ASSIGNMENT

FACTORS AFFECTING INTERNATIONAL EQUITY RETURNS

MASTER OF INTERNATIONAL BUSINESS

Submitted to by

D. DINESH KUMAR

A.ASHARAF ALI

Under the guidance of

Mrs. A. KOKILA.,

M.Com-I.B., M.Phil.,

FACTORS AFFECTING INTERNATIONAL EQUITY RETURNS

Economic factors almost always play a role, affecting your equity returns in

the short and long term. Economic factors are broad-based circumstances that

affect many people, who compose a market, and therefore affect the equity

markets. Being aware of the economic factors that play a role in stock market

performance can help you make more tactical decisions when it comes to equity

purchases. While it is impossible to predict every gyration of an equity holding, by

looking at economic factors you can form general conclusions on whether

economic factors will inflate or deflate equity returns.

Interest Rates

The ability to borrow money is a driving force of the economy. Interest rates

determine the cost of borrowing and can therefore have a significant impact on

equity returns. If interest rates climb, it becomes unattractive to borrow and

equities are likely to decline, followed by the overall economy. Declining interest

rates are a positive sign for equity returns, although if interest rates decline too far

it shows lack of economic demand and can lead to deflation. Lack of demand and

deflation have a negative impact on equity returns.

Balance of Payments

The volume of international transactions significantly affects the economy of

a country, and by extension the stock market within that country. A steady and

consistent flow of money into the country for resources, goods and services means

equities are likely to perform well. This is because when money is flowing it can

be quickly utilized again within the economy, stimulating growth and further asset

purchases. Inconsistent or poor demand (lack of money flow) means equities are

likely to decline.

Government Policy

Trends in government spending and policy can impact the economy and

equity returns. Through spending, governments can temporarily stabilize prices

and employment, a phenomenon known as fiscal policy. This is intended to have a

calming affect on investors and can temporarily boost equity prices. Increases in

taxation, or a decrease in government spending, can have the opposite effect on

equity prices. These action are more typically viewed as negative and can lead to

declining equity returns.

Intermarket Relationships

Equities are a part of a financial system in which multiple asset classes are

traded. Because of this, commodities, currencies and bond prices (as well as other

assets) can have a direct and indirect effect on equity returns. For example, equities

often move higher with commodity prices during the initial phase of an uptrend,

but if commodity prices continue to soar, it has a negative affect on equities.

Stocks also typically follow bonds, although bonds reverse direction several

months or more before stocks do, making the relationship hard to see at times.

Therefore, rising bond prices are positive for equity returns, while falling bond

prices usually indicate that stocks could begin to decline soon as well. At times

these relationships may break down, and may reverse in a deflationary

environment. It is important to analyze how the markets are acting in relation to

each before you make trades based on intermarket relationships.

Supply and Demand

Traders and investors are constantly trying to determine if stocks are going

to go higher or decline. Each of these investors makes trades based on different

criteria and from an alternative perspective. These conflicting views create supply

and demand relationships, across all time frames, which ultimately push equities

higher or lower. If there is little interest in equities, an excess supply develops and

prices drop as investors try to sell. When there is significant demand for equities,

prices rise as investors try to outbid one another and refrain from selling.