CFA Level I · CFA Level I Exam · Industry and Competitive Analysis
An analyst compares two sectors during a recession. Sector X sells discretionary durable goods financed by consumer credit; Sector Y sells regulated electricity. Interest rates then fall sharply and credit loosens as the economy begins to recover. Which outcome is most likely over the recovery?
Sector X's earnings most likely rise faster. Durable goods bought on credit have deferred demand during recessions and respond strongly to lower interest rates and looser credit. Regulated electricity demand is stable and not very rate-sensitive, so it rebounds less, and cyclicality is not set only by life-cycle stage.
- ASector Y's earnings rise faster than Sector X's because regulated demand is highly rate-sensitive
- BSector X's earnings rise faster than Sector Y's because durable demand is rate-sensitive and was deferredCorrect
- CBoth sectors' earnings grow at similar rates because cyclicality depends only on industry life-cycle stage
Explanation
Durable discretionary goods bought on credit have pent-up, deferred demand and respond strongly to lower rates, so earnings rebound sharply. Regulated electricity demand is stable and not very rate-sensitive, so it recovers modestly. Cyclicality is not determined only by life-cycle stage.
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