economic series, expectations for stock
prices become a leading series as well.
OTHER MEASURES OF THE ECONOMY
The leading, coincident, and lagging economic indicators.
Sentiment indicators.
Interest rates 1.
2.
3.
LEADING INDICATOR
Leading indicator includes economic series that usually reach peaks or troughs before corresponding peaks or troughs in aggregate economic activity.
Eventhough the economy is becoming more service based, manufacturing and the production of goods still seems very important.
The production of goods tend to be more volatile than services and therefore has a larger impact on the state on economic growth.
EGGS
CHICKEN
CEMENT
CRUDE OIL
MALAYSIA
https://tradingeconomics.com/
malaysia/indicators
WHOLE WORLD
https://www.investing.com/ec
onomic-calendar/
SENTIMENT AND EXPECTATIONS SURVEY
Consumer expectations are considered relevant as the economy approaches cyclical turning points.
The intuition is that consumers must
have confidence in order to spend.
Business sentiment is often the first indicator for the future direction of the economy. - Eric Hamburger, Deputy Group CEO of CTOS Digital Berhad.
Business sentiment in the country improved in the first quarter of 2023 (1Q2023), as challenges faced by firms eased slightly, according to a survey jointly organised by RAM Holdings Bhd and CTOS Digital Bhd’s wholly-owned unit CTOS Data Systems
Sdn Bhd.
INTEREST
RATES
FEDERAL OPEN MARKET COMMITTEE FOMC
JEROME POWELL
CHAIRMAN OF THE BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
MONETARY POLICY COMMITTEE MPC NOR SHAMSIAH MOHD YUNUS
GOVERNOR OF BNM
OVERNIGHT POLICY RATE
MICROVALUATION ANALYSIS
Growth rate of sales Operating margin Interest expense
Tax rate 1.
2.
3.
4.
Growth Rate of Sales
1. Growth rate of sales is a financial metric that measures the rate at which a company's sales revenue is increasing over a specific period of time.
2. The growth rate of sales is typically calculated by comparing the revenue of a
company in the current period to the revenue of the same period in the previous year or quarter. This percentage change in revenue is then expressed as a growth rate.
3. A high growth rate of sales can indicate that a company is increasing its market share, expanding its product line, or improving its sales and marketing efforts. This
can be a positive sign for investors as it suggests that the company has the potential to
generate higher profits in the future.
Operating Margin
1. It measures the profitability of a company's core operations by calculating the percentage of revenue that remains after deducting operating expenses.
2. Operating margin = (Revenue - Operating expenses) / Revenue x 100%
3. A high operating margin indicates that a company is efficiently managing its costs and generating strong profits from its core operations. This can be a positive sign for investors as it suggests that the company has a competitive advantage in its industry and is likely to be able to sustain its profitability in the long run.
4. A low operating margin may indicate that a company is struggling to control its costs or facing competitive pressures that are impacting its profitability.
5. It is important to compare the operating margins of a company with its industry peers to get a better understanding of its performance.
Interest Expense
1. The cost of borrowing money from creditors or lenders.
2. When a company borrows money from creditors, it is required to pay interest on the loan in addition to repaying the principal amount.
3. A high interest expense may indicate that a company has taken on a significant amount of debt to finance its operations or growth. While debt can provide a company with access to capital, it also comes with the risk of default and bankruptcy if the company is unable to make its interest payments.
4. A low interest expense may indicate that a company has a strong financial position and is not heavily reliant on debt financing.
Tax Rate
1. The percentage of a company's income that is paid in taxes to the government.
2. Tax rate = Income tax expense / Pre-tax income x 100%
3. A high tax rate may indicate that a company is not effectively managing its tax liabilities or is operating in a high-tax jurisdiction. This can negatively impact a company's
profitability and earnings per share.
4. A low tax rate may indicate that a company is taking advantage of tax planning strategies or operating in a tax-friendly jurisdiction.
INDUSTRY ANALYSIS
1. The business cycle and industry sectors.
2. Structural economic changes impact the industry (Demographic, lifestyle,
technology, politics and regulations).
3. Life cycle and competition
The business cycle and industry sectors.
During COVID-19
STRUCTURAL ECONOMIC
CHANGES IMPACT THE
INDUSTRY
DEMOGRAPHIC LIFESTYLE
POLITICS AND REGULATION TECHNOLOGY
Life Cycle of an Industry
REFERENCES
REILLY K, F., BROWN K, C. & LEEDS S, J.
(2019). INVESTMENT ANALYSIS &
PORTFOLIO MANAGEMENT. 11TH EDITION.
CENGAGE LEARNING INC.
JONES C, P. (2014). INVESTMENTS:
PRINCIPLES AND CONCEPTS. 12TH EDITION. NEW JERSEY: JOHN WILEY &
SONS, INC.
FISHER D. E. & JORDAN R, . (1995) SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT.
6TH EDITION. PRENTICE HALL.
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