Portfolio Management

LECTURE TWO

Fundamental Analysis

Prepared By:

Noorulhadi Qureshi
Lecturer Govt College of Management
Sciences Peshawar

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 (cont)

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
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.

Company Analysis
Industry analysis
Economy Analysis

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 (cont)

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 Rate
Interest 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.