Economic developments within any given nation can have an immense influence on share demand, driving up or bringing down share prices accordingly. This may be caused by foreign investment and general economic factors.
Applying Granger causality tests and generalized impulse response functions (GIRF), we find that an unexpected shock to industry returns has an immediate and unidirectional lead effect on market returns.
Industry analysis
Industry analysis is essential in understanding the competitive dynamics and success factors within an industry, and for each constituent company within it. This process typically includes an evaluation of its structure, demand-supply statistics, growth trends and total addressable market size assessments, technological changes analysis, regulatory influence assessment as well as elasticities testing to find optimal pricing strategies.
Financial analysts often consider an industry’s current financial health, including sources of revenue growth for competitors and possible business risks, when conducting an industry assessment. Credit analysts use such research to assess a company’s debt servicing ability as well as level of leverage; competitors’ competitive positioning influences share prices – an essential aspect of share selection process as an investment in poorly-positioned industries could quickly lead to losses. While conducting this type of investigation may take more time and energy than initially planned, this type of analysis must take place if an investment in the wrong sector could quickly turn into losses!
Company analysis
Company analysis involves evaluating the fundamental strengths and risks of individual companies.It involves tracking key operating metrics over time and valuation methods like discounted cash flow modelling to determine a true or equilibrium value, which can then be compared with market prices.
A complete company analysis considers industry characteristics as well as growth prospects, competitive pressures and risk factors so investors can assess the ability of a company’s business model, financial statements, management team and strategic outlook.
Investors use key documents, like annual reports and balance sheets, to analyze historical performance. Ratios allow them to measure profitability, leverage, liquidity, revenue growth trends and margin shifts over time. A comprehensive company analysis ensures that selected company strategies correspond with positive macroeconomic and sector trends, thus reducing the inherent hazards inherent to investing and potentially leading to higher potential returns. It should be remembered that financial statements only look backwards and may have been altered by businesses to appear more favourably than they actually are.
Sector analysis
Sector analysis is an increasingly popular strategy among investors for assessing the economic prospects of an entire industry. It is an analysis of many macroeconomic variables (unemployment rate, output) to determine which sectors do well under existing conditions and in what competitive environments and growth are best served.
Based on sector conditions, both investors and companies can predict the future demand and supply patterns and develop sector allocating strategies to capture maximum profits through the entire market lifetime.
Sector analysis plays an important role in risk management for long- and short-term trades. Sector performance can indicate sentiment among investors and can determine a market direction eg, knowing how different sectors respond to interest rate increases can help with sector rotations eg, higher rates indicate risk-on sentiment toward cyclical stocks, lower rates indicate risk-off sentiment towards defensive stocks.
Conclusions
The industry component of mutual fund alpha shows significant quarterly persistence and is not subject to diminishing returns, suggesting that funds with strong industry selection abilities could generate substantial alpha by investing in passive industry indexes.
Company-specific factors differ across businesses and are specific to each business’s circumstances, making identification of these important for valuation and investor perception purposes. Management quality, competitive positioning and operational efficiency are among the many company-specific elements which need to be assessed when considering investment decisions.
Tracking market share positions among its peers provides valuable insights into competitive strength and pricing power. By using the BCG Growth-Share Matrix, companies can be classified as stars (high growth with high market share), cash cows (high market share with slow or no growth), dogs (low market share and weak growth), or question marks.
