Question 2 [25 marks] Gideon Jariel and Remmy Katemba are analysts at the same firm. Jariel uses the economic indicator approach to formulate his equity market outlook, whereas Katemba uses micro-valuation analysis. Jariel and Katemba have conflicting views on the current outlook for the RSA equity market. Jariel prepares Exhibit 1, a table of recent values of selected RSA economic indicators. He makes the following observation: Several leading indicators suggest further deterioration in economic conditions. Based on the economic indicator approach, these developments are clearly unfavorable for the RSA equity market. Exhibit 1 Selected RSA Economic Indicators Economic Indicator Value as of 31 December 2021 18.1 5.0% 40.3 59.8 Value as of 31 March 2020 18.2 7.0% 39.2 49.2 Average duration of unemployment (weeks) Average prime rate Average weekly hours of manufacturing workers Index of consumer expectations Economic Indicator Average duration of unemployment (weeks) Average prime rate Average weekly hours of manufacturing workers Index of consumer expectations Labor cost per unit of output, manufacturing Index of new private housing starts authorized by local building permits Manufacturing and trade sales (in RSA Rand billions) Ratio of consumer installment credit outstanding to personal income Consumer price index (inflation rate) for services Interest rate spread, 10-year Treasury bonds less prime rate Value as of 31 December 2021 18.1 5.0% 40.3 59.8 124.1 2429 989 0.175 217.7 2.22% Value as of 31 March 2020 18.2 7.0% 39.2 49.2 125.3 2120 920 0.186 216.8 2.45% a) Identify two leading economic indicators in Exhibit 1 that support Katemba's observation regarding the RSA equity market. Explain how the change in value of each of these indicators supports Katemba's observation and their effect on equity market. (6) Question 2 [25 marks] Gideon Jariel and Remmy Katemba are analysts at the same firm. Jariel uses the economic indicator approach to formulate his equity market outlook, whereas Katemba uses micro-valuation analysis. Jariel and Katemba have conflicting views on the current outlook for the RSA equity market. Jariel prepares Exhibit 1, a table of recent values of selected RSA economic indicators. He makes the following observation: Several leading indicators suggest further deterioration in economic conditions. Based on the economic indicator approach, these developments are clearly unfavorable for the RSA equity market. Exhibit 1 Selected RSA Economic Indicators Economic Indicator Value as of 31 December 2021 18.1 5.0% 40.3 59.8 Value as of 31 March 2020 18.2 7.0% 39.2 49.2 Average duration of unemployment (weeks) Average prime rate Average weekly hours of manufacturing workers Index of consumer expectations Economic Indicator Average duration of unemployment (weeks) Average prime rate Average weekly hours of manufacturing workers Index of consumer expectations Labor cost per unit of output, manufacturing Index of new private housing starts authorized by local building permits Manufacturing and trade sales (in RSA Rand billions) Ratio of consumer installment credit outstanding to personal income Consumer price index (inflation rate) for services Interest rate spread, 10-year Treasury bonds less prime rate Value as of 31 December 2021 18.1 5.0% 40.3 59.8 124.1 2429 989 0.175 217.7 2.22% Value as of 31 March 2020 18.2 7.0% 39.2 49.2 125.3 2120 920 0.186 216.8 2.45% a) Identify two leading economic indicators in Exhibit 1 that support Katemba's observation regarding the RSA equity market. Explain how the change in value of each of these indicators supports Katemba's observation and their effect on equity market. (6)
