Topic 3 - Valuation of Equity ((i) Country Analysis) Flashcards
Country Analysis: In each country, economists try to monitor:
In each country, economists try to monitor:
- Anticipated real growth
- Monetary policy
- Fiscal policy
- Wage and employment
- Competitiveness
- Social and political situations
- Investment climate
- Real economic growth rate = key macro measure
- Has the greatest influence on the stock market
Economists focus on economic growth at 2 horizons:
- Business Cycle
- Long term sustainable growth
Country Analysis: The main factors that interact with the country’s investment rate to affect GDP growth are:
The main factors that interact with the country’s investment rate to affect GDP growth are:
- Rate of growth in employment
- Work hours
- Educational levels
- Technological improvements
- Business climate
- Politically stability
- The public/private nature of the investment
- In the short term, business cycle conditions can be favorable for investments, but business cycle turning points are so difficult to predict that such predictions should cause the analyst to make investment recommendations to only slightly adjust portfolio.
- Business cycles represent a complex control system with many causes and interacting private and governmental decisions.
- For example, companies invest in plant and equipment and build inventories based on expected demand but face the reality that actual demand does not continuously meet expectations.
Country Analysis: Calverley (2003) classifies business cycle stages and attractive investment opportunities
as:
Calverley (2003) classifies business cycle stages and attractive investment opportunities as:
- Recovery
- Early upswing
- Late upswing
- Economy slows and goes into recession
- Recession
National business cycles are not fully synchronized.
- The lack of perfect business cycle synchronization is a priori argument in favor of international diversification.
- The degree of business cycle synchronicity also varies over time depending on the pattern of regional shocks, and changes in economies’ propagation mechanisms
Country Analysis: Rate of growth in employment and Work hours and how they affect GDP
- A higher long-term growth in the work force will lead to higher GDP growth just as a reduction in work hours will lead to less GDP growth.
Country Analysis: How Business climate affects GDP
- A business climate of more privatization and reduced regulation is conducive to more investment.
Country Analysis: How Educational levels and Technological improvements affect GDP
- Increasing skills in the work force complement technological advances as they will both lead to higher GDP growth.
- Attractive investment opportunities will also lead to more investment, although an increased propensity to invest can depress rates of return.
Country Analysis: How Political stability affects GDP
-Political stability will reduce the risk and hence increase the attractiveness of investments.
Country Analysis: How the public/private nature of the investment affects GDP
- Finally, private investments are more likely to be made with maximal return on equity as the objective and hence lead to higher GDP growth.
Country Analysis: business cycle stages and attractive investment opportunities (Recovery)
- Recovery: The economy picks up from its slowdown or recession.
- Good investments to have are the country’s cyclical stocks and commodities, followed by riskier assets as the recovery takes hold.
business cycle stages and attractive investment opportunities (Early upswing)
- Early upswing: Confidence is up and the economy is gaining some momentum.
- Good investments to have are the country’s stocks and also commercial and residential property.
business cycle stages and attractive investment opportunities (Late upswing)
- Late upswing: Boom mentality has taken hold. This is not usually a good time to buy the country’s stocks.
- The country’s commodity and property prices will also be peaking.
- This is the time to purchase the country’s bonds (yields are high) and interest-rate-sensitive stocks.
business cycle stages and attractive investment opportunities (Economy slows or goes into recession)
- Economy slows or goes into recession: The economy is declining.
- Good investments to have are the country’s bonds, which will rally (because of a drop in market interest rates), and its interest-rate-sensitive stocks.
business cycle stages and attractive investment opportunities (Recession)
- Recession: Monetary policy will be eased but there will be a lag before recovery.
- Particularly toward the end of the recession, good investments to make are the country’s stocks and commodities.
