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Investment and risk1.3 The economic environment - economic and financial factorsIn this section we aim to explain the main economic and financial factors that affect investment values and returns.
Inflation can be described as a persistent tendency for the general level of prices to rise.
Inflation will affect all investments to a greater or lesser extent. At modest levels, it does not necessarily cause problems to an economy. However, if rises are persistently high, they can have a damaging impact on the returns from inves... Shortened demo course. See details at foot of page. ...esses to sustain productivity and therefore profit making capability.The opposite of inflation is deflation. This would usually be accompanied by declines in output and demand as falling prices can give the incentive of delaying investments or business purchases. Disinflation is the term used for the drop in the rate of inflation. Interest rates
Changes in the level of interest rates have a profound effect on the economy and are used in the UK as a tool to control inflation targets. Changes to interest rates can have some important consequences on the economy as a whole, as well as financial markets. If a decision is made to reduce the level of interest rates and it is agreed that this will become a trend over the medium term, then the likelihood is that the economy will begin to expand and output increase. This is because the cost of borrowing reduces allowing both consumers and businesses to purchase more. This will result in incre... Shortened demo course. See details at foot of page. ... to purchase these issues thus taking it out of circulation. If demand does not meet supply, then bond prices will have to decrease therefore taking less money out of circulation.Reduction in the money supply will decrease the capacity of institutions to lend funds therefore reducing the ability of businesses to expand operations. This in turn can have a negative effect on profit making capability therefore depressing equity values. Conversely, increasing the supply of money can release funds making more available for lending therefore providing companies with the ability to expand and generate further profits. Economic growth output is often measured by the annual rate of Gross Domestic Product (GDP). This is the increase in the total value of goods and services produced annually in a country.
Countries with growing economies will need the necessary capital and supply of workers with the appropriate abilities to produce goods and services. ... Shortened demo course. See details at foot of page. ...ver, by the 1990s it was feeling the effects of world economic conditions as well as its own domestic situation. The economy slowed to the point where there was barely any real growth at all!Some economies in recent years have grown at phenomenal rates for example, China where growth for the last 20 years has averaged over 8% per annum. In addition to individual businesses, national, regional and even the world economies encounter business (or economic) cycles.
In recent years the length of these cycles has typically got longer, often up to 10 years. Business cycles are important to investors as they will have an effect on asset prices. Business cycles tend to be me... Shortened demo course. See details at foot of page. ... by investorsSlowdown – Share prices and dividends fall as a result of increased borrowing costs and reduced demand from customers. Some businesses will fail and make lenders eg banks more vulnerable to the general economic climate. Again fixed interest securities will remain in favour until the economic slowdown is curtailed. Technology has an important influence on modern day investment strategy. Its impact on the economy can come in various forms. For example, t...
Shortened demo course. See details at foot of page. ...ephone? Those companies that were present at the start of each technological boom and survived, many are now multi billion pound businesses. Previous barriers to international trade in the last century were gradually eroded after the end of...
Shortened demo course. See details at foot of page. ... case of manufacturing and India in the case of administrative work such as call centre operations. Nowadays, ca...
Shortened demo course. See details at foot of page. ... Government. Changes in exchange rates can influence investment holdings in two ways:
Firstly there will be an obvious connection with an overseas company. Secondly, there will also be an indirect impact on companies listed in the UK who by the nature of their business are involved in import or export activity or, have overseas operations that earn profits abroad. It is the “real” ex... Shortened demo course. See details at foot of page. ...no effect on the UK’s long term competitive position if is underpinned by lower inflation in the UK than elsewhere in the worldIf the real exchange rate rises, domestic goods and services become more costly compared to foreign goods, thus having a negative impact upon domestic production. If it falls however, domestic goods become less expensive and demand for them rises.
The total level of taxation will dictate the level of funds ...
Shortened demo course. See details at foot of page. ...le, being provided to companies and allowing them to expand. |
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