 Hello and welcome to the session. This is Professor Farhad and the session we would look at the global economy and investment analysis. Why do we have to look at the global economy when we're analyzing, making an investment in a company or an investment in a foreign country? As always, I would like to remind you to link to connect with me on LinkedIn. If you haven't done so, YouTube is where you would need to subscribe. I have 1,900 plus accounting, auditing, tax, finance, as well as Excel tutorials. If you like my lectures, please like them and share them. If they benefit you, it means they might benefit other people as well. Take a look at this table, just to take a look at some figures and numbers. And these are from the stock market return of 2016. Regardless, they are not as recent as 2020. They just want to give us an idea about the global economy. So this is the stock market return and the local currency. This is in the US dollar. And this is the forecasted growth for that economy a year in advance, which is 2017. So this table shows the importance of the global or the broad regional macroeconomy, like the EU, Southeast Asia, South America, so on and so forth. Now, there can be considerable variation in economic performance across countries within the same region. For example, if we look at Germany here and Italy, which are, they are both of the EU, both of the European Union. We can see that the forecasted growth in GDP in Germany is 1.4 versus an Italy 0.8. So just because being in the EU, it doesn't mean we can take one number and go across the board with the forecasted growth. Same thing with the stock market return. For example, here, what we can see is although there is a future GDP of 0.08, the stock market suffered a negative return in 2016. Well, there is a reason for that because Italy is much more in that versus Germany, they had a positive overall stock return. And the stock market return, as I just mentioned, do not always align with macroeconomic expectation. Another example will be China. If we look at this at the numbers here, just to kind of select numbers here and there, if we look at China, let's see where China is right here. The growth is 6.4, and obviously China was still growing back in 2016. It's still not double digit rate, but look, the growth in China is more than the growth in three or four other countries combined. It's the highest. So although the economic growth was 6.4, the stock market return was 16.6. So the economic growth, it doesn't have to be always aligned with the stock market. There are many reasons. You just need to know that it's not, if you have economic growth, you're going to have a positive stock return or vice versa. So the national economic environment can be crucial. That's why. So you want to look at the global as well as the national and regional for your industry. It's far harder, obviously, for a business to succeed if the economy is contracting than it's expanding. So if you're going to look at the economy and the economy is not expanding like in India, notice here, the forecast is they have a point nine. Well, there must be reasons, but if you have constant contraction, you don't want to move into those economies. So first, you want to look at the big picture from an international, then a regional perspective, because not all the countries within the same region performs the same way. Also, when you go internationally, when you look at the global economy, there are many uncertainties. And one of them is political uncertainties that are that affect economic risk. For example, the debt crisis that happened in Spain and obviously in Greece, Spain and Italy did not get that far. But like what happened in Greece is really a political crisis because the political parties, they really did not want to get off the debt. They just wanted to keep borrowing money and spending, which they could not afford to do. So the prospect of a bailout for Greece as well as the support struggling for economies like Spain were really political issues with enormous political economic consequences for the whole world. Okay. Also, if you look at the Brexit, the Brexit is really, it's a political issue, but it has economic consequences. So politics and economy are interrelated. And I'm not sure if you remember that day when the stock market around the world plummeted when the English people voted for the breakfast and they declined by more than 10% against the US dollar, the British pound. So again, political changes will have economic create economic uncertainties. Okay. Obviously that's obviously very clear. Okay. Other political issues that could be less sensational, but important for your growth and investments that include protectionism. I believe that's important. If a country wants to protect their domestic industry, you may not want to invest there because they're not going to be friendly to you. Okay. Trade policies. Again, how much do they want to impose tariff, more tariff or less tariff? How easy is it to invest the free flow of capital and the status of a nation's workforce? That's very important for companies. How do they treat their workforce? Also, what's important to understand when you are dealing with the global economy is the exchange rate or to be more specific, you have to always add the word risk because when you're dealing with the exchange rate, it's basically it fluctuates. It could go up. It could go down. It could work for you. It could work against you. That's obviously one obvious factor that that affect international competitiveness of one company in an industry versus another country. So the exchange rate, what's the exchange rate is the rate of which a domestic currency can be converted into a foreign currency. For example, today, around October the 10th, 106 Japanese yen to buy you one US dollar. Simply put, another way to say it, you need 0.0093 of a dollar to buy one Japanese yen. That's the day. If we look back in the 80s, the dollar yen exchange was about 0.0045 per yen or you needed 222 Japanese yen to buy one US dollar. That's a huge difference. So the US consumers would need more than twice of the amount that they would need in the 80s to buy the same Japanese product. It means the Japanese yen strengthen. This means their product becomes more expensive. It means US consumer cannot spend as much. For example, in the 1980s, if you want to buy something from Japan and it costs 100,000 yen, you would only need it around $450 today for the same item. 100,000 yen, you will need $943. So the yen obviously appreciated. And as a result, it's going to affect their economy. It's not going to only affect their export economy. It's going to make it more expensive for them to export. If you are a US consumer, it's going to be more expensive for you to buy the Japanese product. So the exchange rate is extremely important. This is, for example, this is bad news for Japanese automakers. And that's why some of them, for example, they move to the US if they produce using US suppliers, US product and everything is priced in US dollar. So this way, their product doesn't cost much just from the exchange rate perspective. Another look at the exchange rate is to take a look at the change in the purchasing power. For example, of the US dollar, since we are US, you know, we're in the US relative to the purchasing power of other currencies. And let's take a look at this, this 13 years of a little bit more of a decade between 2003 to 2013, the US versus the UK, the Euro, the Japan and the Canadian, the Canadian dollar. This is the ratio of purchasing power. It's called the real or inflation adjusted. So this has been, this, those numbers has been adjusted. So it adjusted for both exchange rate fluctuation and inflation. So this is the true change, whether the exchange rate measures how much more or less expensive foreign goods become to US citizens. And this is again, accounting for both. So a positive change, a positive value means that the dollar has gained purchasing power relative to another currency. And we have, here we have positive changes. A negative number indicate a depreciating dollar. So notice, let's look at Canada, just kind of take Canada out of the picture. Usually the US dollar and the Canadian dollar, they fluctuate, but to a great degree, I mean, not lately, but for a long period of time, but not lately. It was a dollar, almost dollar for a dollar. Now that's a little bit more dollar for a dollar now. But for the Canadian dollar, kind of almost equal, but look at other countries, our currency has appreciated. The US dollar appreciated in terms of, in terms relative to each of these currencies, we have an appreciated dollar. It means goods price and foreign currency are less expensive for us. That's good. It means we can buy, but when we try to sell them, our goods are becoming less affordable to them. So when your currency appreciate, like what's happening to the US dollar between 2003 to 2016, and this has taken over 13 years adjusted for inflation. Well, we can buy more stuff from the UK. It's 20, you can say it's 27.4% cheaper for us in a sense over the period of time in terms of currency, but our product becomes more expensive for the UK, the euros and the Japanese. And this is basically an overview in the next session. I would look at what's important in the domestic economy, what to look for when you are looking, analyzing a company or trying to, before you invest. As always, I would like to remind you to like this recording if you like it. 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