Determine the Intrinsic Value by Top-Down Approach
Although we know that the value of a security is essentially determined by its quality and profit potential, we also believe that the economic environment and the performance of a firm’s industry influence the value of a security and its rate of return. Hence, we follow the top-down three-step valuation process in which we first examine the influence of the general economy on all firms and the security market, then analyze the prospects for various global industries with the best outlooks in this economic environment, and finally turn to the analysis of individual firms in the preferred industries and to the common stock of these firms. ECONNOMIC ANALYSIS
Analysis of economic is where we are and where we are headed and it should be the first component of security analysis. By studying the big picture of the national and international economy, we can better identify factors and trends that will affect industries and firms in the future and make security buy-and-sell decision accordingly.
Useful economic analysis should provide insights regarding cash flow trends, interest rate trends, and risk premium analysis. This may involve analysis of the economy’s expected growth, inflation, demographic shifts, political environment and industry competition. The global economy affects the domestic economy; for large economies such as the United States, the opposite may be true as well. Fluctuating exchange rates affects prices of imports and exports. Growing consumer demand for the goods can lead to increases in imports. Attractive financial condition overseas may cause investment dollars to be funded to other countries. Thus, the sales and profitability of firms and industries are not necessarily tied into their home market.
Here, we will analyse how macro-economy effect on Shell and PETRONAS. Macro-economy usually means national economy and how the international economy affects the national economy. To analyse the...
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