Industry analysis is a vital part in the investment process. Companies hire consultants to do a lot of industry analysis work in order to make sure that money is spent on the right place. If we want to invest in certain stocks or companies, we need to be sure that the overall industry is growing rather than declining.
Starting with a Macro economic analysis, the primary goal is to identify what are the opportunities and threats to the industry. One method to use is called the PEST analysis:
- Political: This is the first factor in the industry analysis process. Government policy has significant effects on certain industries such as natural resources, telecommunication etc. In those industries, government policy could have huge impact on industry players, influencing strategic planning, financial performance and stock price of those companies. The effect of government policy is the most obvious in Emerging Markets. For instance, in China, foreign investors could not hold controlling interest in financial institutions, on the other hand, government encourages foreign investors to invest in retail chain business. If you want to dig deeper, you could check Carlyle’s acquisition of XuZhou Construction Materials case to see how government policy could influence M&A transactions in Emerging Markets.
- Economic: Economic factors generally include economic growth, interest rates, exchange rates, tax policy and the inflation rate. Some industries will be more influenced by certain factors, for instance, financial services industry is pretty sensitive to change in interest rates and companies have tremendous overseas exposure will pay special attention to exchange rate movement. As a comparison, economic growth and inflation rate actually could be used to gauge the overall health of a country’s economic status. A high growth economy with stable inflation rate could be an attractive place to invest in.
- Social: Social factors include health consciousness, population growth rate, age distribution, career attitudes and emphasis on safety. These are important demographic features for investor to evaluate the characteristics of consumers and those factors help identify the promising industries to invest into. For example, if the country is with an aging population structure, then healthcare industry will benefit from the trend. Similarly, a relatively ‘young’ country indicates that consumer product companies will have promising prospects.
- Technology: Technology factors include technological aspects of specific country, such as R&D activity, automation, technology incentives and the rate of technological change. Technology factors help identify potential markets and build up competitive advantage. Compared with the U.S., Brazil has weak technological infrastructure base and also the level of technology investment. Therefore, it is much easy for a tech company to succeed in Brazil than in the US, because of lower level of technology investment and stronger demand. Another example is mobile apps. The penetration rate of mobile device in the US is much higher than that of Brazil, and consumers in the US are more selective in using mobile apps due to the variety of choices. So a mobile app developer will find Brazil market more attractive because of less competition and more potential customers.