10.1 Methods of Equity Analysis & Macroeconomic Analysis

Canadian Securities Course CSC

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1 Introduction & Exam Overview

About the CSC Exams

2 Chapter 1: The Canadian Investment Marketplace

1.1 The Canadian Securities Industry & the Investment Dealer's Role 1.2 Financial Intermediaries: Banks, Trusts, Credit Unions, Insurers & Pension Funds 1.3 Financial Market Trends 1.4 Investment Capital, Financial Instruments & Financial Markets 1.5 Canadian Exchanges, ATSs, Dark Pools & the Order Protection Rule 1.6 Canadian Securities Regulators, the CSA & CIRO 1.7 Investor Protection: OSFI, CIPF and CDIC 1.8 Ethics, Standards of Conduct & the Client Focused Reforms 1.9 Conflicts of Interest, Complaint Handling & Remediation

3 Chapter 2: The Economy

2.1 Economics Foundations & Measuring Economic Growth 2.2 The Business Cycle & Economic Indicators 2.3 Inflation & Interest Rates 2.4 The Labour Market & Unemployment 2.5 The Bank of Canada & the Inflation-Control Target 2.6 Implementing Monetary Policy: The Operating Band, Market Operations & Transmission 2.7 Fiscal Policy, Deficits & the Challenges of Government Policy 2.8 International Finance & Trade: The Balance of Payments and the Canadian Dollar

4 Chapter 3: Features and Types of Fixed-Income Securities

3.1 The Fixed-Income Marketplace, Bond Terminology & Security 3.2 Protective Covenants, Retirement Provisions & Extendible/Retractable Features 3.3 Government of Canada Securities: T-Bills, Marketable Bonds & RRBs 3.4 Provincial & Municipal Debt and Strip Bonds 3.5 Corporate Bonds, Credit Spreads & Bond Ratings 3.6 Money Market Instruments, Floating-Rate Notes & International Bonds 3.7 Other Fixed-Income Securities & Reading Bond Quotes

5 Chapter 4: Pricing and Trading of Fixed-Income Securities

4.1 Bond Pricing, Price–Yield Relationships & Accrued Interest 4.2 Yield Calculations & Return Measures 4.3 The Term Structure of Interest Rates & Yield Curve Theories 4.4 Fundamental Bond Pricing Properties: Volatility Rules, Duration & Convexity 4.5 Bond Market Trading & Bond Indexes

6 Chapter 5: Common and Preferred Shares

5.1 Common Shares: Ownership Rights, Voting & Restricted Shares 5.2 Dividends, DRIPs, Stock Splits & Consolidations 5.3 Preferred Shares: Features, Cumulative Dividends & Taxation 5.4 Preferred Share Variations: Convertible, Callable, Retractable, Floating & Rate-Reset 5.5 Fundamental Equity Metrics & Ratios 5.6 Stock Indexes & Averages

7 Chapter 6: Equity Transactions

6.1 Order Types, Execution & Market Mechanics 6.2 Margin Trading: Long Accounts & Borrowing 6.3 Short Selling & Short-Margin Requirements 6.4 Trading & Settlement Procedures: T+1, CDS & Confirmations

8 Chapter 7: Derivatives

7.1 Derivatives: Role, Underlying Assets & Users 7.2 Options Fundamentals: Calls, Puts & Moneyness 7.3 Option Strategies & Risk Management 7.4 Forward & Futures Contracts 7.5 Rights & Warrants

9 Chapter 8: Corporations and their Financial Statements

8.1 Corporate Structures & Corporate Governance 8.2 The Annual Report, Accounting Standards & the Auditor's Report 8.3 The Balance Sheet & Income Statement 8.4 The Cash Flow Statement & Earnings Quality 8.5 Public Company Disclosure, Investor Rights, Take-Over Bids & Insider Trading

10 Chapter 9: Financing and Listing Securities

9.1 Government & Corporate Financing: Underwriting and Syndicates 9.2 The Prospectus Process, Stabilization & Purchaser Rights 9.3 The Exempt Market & Private Placements 9.4 The Listing Process: TSX, TSXV & Capital Pool Companies 9.5 Continuous Disclosure, Material Changes & Insider Reporting

11 Chapter 10: Investment Analysis

10.1 Methods of Equity Analysis & Macroeconomic Analysis 10.2 Fundamental Industry Analysis 10.3 Company Analysis: Competitive Advantages, Governance & the Dividend Discount Model 10.4 Discounted Cash Flow & Relative Valuation Multiples 10.5 Financial Statement Ratio Analysis 10.6 Assessing Preferred Share Investment Quality 10.7 Technical Analysis: Charts, Trends & Patterns 10.8 Technical Indicators, Volume, Breadth & Sentiment

12 Chapter 11: Portfolio Analysis

11.1 Measuring Investment Return 11.2 Measuring Risk: Types of Risk, Standard Deviation & Downside Measures 11.3 Portfolio Risk & Return: Correlation and Diversification 11.4 Beta, the Capital Asset Pricing Model & the Security Market Line 11.5 Portfolio Manager Styles: Equity & Fixed Income 11.6 The Portfolio Management Process: Objectives, Constraints & the IPS 11.7 Asset Mix, Monitoring, Performance Evaluation & Rebalancing

13 Chapter 12: Alternative Investments, Other Managed, and Structured Products

12.1 Alternative Investments: Structures, Fees & Liquid Alternatives 12.2 Alternative Strategies, Performance Measurement & Due Diligence 12.3 Segregated Funds, Labour-Sponsored Funds & Listed Private Equity 12.4 Income Trusts, REITs & Closed-End Funds 12.5 Structured Products: PPNs & Market-Linked GICs 12.6 Split Shares & Asset-Backed Securities

14 Chapter 13: Mutual Funds

13.1 Managed Products & Mutual Fund Structure 13.2 Pricing Mutual Fund Units: NAVPS & Forward Pricing 13.3 Mutual Fund Fees, Sales Charges & Unit Series 13.4 Mutual Fund Regulation, Fund Facts & Account Opening 13.5 Types of Mutual Funds & Fund Management Styles 13.6 Redemptions, Withdrawal Plans & Measuring Fund Performance

15 Chapter 14: Exchange-Traded Funds (ETFs)

14.1 ETF Origins, Structure, Tax Efficiency & ETF Facts 14.2 ETF Creation, Redemption & Arbitrage 14.3 Types of ETFs & Advanced Strategies 14.4 Comparing ETFs, Mutual Funds & Individual Securities

16 Chapter 15: Working with the Institutional Client

15.1 The Institutional Marketplace & Institutional Clients 15.2 Institutional Investment Guidelines, Styles & Restrictions 15.3 Buy Side & Sell Side: Trading Desks, Revenue, Clearing & Best Execution 15.4 Block Trading, Dark Pools & Algorithmic Trading

17 Chapter 16: Fee-Based Accounts and Working with the Retail Client

16.1 Fee-Based Accounts: Managed & Non-Managed Models 16.2 Fee Transparency, CRM2 & Total Cost Reporting, and MWRR vs. TWRR 16.3 The Financial Planning Approach & the Life Cycle 16.4 Behavioral Finance, Sequence-of-Returns Risk & Client Coaching 16.5 Estate Planning Basics

18 Chapter 17: Canadian Taxation

17.1 The Canadian Taxation System 17.2 Taxation of Investment Income 17.3 Capital Gains, Losses & The Superficial Loss Rule 17.4 Registered vs Non-Registered Tax-Advantaged Accounts 17.5 Tax Planning Strategies, Pension Plans & the RDSP

10.1 Methods of Equity Analysis & Macroeconomic Analysis

Key Takeaways Explain This Topic AI

Top-down analysis moves from the economy to industries to companies; bottom-up analysis starts with individual companies.

Interest rates, inflation, GDP growth, commodity prices and the Canadian dollar strongly influence Canadian stocks.

A weaker Canadian dollar tends to help resource exporters that earn U.S. dollars but pay costs in Canadian dollars.

Weak-form efficiency rules out profits from technical analysis; semi-strong rules out profits from public information; strong form would rule out insider profits too.

Last updated: October 2026

The Fundamental Analysis Paradigm: Top-Down vs. Bottom-Up

Fundamental analysis evaluates securities by examining the underlying economic, financial, and qualitative factors that determine an asset's intrinsic value. Analysts use fundamental analysis to determine whether a security is undervalued, fairly priced, or overvalued by comparing its estimated intrinsic value to its prevailing market price.

Within fundamental analysis, institutional portfolio managers and retail equity analysts adopt two distinct philosophical approaches: top-down analysis and bottom-up analysis . Fundamental Analysis Architectures

• ├── Top-Down Analysis (Macro-to-Micro Funnel)
• │ ├── 1. Macroeconomic Environment: Global & domestic GDP, interest rates, inflation, CAD currency
• │ ├── 2. Industry Sector Selection: GICS classification, industry lifecycle, cyclical vs. defensive
• │ └── 3. Individual Company Selection: Competitive moats, financial statements, valuation models
• └── Bottom-Up Analysis (Micro-to-Macro Stock Picking)
• ├── 1. Company Fundamentals: Business model, management quality, balance sheet strength
• ├── 2. Valuation Screening: Low P/E, high ROIC, discounted cash flows irrespective of sector
• └── 3. Macro Context: Secondary consideration of economic tailwinds or headwinds
• The Top-Down Funnel

Top-down fundamental analysis operates on the premise that broad macroeconomic conditions and sector-specific dynamics account for the majority of equity return dispersion. Top-down practitioners argue that broad market and sector moves explain a large share of the variation in individual stock returns, so getting the economic backdrop and sector weights right matters before picking stocks.

Macroeconomic Analysis: The analyst examines global and national economic conditions—evaluating GDP growth rates, monetary policy, inflation trends, fiscal policies, unemployment, and currency movements—to identify which asset classes (equities, fixed income, cash, commodities) offer the most favorable risk-adjusted returns.

Industry Sector Analysis: Within equities, the analyst identifies industries positioned to benefit from the prevailing macroeconomic cycle. For example, in an early-stage economic recovery with accelerating industrial output, capital goods and materials sectors typically outperform.

Individual Company Analysis: After identifying attractive sectors, the analyst evaluates individual companies within those sectors to select firms possessing superior competitive moats, pristine balance sheets, experienced leadership, and attractive valuations.

Bottom-Up Analysis

In contrast, bottom-up fundamental analysis (often called stock picking) focuses almost exclusively on the individual enterprise. A bottom-up analyst screens companies based on microeconomic characteristics, including product differentiation, return on invested capital (ROIC), operational efficiency, and standalone valuation multiples (such as a depressed Price-to-Earnings or EV/EBITDA ratio).

Bottom-up investors pay minimal attention to macroeconomic forecasts or sector rotations, operating under the conviction that exceptional companies can compound shareholder wealth and gain market share across all phases of the economic cycle.

• Analytical Dimension Top-Down Analysis Bottom-Up Analysis
• Starting Point Global and domestic macroeconomic data Individual company financial statements

Core Philosophy Favorable sector tailwinds drive stock returns Superior business models succeed regardless of macro backdrop

Primary Driver Asset allocation and sector rotation Individual security selection ("stock picking")

Key Metrics GDP growth, yield curve, CPI, commodity prices ROIC, free cash flow conversion, operating margins, P/E

Risk Exposure Misdiagnosing economic inflection points Holding great companies trapped in secularly declining sectors

Macroeconomic Analysis & Canadian Economic Drivers

Macroeconomic analysis forms the top layer of the investment funnel. For Canadian securities professionals, understanding the interaction between domestic and global economic variables is critical, as Canada is a small, open, resource-dependent economy highly integrated with the United States.

1. Gross Domestic Product (GDP) and the Business Cycle

Gross Domestic Product (GDP) measures the total market value of all final goods and services produced within a nation's borders over a specified timeframe. The business cycle moves continuously through four distinct sequential phases:

Trough: The lowest point of economic activity. Capacity utilization is depressed, unemployment is elevated, and consumer confidence is low. However, monetary policy is typically highly accommodative, laying the groundwork for recovery.

Expansion (Recovery): Industrial production accelerates, corporate profits rebound, employment grows, and business capital expenditures rise. Cyclical equities and commodities typically lead equity market returns.

Peak: Economic activity operates at or above full capacity. Labor markets tighten, wage growth accelerates, and capacity constraints emerge. Inflationary pressures mount, prompting the central bank to tighten monetary policy by raising interest rates.

Contraction (Recession): Defined technically as two consecutive quarters of negative real GDP growth. Consumer spending slows, business investment contracts, corporate margins compress, and unemployment rises. Defensive sectors and sovereign bonds outperform.

2. Inflation and Bank of Canada Monetary Policy

The Bank of Canada (BoC) conducts monetary policy using an inflation-control target framework established jointly with the federal government. The target is set at the 2% midpoint of a 1% to 3% control range , measured by the year-over-year rate of change in the Consumer Price Index (CPI).

The Policy Interest Rate (Target for the Overnight Rate): The primary tool used by the Bank of Canada to manage monetary policy. Changes in the overnight rate directly influence commercial bank prime lending rates, variable-rate mortgages, commercial paper rates, and Government of Canada bond yields.

Policy Transmission Mechanism: When the Bank of Canada raises its policy rate to curb inflation, borrowing costs increase across the economy. Higher borrowing costs cool consumer spending on durable goods and housing while dampening corporate capital expenditures. In equity markets, higher interest rates elevate the discount rate applied to future corporate cash flows, compressing equity valuation multiples (particularly for high-growth, long-duration technology firms).

3. Fiscal Policy

Fiscal policy represents federal and provincial government decisions regarding taxation and public expenditure. An expansionary fiscal policy (characterized by budget deficits, tax cuts, or major infrastructure spending programs) stimulates aggregate demand, benefiting engineering, construction, and building materials sectors. Conversely, a contractionary fiscal policy (spending austerity and tax hikes) slows economic growth and reduces corporate after-tax margins.

4. The Canadian Dollar (CAD/USD) and Commodity Cycles

Because commodities represent a substantial share of Canadian exports, the Canadian dollar frequently behaves as a commodity currency (historically nicknamed the "petrodollar"). The CAD exhibits a strong positive correlation with global crude oil (Western Canadian Select [WCS] and West Texas Intermediate [WTI]), natural gas, and base metal prices.

Impact of a Weak Canadian Dollar (Depreciating CAD vs. USD):

Exporters and Resource Producers: Canadian energy and mining companies receive revenues denominated in U.S. dollars while incurring substantial operational expenses (labor, equipment leases) in Canadian dollars. A depreciating CAD expands their profit margins when translated back to domestic currency.

Domestic Consumers & Importers: Import costs increase, exacerbating domestic consumer price inflation and increasing costs for retailers sourcing foreign merchandise.

Impact of a Strong Canadian Dollar (Appreciating CAD vs. USD):

Exporters: Reduces the price competitiveness of Canadian manufacturing exports in global markets and shrinks translated CAD earnings for Canadian multinationals.

Importers & Capital Goods Buyers: Lowers the cost of imported machinery, components, and international consumer products, encouraging domestic business capital investment.

Other Approaches: Quantitative Analysis and Market Efficiency

Besides fundamental and technical analysis, analysts use quantitative analysis : statistical models that rank or select securities using measurable factors such as valuation ratios, earnings momentum, price momentum, volatility and quality. Quantitative screens can process thousands of stocks consistently, though models can fail when market conditions change.

The efficient market hypothesis (EMH) asks whether any of these methods can beat the market consistently. It comes in three forms:

• Form Prices already reflect Implication
• Weak All past price and volume information Technical analysis cannot earn consistent excess returns

Semi-strong All publicly available information Neither technical nor fundamental analysis of public data can consistently beat the market

Strong All information, public and private Not even insiders could profit (evidence of insider-trading profits contradicts this form)

In practice, markets are highly but not perfectly efficient. Behavioural biases, limits to arbitrage and costly information leave room for skilled analysis, but after fees many active managers fail to beat their benchmarks. That debate underlies the choice between active and passive management.