Investment and Portfolio Management BAF106

Session 5
November 23, 2012
FORMATION OF STOCK PORTFOLIOS
Investment and Portfolio Management BAF106
Strategies for investing in stocks
The three main types of strategies than investing in stocks:

1. Sector rotation and business cycle strategy;

2. Market timing strategy;

3. Value screening strategy.
Investment and Portfolio Management BAF106
Strategies for investing in stocks
Sector rotation and business cycle strategy

The essentiality of this strategy:
Each economic sector as potential investment object has the specific patterns
of market prices which depend upon the phase of the economic (business)
cycle.

Sector rotation and business cycle strategy intends the movement of invested
funds from one sector to the other depending on the changes in the economic
(business) conditions.

This strategy use the classification of all stocks traded in the market on the
bases of their behavior in regard to business cycle.

The following groups are identified:
- Defensive stocks
- Interest-sensitive stocks
- Consumer durables
- Capital goods
Investment and Portfolio Management BAF106
Strategies for investing in stocks
Defensive stocks - these stocks are usually related with food industry,
retail, tobacco, beverages industries, pharmaceuticals and other
suppliers of the necessity goods and services. The prices of these
stocks reach their highest levels in the later phases of business cycle.

Interest-sensitive stocks - are related with the sectors of
communications, utilities, housing industry, also with the insurance
and other financial institutions. The behavior of these stocks is most
unfavorable for the investor in the phase of economic crises/
recession. These stocks are considered as a good investment in the
early phases of business cycle, i.e. in the optimistic phase.
Investment and Portfolio Management BAF106
Strategies for investing in stocks
Consumer durables are related with automobile, domestic electric
appliances, furniture industries, and luxury goods and also with the
wholesale. These stocks are a good investment in the middle of
business cycle.

Capital goods are related with industries producing machinery, plant,
office equipment, computers and other electronic instruments.
Because of the remarkable time gap between the orders of this
production and the terms of their realization, these stocks
demonstrate their high and stabile prices in the latest phases of
business cycle.

Thus by knowing and identifying the different patterns of prices
relating to the industries in the real investment environment the
investor can diversify his / her stock portfolio which will reflect to the
changes in the economic (business) cycle
Investment and Portfolio Management BAF106
Strategies for investing in stocks
Market timing strategy

The essentiality of this strategy:
The investors endeavor to be in-the-market when market is in a bullish
phase, i.e., when prices are growing, and to withdraw from the market in the
bearish phase, i.e., when prices are slumping.

Investors use several different techniques for forecasting the major ups and
downs in the market.

The most often applied techniques using market timing strategies:

- Technical analysis;
- Stock valuation analysis
- Analysis of economic forecasting
Investment and Portfolio Management BAF106
Strategies for investing in stocks
Technical analysis - is based on the diagrams of price fluctuations in
the market, the investors continuously watch the stocks which prices
are growing and which falling as they signalize about the presumable
changes in the stock market .

The purpose of the stock valuation analysis is to examine whether
the stock market is a supply market, or is it a demand market. If the
under valuated stocks prevail in the market it reflects to supply market
and vice versa if the over valuated stocks prevail, it reflects to
demand market

The valuation tools frequently used when applying for market timing
strategy are:
1) Price/Earnings ratio (PER);
2) The average market price/ book value ratio;
3) The average dividend income
Investment and Portfolio Management BAF106
Strategies for investing in stocks
Investment and Portfolio Management BAF106
Strategies for investing in stocks
Analysis of economic forecasting. Investors by forecasting changes in
the macro economy and in interest rates endeavor to decrease the
investment in stocks in the phases of economic downturn and to
return to these investments during upturn phases of the economy .