PRINCIPAL OF FINANCIAL MARKETS The objective of this assignment is to assess the investment conditions in the Australian economy form Top Down Fundamental Analysis. Students should proceed to the...

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Table of contents
1. Introduction………………………………………………………………………………..2
2. Overview of Australian economy……………………………………………………….2
3. Fundamental analysis……………………………………………………………………3
4. Conclusion…………………………………………………………………………………8
5. References………………………………………………………………………………..10
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Introduction
Investment involves a trade-off between risks assumed and the rewards expected. It is
a tricky business and needs strong foundation and understanding of fundamentals to
come up with the right choice. Investing in different geographies is a diversification
strategy that is widely adapted to hedge the risks by multinationals today. The most
important factor is to understand the macro as well as micro economic environment
before proceeding to make rational investment decisions. The fundamental analysis is
nothing but an understanding of factors that affect the investment in, say, stock market.
Here we keep the fundamental analysis broad-based by looking at the economy as a
whole. Now that we decided to start with the big picture, we take the top down
approach. This approach is about taking the larger idea first and then breaking it down
to study finer details. We present in this paper the top down analysis of the Australian
economy.
Overview of Australian Economy
The Australian economy has shown to have a robust outlook in the past. It is primarily
dominated by the services sector. But its main strength lies in its richness in natural
minerals and abundance of agricultural resources. It has a strong domestic financial
market and also makes up an important part of the global financial system. The
country’s natural resources attract a lot of foreign investments and are a major export
segment as well. The global financial crisis that hit in 2009, did not leave Australia
unaffected. Its economy was impacted and is saw a dip in growth during that period.
However, strong policy framework and continued demand from China helped the
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economy rebound quickly. The country continues to keep its economic productivity high
by leveraging its strengths. In fact, among all the developed countries, Australia was the
least shaken by economic crisis because of it strong structural, political and economic
design. It has well-managed to keep both unemployment and inflation rates on the lower
side.
Fundamental analysis
To begin with the fundamental analysis, we begin with the single most important
macroeconomic indicator of a country, which is its GDP. The graphs below present
GDP growth for both the global economy and the Australian economy in particular.
The GDP of a country is an indication of its total economic output. It assigns a monetary
value to all the goods and services produced in a country within a given period of time.
The global GDP is the reflection of output of total economic activity in the world. As we
can see from the chart, the global economy saw a major dip in 2009 when the
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slowdown was at its peak. It did see a sharp rise following years but then started
tapering thereafter.
After the drop in 2009, the gross domestic product rose in the next year. This growth
was supported by increase in China’s demand for iron ore and coal. Besides,
manufacturing in China, the largest trade partner for Australia, grew at a faster pace in
mid of 2010, indicating a limitation in the economy’s slowdown.
The relationship between world GDP growth and Australian stock market is
complicated. There are a lot of other factors which are interwoven with GDP that affect
the stock market performance. The underlying premise of studying the economy is that
economic situations and variables impact the earnings of a company and affect both
their revenues as well as costs. Investors’ expectations of these earnings are reflected
in the stock price of the company. This calls for a sound judgment of economic factors
so as to make rational investment decisions.
Since 2012, the global equity markets have seen a rise. Improvement in the momentum
of US economy is the driver of this growth along with steps taken by governments to
deal with...