WHY?

To determine the intrinsic value of an equity share, the security analyst must forecast the earnings and dividends expected from the stock and choose a discount rate which reflects the risk of the stock. This is what is involved in the fundamental analysis, perhaps the most popular method used by investment professionals.

HOW?
Understanding of the macroeconomic environment and developments. Analyzing the prospects of the industry to which the firm belongs Assessing the projected performance of the company and the intrinsic value of its shares.

FACTORS AFFECTING CHANGES IN STOCK PRICES

Researchers have found that stock price changes can be attributed to the following factors: Economy-wide factors: 30- 35% Industry factors: 15-20% Company factors: 30-35% Other factors: 15-25%

MACRO ECONOMY
It includes the following

The global economy The Indian economy

THE GLOBAL ECONOMY

From time to time , countries may experience turmoil due to a complex interplay between political and economic factors . The exchange rate between a countrys currency and other currencies is a keys factor affecting the international competitiveness of its industries.

THE GLOBAL ECONOMIC SENSE

It includes GDP of the world, the industrial growth, trade growth etc
According to World Trade Organization (WTO), The growth of the world trade in the year 20102011 is 6.5%. The world merchandise exports rose to 14.5% in volume terms Imports of developed economies grew more slowly than exports in 2010 (10.7% compared to 12.9%)

CONTND.
World GDP at market exchange rates expanded 3.6% in 2010. GDP growth rate has decreased from 3.6% to 3.1% in 2011 at market exchange rates, said the WTO.

Output of developed economies rose 3.7% in the latest year after falling 2.6% in 2009.

GLOBAL ECONOMIC ORDER

The US economy has been the principal engine of the world economy with its robust growth.

It dominates the world economic sense and hence developments in the US like employment figures , housing, interest rates , and current account deficits are keenly watched by economists , businessmen , and investment analysis all over the world.

A STRANGE GLOBAL EQUILIBRIUM

It describes the capital flows from rich countries to poor countries. The richest economy in the world has the lowest savings rate and the largest trade deficit. Meanwhile Asian countries have the largest savings and trade surpluses which their central banks trying to invest in US treasury bills.

CENTRAL GOVERNMENT POLICY

The government employs two broad classes of macroeconomic policies, Demand side policies Supply side policies

TWO MAJOR TOOLS OF DEMAND SIDE ECONOMICS

Fiscal policy Monetary policy

FISCAL POLICY
Fiscal policy is concerned with the spending and tax initiative of the government. It is perhaps the most direct tool to stimulate or dampen the economy. An increase in government spending stimulates the demand for goods and services, whereas decrease deflates the demand for goods and services. By the same sense, if tax rates decrease the consumption of goods and services increases


Standard rate of excise duty held at 10 percent
Personal income tax exemption limit raised to Rs 180,000 from Rs 160,000 for individual tax payers For senior citizens, the qualifying age reduced to 60 years and exemption limit raised to Rs 2.50 lakh. Citizens over 80 years to have exemption limit of Rs 5 lakh.

MONETARY POLICY
Monetary policy which is concerned with the manipulation of money supply in the economy is the other main plank of demand side economics. Monetary policy affects the economy mainly through its impact and interest rates. An expansionary monetary policy lowers short term interest rates thereby stimulating investment and consumption demand. A contractionary monetary policy has the opposite effects.

TOOLS OF MONETARY POLICY

Open market operations Bank rate Cash Reserve Ratio& Statutory Liquidity Ratio Direct credit controls Repo rate and Reverse Repo Rate

SUPPLY SIDE POLICIES

Supply side economists pay attention to tax policy from a different angle. While the demand sides focus on the impact of taxes on incentives to work and invest. Lower tax rates encourage growth. The reduction in tax rates eventually leads true increase in tax revenues because the higher level of economic activity and tax base induced by tax reduction more than offsets the lower tax rate.

MACRO ECONOMIC ANALYSIS

The macro economy is the overall economic environment in which all firms operate. The key variables commonly used to describe the state of the macro economy are Growth rate of Gross Domestic Product Industrial growth rate Agriculture and monsoons Savings and investments Government budget and deficit Price level and inflation Interest rates Balance of payment forex reserves and exchange rates Infrastructural facilities and arrangements

GROWTH RATE OF GDP

The gross domestic product is a measure of the total production of final goods and services in the economy during a specified period usually a year. The Gross Domestic Product (GDP) of India is estimated to have grown at 8.6 per cent in 2010-11 in real terms.
2007 2008 2009 2010

GROWTH RATE OF GDP

9.40

7.30

5.40

7.20

FORECASTING OF GDP GROWTH

A commonly employed procedure for forecasting the GDP growth rate is to Estimate the most likely growth rates of three sectors of the economy Agriculture , Industry and Services Calculate the weighted average of the three rates, the weight of a sector being its share of the GDP. The weights of the agriculture, industry services sector is 0.25,0.25,0.50 respectively. In 2010-11 agriculture is estimated to have grown at 5.4 per cent, industry at 8.1 per cent and services at 9.6 per cent.

INDUSTRIAL GROWTH RATE

Manufacturing and mining sectors pulled down the industrial growth rate to 7.8 per cent in 2010-2011. 13 out of 17 industry groups posted positive growth in march this year, the official data shows that the annual growth in manufacturing declined to 8.1 per cent in 201011 from 11 per cent in the previous fiscal.
For the month of march alone also, the sector's production increase was lower at 7.9 per cent as compared to the16.4 per cent expansion achieved in march 2010-11 from 10.5 per cent in 2009-10

Capital goods were one of the worst affected to register a growth of 9.3 per cent in 2010-11 as against a healthy 20.9 per cent increase in the previous fiscal.

The mining sector also witnessed a fall in growth to 5.9 per cent in 2010-11 from 9.9 per cent in 200910. The growth in electricity generation also slowed down to 5.6 per cent in 2010-11 from 6 %in 200910

INDUSTRIAL GROWTH RATE OF 20102011

AGRICULTURE AND MONSOONS

Agriculture accounts for about a quarter of the Indian economy and has important linkages , direct and indirect with industry. Hence the increase or decrease of agricultural production has a significant bearing on industrial production and corporate performance. Companies using agricultural raw materials as inputs or supplying inputs to agriculture are directly affected by the changes in agricultural production. Other companies also tend to be affected due to indirect linkages.

SAVINGS AND INVESMENTS

Level of investment in the economy is equal to domestic savings + inflow of foreign capital investment made abroad. Currently the savings in India is 34% which is favorable when compared to other industries.

GOVERNMENT BUDGET AND DEFICIT

In India governmental revenues come from indirect taxes such as Exercise duty Customs duty & Direct taxes The revenue from taxes has increased 23% due to increase in TDS collections from interest , royalties and other such payments made by companies in the year 2010-2011

 Investment analysts generally examine the government budget to assess how it is likely to impact stock market. They generally classify this into favourable and unfavourable.
Favourable A reasonably balanced budget A level of debt which can be serviced comfortably A tax structure which provides incentive for stock market investment Unfavourable A budget with high surplus and deficit A level of debt both internal and external which is difficult to service A tax structure which provides disincentive for stock market investments

MONEY SUPPLY
This growth rate can be attributed to 3 factors Growth in the real economy Monetization of a portion of deficit financing Financial deepening of the economy

PRICE LEVEL AND INFLATION

The effect of inflation on the economic sector tends to be uneven. While certain industries may benefit others tend to suffer. Industries which enjoy a strong market for their products and which don't come under the purview of price control may benefit and vice versa. Always a mild level of inflation is good for growth.

INTEREST RATE
Interest rate varies with maturity , default risk , inflation rate, productivity of capital and special features and so on. The interest on money market instruments are risk free and are lowest.

A rise in the interest rates decrease the corporate profitability and also leads to increase in the discount rate applied by equity investors , both of which have an adverse impact on stock prices and vice versa.

BALANCE OF PAYMENTS , FOREX RESERVES AND EXCHANGE RATES

Balance of trade ( imports exports) A balance of trade depletes the forex reserves of the country and has an adverse impact on the exchange rate and vise versa If rupee weakens the dollar hurts importers but benefits exporters Exports have grown at 29.4 per cent to reach US Dollar 184.6 billion, while imports at US Dollar 273.6 billion have recorded a growth of 17.6 per cent during April-January 2010-11, over the corresponding period last year

FOREIGN INVESTMENT
Foreign investments in India comes in two forms , a) Foreign direct investment b) Foreign portfolio investment The former represents investment for setting up new projects and hence is long term in nature. The latter is in the form of purchase of outstanding securities in the capital market and hence can be reversed easily

INFRASTRUCTURAL ARRANGEMENTS AND FACILITIES

Infrastructure arrangements in country greatly influence industry performance. Adequate and regular supply of electric power at a reasonable tariff. A well developed transportation and communication system An assured supply of basic raw materials like steel , coal , petroleum and telecommunications