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Chapter 17_Hand-out 12

Chapter 17_Hand-out 12 - CHAPTER 17 MACROECONOMIC AND...

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CHAPTER 17 MACROECONOMIC AND INDUSTRY ANALYSIS 17.1 THE GLOBAL ECONOMY For some firms, macroeconomic and industry circumstances might have a greater 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. A top-down analysis of a firm's prospects must start with the global economy. The international economy might affect a firm's export prospects, the price competition 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 variation 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 global 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 Mexican stock 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 Hong Kong stock market was extremely sensitive to political developments leading up to the transfer of governance to China. The biggest international economic story in late 1997 and 1998 was the turmoil in several Asian economies, notably Thailand, Indonesia, and South 1
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Korea. These episodes also highlighted the close interplay between politics and economics, as both currency and stock values swung with enormous volatility in response to developments concerning the prospects for aid for these countries from the International Monetary Fund. ( In August 1998, the stock waves following Russia’s devaluation of the ruble and default on some of its debt created havoc in world security markets, ultimately requiring a rescue of the giant hedge fund Long Term Capital Management to avoid further major disruptions.
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