Reference no: EM132973109

Identify and interpret economic variables that impact on share price movements within the context of the top-down approach to fundamental analysis.

1. The price of a share is essentially determined by the demand for and supply of the share. At any moment, the balance between buyers and sellers of a company's shares is determined by their assessment of the future profitability of a company and forecast movement in the share's price
2. Investors and share analysts may conduct their evaluations and issue their buy/sell recommendations using fundamental analysis.
3. Fundamental analysis, incorporating the top-down approach and the bottom-up approach, examines variables that finance and economic theories identify as being relevant to a company's future performance.
4. The top-down approach looks at prospective developments in the broader economic environment within which the various industry sectors and specific companies are situated.

Important variables that are identified as being of relevance to the future performance of various industry sectors, and therefore companies operating within those sectors, include:

• developments in major international economies - the rate of growth within a domestic economy - the variability and volatility of exchange rates, particularly those of major trading partners
• changes in monetary policy settings and movements in interest rates
• the balance of payments current account, and whether the current account is in surplus or deficit
• upward pressures on wages growth relative to increases in productivity

Problem 1: Globally, interest rates have been low for some time as central banks maintained an easy monetary policy to stimulate economic growth. GPT Group is a property trust operating in Australia. The board is particularly concerned about the implications of rising interest rates for its retail investments. Analyse the situation and discuss how a tightening monetary policy may impact the performance of GPT and its share price.