Chapter 9: Economy and sector

Question 1

7 Factors affecting share price directly

Answer 1

• Monetary policy
• Fiscal factors
• Inflation
• Economic growth
• Global share markets
• Warfare
• Sentiment

Question 2

Interest rate’s influence on investments: High vs low

Answer 2

High interest rates are bad for share markets, since they are associated with lower prices.

Low interest rates are good news for share prices.

Question 3

Why are higher interest rates “bad news”?

Answer 3

• Discourages the general public to finance shares with borrowed money. The demand for shares decreases.
• A Company’s performance is influenced negatively since interest payments increase => lower share prices.
• Will encourage investors to rather invest in fixed interest-bearing securities - lower risk. Share prices will fall.

Question 4

Fiscal factors’ effects on shares

Answer 4

Government spending:
Ex. Decreased government spending causes a decrease for goods and services
Tax: Lower a consumer’s disposable income.
Thus affecting share prices

Question 5

Inflation

Answer 5

The continuing increase in the prices of a selection of items.

Question 6

The reason behind the relationship between the relationship between the JSE and international markets

Answer 6

• The attitude that the American economy is the leading international market.
  The Dow Jones Industrial Index reflects not only the state of American industrial shares, but on global industrial shares.

Question 7

Sector classification acoording to the JSE

Answer 7

Companies divided into 12 categories with a number of sub-categories (sectors) within each of the main categories.

Question 8

4 Distinct sector life cycle phases:

Answer 8

• Pioneering phase
• Primary growth phase
• Mature phase
• Decline phase

Question 9

Pioneering phase

Answer 9

• Large sums of money is invested into research and the development of new ideas. New products/services and new companies are identified.
• Speculators are mostly active during this phase
• Above-average returns can be realised

Question 10

Skimming policy

Answer 10

When companies that are successful often increase their profitability by asking high prices for their products.

Question 11

Primary growth phase

Answer 11

• Both turnover and profitability increases as the company (and the sector) becomes established.
• Weaker companies drop out and competition becomes fierce.
• Grows at a faster rate than that of the general economy as the product is making inroads into the consumer market.
• Structural changes take place within the sector (mergers & takeovers)
• Higher than average returns (but lower than in pioneering phase)

Question 12

Mature phase

Answer 12

• Future growth is a function of the growth of the general economy.
• Competition is immense and price is very important.
• Lower prices put pressure on profit margins and profits.
• Improved cash flow
• Either huge capital amounts can be invested in improvement or the product can be regarded a cash cow, with little opportunity for expansion.

Question 13

Stagnation and decline

Answer 13

• Growth at a slower rate than that of the general economy.
• Investors should be cautious NOT to invest in companies in the phase (nor sectors)
• Unless an attempt is made to start a new lifecycle, the company will fail. Many companies dying out can lead to the sector collapsing (ex. coach building, blacksmiths, tailoring etc.)