Tài chính doanh nghiệp - Chapter 7: Forecasting share price movements

Chapter 7Forecasting SharePrice MovementsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonLearning ObjectivesUnderstand the factors that determine the price of a firm’s sharesContrast fundamental analysis techniques with technical analysisExplain the theoretical concepts of the random walk and efficient market market hypothesesCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation7.1 Introduction7.2 Fundamental Analysis: Bottom-up Approach7.3 Fundamental Analysis: Top-down Approach7.4 Technical Analysis7.5 Program Trading7.6 Random Walk and Efficient Market Hypothesis7.7 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson7.1 IntroductionShare price is determined by supply and demand of a company’s sharesExpectation of bad company performance causes investors to sell their shares, increasing supply and reducing the priceSimilarly expectation of good company performance increases demand and leads to an increase in share priceCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson7.1 Introduction (cont.)What causes the shifts in demand and supply of a company’s securities on the secondary market?Three approaches taken in analysing this questionFundamental analysis: bottom-upFundamental analysis: top-downTechnical analysisCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation7.1 Introduction7.2 Fundamental Analysis: Bottom-up Approach7.3 Fundamental Analysis: Top-down Approach7.4 Technical Analysis7.5 Program Trading7.6 Random Walk and Efficient Market Hypothesis7.7 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson7.2 Fundamental Analysis: Bottom-up ApproachFundamental analysisConsiders macro and micro factors that impact upon future share price changesMacro factors include interest rates, economic growth, business investmentMicro factors are firm-specific and relate to management’s impact on company performanceCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson7.2 Fundamental Analysis: Bottom-up Approach (cont.)Focuses on ratios and other measures of the firm’s financial characteristics and performanceConsiders such factors asAccounting ratios which consider a company’s capital structure, liquidity, debt servicing, profitability, share price and risk (see Chapter 6), and make comparisons with firms in the same industryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson7.2 Fundamental Analysis: Bottom-up Approach (cont.)Considers such factors as (cont.)Additional information on key management changes, corporate mission and strategic direction and trend analysis of accounting ratiosCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson7.2 Fundamental Analysis: Bottom-up Approach (cont.)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation7.1 Introduction7.2 Fundamental Analysis: Bottom-up Approach7.3 Fundamental Analysis: Top-down Approach7.4 Technical Analysis7.5 Program Trading7.6 Random Walk and Efficient Market Hypothesis7.7 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson7.3 Fundamental Analysis: Top-down ApproachForecasts and analyses the economic environment, and considers the impact on firms and industry sectorsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson7.3 Fundamental Analysis: Top-down Approach (cont.)Considers such factors asInternational economiesRate of economic growthExchange ratesDomestic economyInterest rates, growth rate, balance of payments, inflation, wage growthCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonConsider such factors as international economiesThe higher the growth rate in the rest of the world, the greater will be the demand for Australian exportsThe sectors which benefit from international growth will depend on the source of the growthCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonConsider such factors as international economies (cont.)Growth can be driven byIncreased consumer demandIncreased business investment in equipmentCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonConsider such factors as rate of economic growthGenerally, greater domestic growth leads to increased profitability of firmsHowever, high growth may lead toDeterioration in balance of paymentsIncrease in inflationary pressuresPressure on wagesCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonConsider such factors as rate of economic growth (cont.)The presence of any of these factors may lead to a reduction in firm profitabilityCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonConsider such factors as exchange ratesAffect the domestic currency profit of exporters that quote their products in foreign currency pricesA strengthening of the Australian dollar (AUD) makes these firms worse off, as the AUD value of their exports is now lessCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonConsider such factors as exchange rates (cont.)Exchange rates also affect firms indirectlye.g. devaluation of currency increases cost of imports, thereby increasing inflationCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonConsider such factors as domestic economyInterest rates Have both a direct and indirect impact on firms’ valueDirect effect on profitabilityRepresents the cost of debt finance for borrowers and the return for finance providersIndirect effect on profitabilityRise in interest rates may indicate a slowing of economic activityFuture reduction in profitabilityCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonConsider such factors as domestic economy (cont.)Current account of balance of paymentsIf current account is in deficit i.e. total international payments exceed total international receipts, thenSome export income is diverted to service debtNeed to borrow foreign currency to service debtCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonConsider such factors as domestic economy (cont.)Current account of balance of payments (cont.)Indirect effect on firms’ profitabilityGovernment may increase interest rates to slow economic growth and control the debtCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonConsider such factors as domestic economy (cont.)Inflationary pressuresEffect of inflation on firms’ real profitTax treatment of inflationMakes historical-based depreciation allowances inappropriateCombined with higher replacement costs leads to an overstatement of after-tax profitCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonConsider such factors as domestic economy (cont.)Inflationary pressures (cont.)Inventory‘Inflated’ selling price of inventory creates an illusion of inventory profitsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonConsider such factors as domestic economy (cont.)Wages growthIncrease in wages growth raises the amount of business profit used for salariesThis will impact most heavily on those firms that are highly labour intensiveCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation7.1 Introduction7.2 Fundamental Analysis: Bottom-up Approach7.3 Fundamental Analysis: Top-down Approach7.4 Technical Analysis7.5 Program Trading7.6 Random Walk and Efficient Market Hypothesis7.7 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson7.4 Technical AnalysisExplains and forecasts share price movements based on past price behaviourAssumes markets are dominated at certain times by a mass psychology, from which regular patterns emergeTwo main forecasting modelsMoving average (MA)ChartingCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonTwo main forecasting modelsMoving average (MA) modelsSmooths out a series facilitating the identification of trends in the seriesCalculation of MAAssuming a five-day moving averageThe MA is calculated by taking the average of the price series for the preceding five daysCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonTwo main forecasting models (cont.)Moving average (MA) models (cont.)Trading rulesBuy when the price series cuts the MA from belowBuy when the MA series is rising strongly and the price series cuts or touches the MA from above for only a few observationsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonTwo main forecasting models (cont.)Moving average (MA) models (cont.)Trading rules (cont.)Sell when the MA flattens or declines and the price series cuts MA from aboveSell when the MA is in decline and the price series cuts or touches the MA from below for only a few observationsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonTwo main forecasting models (cont.)Moving average (MA) models (cont.)Typically for daily price series both 10-day (short-term) and 30-day (medium-term) moving averages are calculatedWeighted moving averagesThe most recent information is given the greatest weightCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonTwo main forecasting models (cont.)ChartingInvestigate patterns in price chartsSeveral techniquesTrend linesSupport and resistance linesContinuation patternsReversal patternsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonTwo main forecasting models (cont.)Charting (cont.)Several techniques include trend linesTrends are regular movements in share pricesThree types of trendsUptrend line—connecting the lower points of rising price seriesDowntrend line—connecting the higher points of falling price seriesSideways trendCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonTwo main forecasting models (cont.)Charting (cont.)Several techniques include trend lines (cont.)Critical issue is determining when the trend is going to changeCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonTwo main forecasting models (cont.)Charting (cont.)Several techniques include support and resistance linesSupport levels—where there is sufficient demand to halt further price fallsResistance levels—where there is sufficient supply to halt further price increases‘Strong’ levels—historical support and resistanceCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonTwo main forecasting models (cont.)Charting (cont.)Several techniques include support and resistance lines (cont.)‘Weak’ levels—support and resistance based on more recent activityCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonTwo main forecasting models (cont.)Charting (cont.)Several techniques include continuation patternsSideways share trading that does not normally signal a change in a trendTwo typesTriangles—composed of a series of price fluctuations, each smaller than it’s predecessorSymmetrical triangle (no change in trend); ascending triangle (uptrend); descending triangle; (downtrend)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonTwo main forecasting models (cont.)Charting (cont.)Several techniques include continuation patterns (cont.)Two types (cont.)Pennants and flags—form during a sharp rise in prices (‘the pole’), trading volume then reduces and then increases suddenly to take prices sharply higherCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonTwo main forecasting models (cont.)Charting (cont.)Several techniques include reversal patternsOccurs after a major market moveResults in a ‘head and shoulders’ (H/S) patternCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonTwo main forecasting models (cont.)Charting (cont.)Several techniques include reversal patterns (cont.)H/S consists of three successive rallies and reactionsLeft shoulder—formed by volume-strong rally on up trend, followed by reduced-volume reactionHead—second rally increases price before reaction moves price back to previous lowCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonTwo main forecasting models (cont.)Charting (cont.)Several techniques include reversal patterns (cont.)H/S consists of three successive rallies and reactions (cont.)Right shoulder—final rally marked by reduced volume indicating price weaknessCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation7.1 Introduction7.2 Fundamental Analysis: Bottom-up Approach7.3 Fundamental Analysis: Top-down Approach7.4 Technical Analysis7.5 Program Trading7.6 Random Walk and Efficient Market Hypothesis7.7 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson7.5 Program TradingRefers to buy and sell strategies generated by computer programsPrograms range betweenSimple buy/sell orders based on moving averagesComplex monitoring of both derivatives and share markets for the purpose of hedging or speculationProgram trading increases the speed at which prices changeCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation7.1 Introduction7.2 Fundamental Analysis: Bottom-up Approach7.3 Fundamental Analysis: Top-down Approach7.4 Technical Analysis7.5 Program Trading7.6 Random Walk and Efficient Market Hypothesis7.7 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson7.6 Random Walk and Efficient Market Hypothesis (EMH)Random walkShare price is assumed to be formed by investor’s expectations of future cash flows (i.e. intrinsic value)Price will change in response to new information; since information arrives in a random fashion, stock prices adjust in an unpredictable fashionCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson7.6 Random Walk and Efficient Market Hypothesis (EMH) (cont.)Random walk (cont.)Each observation in the (price) series is assumed to be independent of the previous priceThere is an equal probability that the next price will move up, down or remain unchangedCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson7.6 Random Walk and Efficient Market Hypothesis (EMH) (cont.)Efficient market hypothesis (EMH)EMH proposes that markets are informationally efficient if prices adjust immediately to new informationIt is not possible for an investor to make abnormal profits through superior informationCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson7.6 Random Walk and Efficient Market Hypothesis (EMH) (cont.)Efficient market hypothesis (EMH) (cont.)Three formsWeak form—historic price data reflected in share priceSemi-strong form—all publicly available information is reflected in share priceStrong form—public and private information is fully reflected in share priceCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation7.1 Introduction7.2 Fundamental Analysis: Bottom-up Approach7.3 Fundamental Analysis: Top-down Approach7.4 Technical Analysis7.5 Program Trading7.6 Random Walk and Efficient Market Hypothesis7.7 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson7.7 SummaryDemand and supply determines the price of sharesDemand and supply of shares is determined by expectations about futureCompany performanceFundamental analysisBottom-up approachTop-down approachShare price movementTechnical analysisMoving averages modelsChartingCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson7.7 Summary (cont.)Program trading involves buy and sell orders generated by computer programsRandom walk hypothesis is where the price of a share is independent of its previous priceEfficient market hypothesis prices adjust immediately to new informationCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson