Performing Gloabal Industry Analsyis

The valuation of a common stock is usually.conducted in several steps. A company belongs to a global industry and is based in a country. Hence, country and industry analysis is necessary. Companies compete against global players within their industry, Studying a company within its global industry is the primary approach to stock valuation.

Country Analysis

Companies tend to favor some countries in their business activities. They target some countries for their sales and base their production in only a few countries. Hence, country analysis is of importance in studying a company. In each country, economists try to monitor a large number of economic, social, and political variables, such as

• anticipated real growth; monetary policy;
• fiscal policy (including fiscal incentives for investments) ;
• investment climate.
• social and political situations;

A high long-term sustainable growth rate in gross domestic product (GDP) is favorable, because this translates into high long-term profits and stock returns. In creating GDP and productivity growth rate expectations, the analyst will undoubtedly examine the country's savings rate, investment rate, and total factor productivity (TFP). TFP measures the efficiency with which the economy converts capital and labor into goods and services. Increased investment rates due to technical progress will increase rates of return; but the savings and investment rates themselves must be closely analyzed. A country's investments reflect replacement and capacity expansion, and influences future productivity gains. If the ratio of investment to GDP is low, then the investments are largely replacement investments; whereas a high rate suggests that capacity expansion is under way. Further, a positive correlation between investment rates and subsequent GDP growth rates cannot be taken for granted, because there are other factors to consider.

Factors that Influence Country Growth Rate

The main factors that interact with the country's investment rate to affect GDP growth are the rate of growth in employment, work hours, educational levels, technological improvement, business climate, political stability, and the public or private nature of the investment. 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.' Increasing skills in the work force complement technological advances as they will both lead to higher GDP growth. A business climate of more privatization and reduced regulation is conducive to more investment. Attractive investment opportunities will also lead to more investment, although an increased propensity to invest can depress rates of return, Political stability will reduce the risk and hence increase the attractiveness of investments. Finally, private investments are more likely to be with maximal return-on-invested capital as the objective and hence lead to higher GDP growth.

Limitation of Country Analysis

The distinction between countries and companies is misleading in some respects. Many companies compete globally. The national location of their headquarters is not a determinant variable. Many multinational corporations realize most of their sales and profits in foreign countries. So, an analysis of the economic situation of the country of their headquarters is not of great importance. For Example, The top ten Swiss multinational firms account for more than 70 percent of the Swiss stock exchange, But these companies do most of their business outside of their home country, so their valuation should be based on the global competition they face in their industry, not on the state of their home economy.