MACROECONOMIC AND INDUSTRY ANALYSIS
17.1 THE GLOBAL ECONOMY
For some firms, macroeconomic and industry circumstances might have a
influence on profits than the firm’s relative performance within the
industry. In other words, investors need to keep the big economic picture in
mind. Therefore, in analyzing a firm’s prospects it often makes sense to start
with the broad economic environment, examining the state of the aggregate
economy and even the international economy. From there, one considers the
implications of the outside environment on the industry in which the firm
operates. Finally, the firm’s position within the industry is examined.
of a firm's prospects must start with the global economy.
The international economy might affect a firm's export prospects, the price
it faces from foreign competitors, or the profits it makes on
investments abroad. Nevertheless, despite the fact that the economies of most
countries are linked in a global macroeconomy, there is considerable
in the economic performance across countries at any time. (Consider, for example,
Table 17.1 in the textbook, which presents data on several so called emerging economies. The
table documents striking variation in growth rates of economic output (GDP) in 2007.
Similarly, there has been considerable variation in stock market returns in these countries in
2007, ranging from 2.7% in Colombia (in dollar terms) to a 133.8% gain in China.
These data illustrate that the national economic environment can be a crucial
determinant of the industry performance. It is far harder for businesses to
succeed in a contracting economy than in an expanding one. This observation
highlights the role of a big-picture macroeconomic analysis as a fundamental
part of the investment process.
In addition, the
environment presents political risks of far greater
magnitude than are typically encountered in U.S.-based investments. In the last
decade, we have seen several instances where political developments had
major impacts on economic prospects. For example, in 1992 and 1993, the
market responded dramatically to changing assessment
regarding the prospect of passing the North American Free Trade Association
(NAFTA) by the U.S. Congress. In 1997, the
stock market was
extremely sensitive to political developments leading up to the transfer of
governance to China.
international economic story in late 1997 and 1998 was the
turmoil in several Asian economies, notably Thailand, Indonesia, and South