Fundamental analysis is a method of analysis based on the economic fundamentals of a company . This technique focuses on the financial ratios and events that directly or indirectly affect the company’s financial performance . Some experts argue the fundamental analysis techniques better suited to make decisions in selecting stocks in the long run . Analysis Fundamental analysis is divided into three stages , namely economic analysis , industry analysis , and company analysis .
FACTORS DETERMINING THE FUNDAMENTAL ANALYSIS
Fundamental factors that are broad and complex can be grouped into four major categories , namely :
A. ECONOMIC FACTORS
Economic indicators are often used in fundamental analysis , namely :
1 . Gross Domestic Product
Gross Domestic Product is the sum of all goods and services produced by a country both by domestic companies and by foreign companies operating in the country at a time / period of time.
2 . inflation
A trader will always pay close attention to the development of the inflation rate . One way the government in tackling inflation is by raising policy interest rates . Policy interest rate increase is expected to strengthen the exchange rate and controlling inflation . Use the inflation rate as an indicator of economic fundamentals is to reflect the level of GDP and GNP to the true value . GDP and GNP is the value of an indicator is very important for a trader in comparing investment opportunities and risks in foreign countries. Generally, a trader will use indicators of inflation as follows :
a) The Producer Price Index ( PPI )
PPI is an index that measures the average change in prices received by domestic producers for each output produced in each level of the production process . PPI data collected from various sectors of the economy especially in the manufacturing , mining and agriculture .
b ) Consumer Price Index ( CPI )
The CPI is used to measure the average change in retail prices and a certain group of goods and services . The second index, the CPI and PPI , used by traders as an indicator to measure the rate of inflation . A trader can not expect that the central bank will raise interest rates any one of the indicators give a strong signal about the inflation and lower interest rates to state otherwise . Example : the impact of the Gulf War (1991 ) is the increase in oil prices and this makes the CPI index in the United States also rose . However, due to the increase in the CPI index did not last long , then the Central Bank of the United States did not take any action .
3 . Balance of Payment
Balance of Payment is a balance sheet that consists of all activities of international economic transactions of a country , both commercially and financially , with other countries in a given period . Balance of Payment reflects all transactions between residents , government and employers of domestic and foreign parties , such as export and import transactions , investment portfolio , transactions between the Central Bank and others. A commonly used indicator is the trade balance / current account . Other factors affecting the balance of payments is the flow of foreign investment into the country in the form of Foreign Direct Investment and Portfolio Investment . Example : Japan’s trade surplus against the United States in 1998 give an idea / clear indication of the increasing volume demand for yen in trading activities . Consequently the Yen exchange rate against the U.S. dollar strengthened .
4 . Employment
Employment is an indicator that can give you an idea of the real condition of the various sectors of the economy . Indicator of the level of employment can be used as a tool to analyze healthy / absence of a country’s economy . When the economy is in a state of full capacity / full capacity it will be achieved full employment . If the opposite situation , the unemployment rate will increase. The level of employment is a very important economic indicator for the financial markets in general and in particular the foreign exchange market .
B. POLITICAL FACTORS
Political factors , as an indicator to predict exchange rate movements , it is very difficult to know the timing / timing of certainty and to determine their impact on exchange rate fluctuations . Example : the political turmoil that occurred in Indonesia in the post- national changes in leadership of the government of the New Order (1966 – 1998) Reform Order to cause turbulence fluctuations in the rupiah against the U.S. dollar which is very significant . But there are times when political issues do not affect the exchange rate fluctuations , as in the case of United States President , Bill Clinton , and Monica Lewinsky in 1998 which does not necessarily have an impact on changes in the U.S. dollar exchange rate .
C. FACTORS OF MONETARY FINANCIAL
Role of Finance is very important factor in doing Fundamental Analysis . The change in the monetary and fiscal policies implemented by the government , especially in terms of policies relating to changes in interest rates , will have significant impact on changes in economic fundamentals .
D. EXTERNAL FACTORS
External factors can cause significant changes to the exchange rate of a country . Economic changes occurring in a country can have an impact to the regional economy of other countries that are in the same region .