Tutorial 5

Tutorial 5 4)a) Use the industry life-cycle approach to  Forecast industry earnings growth, risk and profit margin  Commit funds to an industry in expansionary phase  Sell out of an industry in stagnation phase. Deciding correct phase an industry is in is difficult  An industry in decline/stagnant phase may be revived by a technical breakthrough  Transition from one stage to another is not clear as the duration is not fixed for each stage  Industry may even skip certain stage(s) However, the life-cycle approach is still useful in assigning an industry to approximate (historical perspective) growth or decline status b) Some possible reasons are:  High labour cost e.g. textiles driven out of S’pore in 1970s  For labour intensive industry  Change in consumer habit e.g. “bubble tea” Products or services no longer in demand  Change in government regulations e.g. COE needed to buy car  COE structure limits growth in number of cars  Technological advancement e.g. E-commerce vs retail shop  Invention of internet give rise to e-commerce, affect brick and mortar companies  New & better products e.g. mobile phones vs pagers  Presence of substitute products  Increased competition  Presence of overseas or local competitions Concept of “Permanence” of industry is key 5)i) Rotation Strategy is key to this question (predict where business cycles are headed and invest accordingly) Invest in stocks from car manufacturing industry (cyclical stocks) because:  Improving economy  increase consumer confidence and personal income level  consumers start to buy durable goods like cars + pent-up demand (delayed due to recession previously

ii) Invest in stocks from heavy machinery manufacturing industry (cyclical stocks) because:  As consumers demand increases  greater business confidence that current level of consumer demand is sustainable or growing  business begin to think about modernising and upgrading their equipment to meet higher demand 6) Disposable income (Drop) Fast Food industry

Property industry Banking industry Retail industry Durable Consumer Goods

Defensive industry – no or little negative effect on sales Sales down Deposits growth slow – less money to save Luxury items sales down Sales shift towards cheaper brands / or postpone

Employer CPF contribution rate (Drop) No / limited effect

Bank’s Prime Interest Rate (Up) No effect

Stock Market Index (Up)

Cash diverted to service loan – sales down Less housing loan & investment business Sales down as people feel ‘poorer’ Sales shift towards cheaper brands / or postpone

Financing cost up – sales down

Wealth effect – sales up

Higher cost of financing – less loan made Credit sales down Credit sales affected by higher financing cost

More investment banking business

No / limited effect

Wealth effect – people willing to spend more Wealth effect – people willing to spend more