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Security analysis and portfolio management

Report on the relationship of stock prices with Economic indicators of Automobile industry
Group members Muhammad Irfan Hina Mubeen Aqeela Tariq Masham Zehra Rizvi Najma Malik Roll No: 51 Roll No: 29 Roll No: 09 Roll No: 40 Roll No: 04 Section A, MBA3 Section A, MBA3 Section A, MBA3 Section B, MBA3 Section B, MBA3

Submitted to: Sir Nadeem Araien

Finance report: | Federal Urdu university Gulshan campus Karachi

Security analysis and portfolio management

Acknowledgement
First of all we would like to thank that Great entity that helped us to get through this report safely, the one who was always there when no one was! SHUKER- ALL- HUMDULILLAH! Would that we have words to pay tribute to our loving Parents and teachers whose invaluable prays salutary admire and embodying attitude kept our spirit alive to strive for Knowledge and integrity which enable us to reach milestone We would also like to express enormous gratitude to our Respectable teacher

Sir Nadeem Araien

For providing the direction for this project and for helping us in refining our effort and ideas we also acknowledge the help and Pleasant gathering of all our class fellows we are also thankful to all of those people who helped us in accomplishing our project.

Finance report: | Federal Urdu university Gulshan campus Karachi

Security analysis and portfolio management

Table of contents
1. Gross domestic product 2. Gross national product

3. Pakistan - interest rate spread 4. Foreign direct investment, net (Bop, current US$) 5. Foreign Reserves

6. KSE 100 Index 7. Automobile Industry ( Companys profiles) 8. Data of Economic Indicators 9. Stock prices of Auto mobile Companies 10. Correlation among Stock prices of companies & Economic indicators 11. Conclusion 12. References

Finance report: | Federal Urdu university Gulshan campus Karachi

Security analysis and portfolio management

Introduction of Indicators:

1.Gross domestic product/Growth rate:

The gross domestic product (GDP) is one of the primary indicators used to gauge the health of a country's economy. It represents the total dollar value of all goods and services produced over a specific time period - you can think of it as the size of the economy. Usually, GDP is expressed as a comparison to the previous quarter or year. For example, if the year-to-year GDP is up 3%, this is thought to mean that the economy has grown by 3% over the last year.

Measuring GDP is complicated (which is why we leave it to the economists), but at its most basic, the calculation can be done in one of two ways: either by adding up what everyone earned in a year (income approach), or by adding up what everyone spent (expenditure method). Logically, both measures should arrive at roughly the same total.

The income approach, which is sometimes referred to as GDP (I), is calculated by adding up total compensation to employees, gross profits for incorporated and non incorporated firms, and taxes less any subsidies The expenditure method is the more common approach and is calculated by adding total consumption, investment, government spending and net exports. As one can imagine, economic production and growth, what GDP represents, has a large impact on nearly everyone within that economy. For example, when the economy is healthy, you will typically see low unemployment and wage increases as businesses demand labor to meet the growing economy. A significant change in GDP, whether up or down, usually has a significant effect on the stock market. It's not hard to understand why: a bad economy usually means lower profits for companies, which in turn means lower stock prices. Investors really worry about negative GDP growth, which is one of the factors economists use to determine whether an economy is in a recession.

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GDP - real growth rate: 2.7% (2010 est.) 4.3% (2009 est.) 3.6% (2008 EST.)

2.Gross national product/ GNI, Atlas method (current US$):

The Gross National Product (GNP) is the total dollar value of all final goods and services produced for consumption in society during a particular time period. Its rise or fall measures economic activity based on the labor and production output within a country. The figures used to assemble data include the manufacture of tangible goods such as cars, furniture, and bread, and the provision of services used in daily living such as education, health care, and auto repair. Intermediate services used in the production of the final product are not separated since they are reflected in the final price of the goods or service. The GNP does include allowances for depreciation and indirect business taxes such as those on sales and property. The Gross Domestic Product (GDP) measures output generated through production by labor and property which is physically located within the confines of a country. It excludes such factors as income earned by U.S. citizens working overseas, but does include factors such as the rental value of owner-occupied housing. In December 1991, the Bureau of Economic Analysis began using the GDP rather than the GNP as the primary measure of United States production. This figure facilitates comparisons between the United States and other countries, since it is the standard used in international guidelines for economic accounting. GNI (formerly GNP) is the sum of value added by all resident producers plus any product taxes (less subsidies) not included in the valuation of output plus net receipts of primary income (compensation of employees and property income) from abroad. Data are in current U.S. dollars. GNI, calculated in national currency, is usually converted to U.S. dollars at official exchange rates for comparisons across economies, although an alternative rate is used when the official exchange rate is judged to diverge by an exceptionally large margin from the rate actually applied in international transactions. To smooth fluctuations in prices and exchange rates, a special Atlas method of conversion is used by the World Bank. This applies a conversion factor that averages the exchange rate for a given year and the two preceding years, adjusted for

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Security analysis and portfolio management

differences in rates of inflation between the country, and through 2000, the G-5 countries (France, Germany, Japan, the United Kingdom, and the United States). From 2001, these countries include the Euro area, Japan, the United Kingdom, and the United States. GNI (formerly GNP) is the sum of value added by all resident producers plus any product taxes (less subsidies) not included in the valuation of output plus net receipts of primary income (compensation of employees and property income) from abroad. Data are in current U.S. dollars.

3.Interest rate spread (lending rate, %):

Interest rate spread is the interest rate charged by banks on loans to prime customers minus the interest rate paid by commercial or similar banks for demand, time, or savings deposits. The difference between the average yield a financial institution receives from loans and other interest-accruing activities and the average rate it pays on deposits and borrowings. The net interest rate spread is a key determinant of a financial institutions profitability (or lack thereof). In simple terms, the net interest spread is like a profit margin. The greater the spread, the more profitable the financial institution is likely to be; the lower the spread, the less profitable the institution is likely to be. While the federal funds rate plays a large role in determining the rate at which an institution lends immediate funds, open market activities ultimately shape the rate spread.

4.Foreign direct investment, net (Bop, current US$):

FDI provides an inflow of foreign capital and funds, in addition to an increase in the transfer of skills, technology, and job opportunities. Many of the East Asian tigers such as China, South Korea, Philippines, and Singapore benefited from investment abroad. A recent meta-analysis of the effects of foreign direct investment on local firms in developing and transition countries suggest that foreign investment robustly increases local productivity growth. The Commitment to Development Index ranks the "development-friendliness" of rich country investment policies. Foreign direct investment is net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of

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Security analysis and portfolio management

the investor. It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments. This series shows total net, that is, net FDI in the reporting economy from foreign sources less net FDI by the reporting economy to the rest of the world. Data are in current U.S. dollars.

5.Foreign Reserves:
Foreign reserves (also called Forex reserves or FX reserves) in a strict sense are only the foreign currency deposits and bonds held by central banks and monetary authorities. However, the term in popular usage commonly includes foreign exchange and gold, SDRs and IMF reserve positions. This broader figure is more readily available, but it is more accurately termed official international reserves or international reserves. These are assets of the central bank held in different reserve currencies, mostly the US dollar, and to a lesser extent the euro, the UK pound, and the Japanese yen, and used to back its liabilities, e.g. the local currency issued, and the various bank reserves deposited with the central bank, by the government or financial institutions.

6.Karachi Stock Exchange:

In the first four years of the twenty-first century, Pakistan's KSE 100 Index was the bestperforming stock market index in the world as declared by the international magazine Business Week. The stock market capitalisation of listed companies in Pakistan was valued at $5,937 million in 2005 by the World Bank. But in 2008, after the General Elections, uncertain political environment, rising militancy along western borders of the country, and mounting inflation and current account deficits resulted in the steep decline of the Karachi Stock Exchange. As a result, the corporate sector of Pakistan has declined dramatically in recent times Karachi Stock Exchange 100 Index (KSE-100 Index) is a stock index acting as a benchmark to compare prices on the Karachi Stock Exchange (KSE) over a period of time. In determining representative companies to compute the index on, companies with the highest market capitalization are selected. However, to ensure full market representation, the company with the highest market capitalization from each sector is also included. The index was launched in late 1991 with a base of 1,000 points. By 2001, it had grown to 1,770

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points. By 2005, it had skyrocketed to 9,989 points. It then reached a peak of 12,285 in February 2007. KSE-100 index touched the highest ever benchmark of 14,814 points on December 26, 2007, a day before the assassination of former Prime Minister Benazir Bhutto, when the index nosedived. The index recovered quickly in 2008, reaching new highs near 15,500 (citation needed) in April. However, by November 22, 2008 during the global financial crisis of 2008 it had fallen to 9,187.

Automobile industry:
1. Pak Suzuki Motors Co. Ltd. 2. Hino Pak motors Ltd. 3. Millat tractors Ltd. 4. Atlas Honda Ltd.

Pak Suzuki Motor Company Limited was formed as a joint venture between Pakistan Automobile Corporation and Suzuki Motor Corporation (SMC) - Japan. The Company was incorporated as a public limited company in August 1983 and started commercial operations in January 1984. The initial share holding of SMC was 12.5% which was gradually increased to 73.09%. Pak Suzuki is pioneer in Automobile Business having the most modern and the largest manufacturing facilities in Pakistan with an Annual production capacity of 150,000 vehicles. The vehicles produced include cars, small vans, Pickups, Cargo vans and Motorcycle. Pak Suzuki holds more than 50% Market Share. Following the aggressive policy of Indigenization, Suzuki vehicles have a healthy local content upto 72%. This was made possible by strong support of our vendors. Pak Suzuki has the largest Dealers network offering 3S (Sales, Service and Spare Parts) facilities across Pakistan. Caring for the Environment Pak Suzuki was pioneer in introduction of Factory fitted CNG vehicles. Pak Suzuki always endeavors to go aggressively for the sound

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Security analysis and portfolio management

development of the society by increasing motorization, industrialization and creating job opportunities thus improving the peoples living standards with the combined efforts of all the dealers, vendors and Pak Suzuki employees. Pak Suzuki is also exporting Suzuki Ravi pickup, Liana and components to Bangladesh and Europe thus earning precious foreign exchange for the country.

Hino Motors Japan and Toyota Tsusho Corporation in collaboration with Al-Futtaim Group of UAE and PACO Pakistan formed Hinopak Motors Limited in 1986.

In 1998, Hino Motors Ltd., and Toyota Tsusho Corporation obtained majority shareholding in

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the company after disinvestments by the other two founding sponsors. This decision to invest in Hinopak at a time when the country's economy was passing through a depression and the sale of commercial vehicles was at an all time low reflects the confidence our Principals have in our company and their commitment to the Pakistani market. Hinopak is the trusted market leader with over 65% share in the Pakistani Truck and Bus industry. Hinopak a vital contributor in saving of foreign exchange is also providing jobs and plays a pivotal role for the development of the local industry through its progressive manufacturing.

The largest Manufacturer of Buses in Pakistan, Hinopak is fully-equipped to design and manufacture a wide range of Bus Chassis and all types of Bus Bodies. Hinopaks Bus Line Up includes the Roadliner Supreme Luxury Bus for long journeys, Citiliner Intercity Buses, Citiliner Urban Buses and the luxury Senator Coach and Rapidliner Deluxe Coaches.Hinopak delivers only the safest most reliable products and remains the Pioneer in supplying the largest number of Urban Buses those are successfully facilitating the commuters of Punjab and Sindh.Hinopak is fully-equipped to design and manufacture a wide range of Bus Chassis and all types of Bus Bodies. Hinopaks Bus Line Up includes the Roadliner Supreme air-condition Super Luxury Bus, Citiliner Intercity Buses, Citiliner Urban Buses, Senator Pride, air-condition luxury coach and Rapidliner Deluxe Coach.

By continuing to move forward and staying alert to the ever-changing market & social needs, Hinopak will continue to be a successful and respected corporate citizen of Pakistan, reflecting their commitment and belief in the Hinopak corporate philosophy to "contribute to the development of a more prosperous and comfortable society by providing the world with a new set of values".

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A wide range of Massey Ferguson Tractors from 50 hp to 85 hp is available to cater to the needs of farmers. These Tractors can be procured against Cash, as well as through Bank Financing. Brief Specifications of each of the Tractors are available under Tractors. In Industrial Products , a wide range of Generating Sets 15 KVA to 40 KVA, Forklift Trucks (3 ton) and Prime Movers (Power packs) from 50 hp to 85 hp. Also deals in range of Generating Sets from 27 kVA to 2000 kVA. A wide range of Agricultural Implements is also available like Chisel, Disc & Mould Board Plough, Tine Tillers, Offset Disc Harrow, Ridger, Front Blade, Multi-purpose Rear Blade, Agricultural Loader, Farm Trailer, Hydraulic Tipping Trailer, Jib Crane, Post Hole Digger, Lawn Mover, and Pneumatic Pruning Set etc. The biggest Spares Network ensures the availability of Genuine Parts, for the complete range of products throughout the country. Now HOLOGRAM SEAL backed by one year warranty ensures its genuineness. Millat also ensures to provide prompt after-sales service to its valued customers through spread network of main and rural

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workshops throughout the Country.

Atlas Honda Limited (AHL) is a joint venture between the Atlas Group and Honda Motor Co. Ltd., Japan. The company was created by the merger of Panjdarya Limited and Atlas Autos Ltd. in 1988. Both these motorcycle manufacturing concerns were established by the Atlas Group. In addition, a third concern, Atlas Epak Ltd. was taken over by the Government of Bangladesh in 1971 after the fall of Dhaka. AHL manufactures and markets Honda motorcycles in collaboration with Honda Motor Company. Honda motorcycles are by far the largest selling motorcycles in the country with an unmatched reputation for high quality, reliability and after-sales-service.

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Atlas Honda Ltd. operates under the basic principles of "Respect for the individual" and "The Three Joys" - commonly expressed as The Joy of Buying, The Joy of Selling and The Joy of Creating. "Respect for the individual" reflects our desire to respect the unique character and ability of each individual person, trusting each other as equal partners in order to do our best in every situation. Based on the foundation of "Respect for the individual", "The Three Joys" expresses our belief and desire that each person working in, or coming into contact with our company, directly or through our products, should share a sense of joy through that experience.

In line with these basic principles, since its establishment AHL has remained on the leading edge by creating new value by providing products of the highest quality at a reasonable price for the customer's satisfaction. In addition, the Company has conducted its activities with a commitment to protecting the environment and enhancing safety in a mobile society.

DATA & METHODOLOGY:

the data is gathered from various web sites. It is related to the time period of 2006 to 2010. GDP is in growth rate % form, GNP/GNI is in us billions $, Interest rate is related to lending & in %

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form, FDI are net from Bop method & in us billions $, foreign reserves data is collected from the board of investment Pakistans web site & are in us billion $ & KSE 100 index points are taken from the website of KSE 100 index & they are the points at the closing of year. To analyses the relationship among the stock prices & economic indicators we use coefficient of correlation method. We form two sets of variable taken the stock price of company & one economic indicator, & compare the stock price of each year with each economic indicator.

Data of Economic indicators:

Year GDP (growth rate)% GNI (atlas method) us billions 2006 2007 2008 2009 2010 6.60 6.60 5.30 2.70 4.30 126.35 140.15 156.70 169.78 146.32 10.40 11.33 11.96 14.02 13.39 3.52 5.13 5.15 3.72 2.21 13.14 15.18 10.83 12.23 16.07 10040 14077 5885 9386 12022 Interest rate (lending $ rate)% FDI net Foreign Kse 100 index (close) (Bop us $ Reserves billions) (us billions) $

Stock prices of automobile industry:

Year Pak Suzuki motors Co. Ltd. 2006 2007 2008 2009 2010 250 300 50 100 100 Hinopak motors Milat tractors Ltd. 150 550 600 400 200 Ltd. 150 130 90 300 400 80 140 140 100 100 Atlas Honda

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Security analysis and portfolio management Correlation among stock prices of companies & economic indicators:
Companies GDP GNI Interest rate Pak Suzuki motors Co. Ltd. HinoPak motors Ltd. Milat tractors Ltd. Atlas Honda 0.21 0.27 0.06 0.78 0.13 0.05 0.69 0.29 0.77 0.87 -0.35 0.3 0.03 0.47 0.02 0.88 -0.4 -0.32 0.72 -0.73 -0.68 0.21 FDI Foreign reserves 0.45 KSE 100 index 0.71

Conclusion:
The objective of the study is to analyze the relationship among stock price & economic indicators. The correlation of each set of variable shows, the stock prices of companies is highly related to the FDI. GDP & GNI has almost the same impact on the stock prices. Foreign reserves & KSE 100 Index points have moderate impact on the stock prices. There are many other factors contribute to the stock price of any company than just the economic indicators.

References:
www.boi.gov.pk www.investinpakistan.com www.indexmundi.com www.finance.gov.pk www.answer.com

Finance report: | Federal Urdu university Gulshan campus Karachi