Top-Down Analysis of Investment Decision
AnalysisAnalysisof the Economyof the Economy
1. Variables Studied:
For following top down approach we initially consider the aggregate economy and marketand then we put our attention on industry and finally analyze our concerned firm & their stock. Variables considered in the study of the economy are:
2. Outcome of the study:
Gross domestic product (GDP):
GDP is an indicator of the economic activities of a nation. A country is likely to increase itsGDP growth rate as it reflects a positive economic progress of the country. In the last year,the GDP growth rate of Bangladesh was around 6.7%. And this year it is expected to 6.8%or it can be 7%. But ADB has said that for political complicacy, the current GDP would fallto around 6.5%. So we expect that the expected GDP for 2007 would be around 6.8%which is not much deviated from last years GDP. So it will not create significant impact onour valuation process.
If inflation rate is expected to increase or decrease it will have an impact on both the rate of return and the stock price. For an increase in the expected rate of inflation real rate of return of an investor also increases and vice versa. Again it has a positive impact on stockmarket as purchasing power of people increase and they might invest in stock market.
Source: Bangladesh Bureau of statistics
From the above table we see that inflation is expected to grow in the next financial year 2007. As a result of these expectation investors expected rate of return from investment instock market will also increase. Again we can think that for an inflation rate that is expectedto increase, income as well as purchasing power of people will increase. But as demand of sugar will not increase with the increase of income people will use their money either to