2206 AFE Tutorial answers 4
Question 2, p.395
It is intuitively logical that aggregate market analysis precede industry and
company analysis because the government and federal agencies can exert
influence on the aggregate economy via fiscal (changes in government
spending, taxes, etc.) and monetary (changing money supply, interest rates,
etc.) policy. Further, inflation, another aggregate economic variable, must be
considered because of its major impact on interest rates and the spending and
saving/investment of consumers and corporations. Therefore, a major division
is the asset allocation among countries based upon the differential economic
outlook including exchange rates (the outlook for the currency).
Again, industry analysis should precede individual security analysis since
there are several factors that are generally national in scope but have a
pervasive effect on some industries - e.g., industry-wide strikes, import/ export
quotas, etc. In addition, alternative industries feel the impact of economic
change at different points in the business cycle -e.g., industries may lead or lag
an expansion. Further, some industries are cyclical (e.g., steel, auto), some are
stable (utilities, food chains, etc.).
The thrust of the argument is that very few, if any, industries perform well in a
recession, and a “good” company in a “poor” industry may be difficult to find.
Question 7 (p.395)