A financial market allows investors or other people to trade commodities, financial securities and other fungible items of value at low cost of transactions and at prices that would reflect demand and supply. It is a broad term which describes any marketplace where securities comprising currencies, equities, bonds and derivatives takes place. In this paper, an industry and two ASX listed organizations from the same industry would be taken in account for conducting fundamental analysis more specifically, top down analysis and bottom up analysis. It would help in understanding and analyzing overall economic environment and financial situation of the companies. Therefore, retail industry of Australia has been considered for this paper. Australian retail industry has shown significant rise over the years. Like other major industries in Australia, retail industry too largely contributes in the economic development of the nation. The retail industry in Australia is driven by technological changes which range from the exercise of plate glass windows to the advent of the internet that effectively offers a similar customer service.
According to the report of Australian Bureau of Statistics Retail Trade figures, the turnover of retail industry has increased by 3.7% between 2014 and 2015 (Editor, 2016). It is also reported that average retail sales year-on-year in Australia attained is 5.97% from 1983 until 2016 (Tradingeconomics, 2016a). Therefore, Australian retail industry is growing at a significant pace. The companies that have been selected from considered industry are Woolworths Limited and AMA Group Limited. The mission Statement of Woolworths Limited is to deliver and offer to the consumers a satisfactory shopping experience (Woolworthslimited, 2016). On the other hand, the mission statement of AMA Group is to give high commitment to excellence in cost effective operations, customer service and sector leading brands. The firm is intensely focused on investing in its customers and people, maintaining focus on shareholder value and delivering growth (Amagroupltd, 2016).
The monetary policy of Australia is formulated and implemented by the Reserve Bank of Australia. Monetary policy entails the management of short-term interest rates for attaining domestic policy objectives in accordance with the floating exchange rates. The bank maintains an inflation target and seeks to hold consumer price inflation in the economy to 2% to 3% so that price stability, economic prosperity, full employment and welfare of people could be maintained (RBA, 2016). On the other hand, the current inflation rate in Australia is 2.1% in 2016 which has slightly increased from 1.53% in 2015. It is also expected that the inflation rate would further increase to 2.49% till 2020.
Figure 1: Australian Inflation Rate
(Source: Statista, 2016a)
However, it could be pointed that the country would be able to maintain the inflation rate within its inflation target standard. Moreover, it could be seen that forecasted inflation rate is almost similar or stable. It indicates that the companies like Woolworths and AMA Group or others would be more optimistic and confident to invest. This in turn could lead to rise in LRAS (Long Run Aggregate Supply) and would facilitate higher rates of economic development in the future. On the other hand, as Australia is able to maintain the inflation target, then it would extensively promote the companies to make efficient utilization of the productive resources. Moreover, the stable inflation would foster investment as it would help in reducing the uncertainty about the financial market (Hall and Lieberman, 2012). Therefore, the organizations would be able to take long-term decisions which could help in contributing to economic development and in national reserve. It could be pointed that inflation rate in Australia is quite normal which would support many investors, shareholders and businesses to avoid financial losses.
Further, the factor that could be considered is GDP (Gross Domestic Product) of the country. The GDP in Australia in 2015 has been reported to be 1339.54 billion US dollars which declined from 1454.68 billion US dollars in 2014 (Tradingeconomics, 2016b). Decreasing GDP indicates that economic condition of the country is going down. Therefore, it can impact on the stock prices, profits of the companies, employment level, wages, etc. It might force the firms to lower down its stock prices which could largely and directly affect their earnings and returns. Moreover, it could be understood from the declining Australian GDP is that the country might not be using the resources economically and productively. This can have long term impact on the overall economic development of financial market or other markets in Australia. However, it is predicted that the GDP of Australia would increase to 1468.69 billion US dollars till 2020 (Statista, 2016b). The basis for such forecast is that the country would be welcoming more foreign direct investment in the financial market and simultaneously in other markets which could significantly contribute in the economic growth. It is also pointed that export of goods and services would also increase in future which shall help in increasing the GDP value. On the other hand, it has been reported that in the final quarter of 2015, GDP has increased by 0.6% which was driven by potency in household final consumption expenditure and with public gross fixed capital arrangement. It has also be noted by ABS (Australian Bureau of Statistics) that the rise in GDP was driven by development in service industries such as arts and recreation services (2.2%), information, communication and media (2.7%) and retail trade (1.0%) (Scutt, 2016).
The value of Australian Dollar is currently lower than developed countries like the US, the UK and other nations but higher than developing economies like India, Mauritius, etc.