UK Economy and Inflation Rate Analysis

The assignment provides a comprehensive analysis of the UK economy, including inflation rate, average consumer prices, real GDP growth, import and export data, and sectoral employment. It also discusses the impact of exchange rates on domestic prices and China's influence on the US dollar. The study aims to understand the current state of the UK economy and its key indicators.

FINANCIAL ECONOMICS

TABLE OF CONTENTS
INTRODUCTION....................................................................................................................... 3
(1)Economic growth prospect of emerging markets and established markets...............................3
Oil price movement and how it might impact on UK’s economic outlook...............................6
Commodities price movement and how it might signal the world and the UK’s economic
outlook..................................................................................................................................... 8
Inflation and interest rate movement and its effect on UK’s business and economic outlook. . .9
Foreign Exchange rates movement and its impact on the world and UK’s economic outlook 16
2 Sector in which investment will be made for next 3 years.......................................................20
3 Company selected for portfolio and other elements that will be included in it.........................21
CONCLUSION.......................................................................................................................... 23
REFERENCES.......................................................................................................................... 24

INTRODUCTION
Economics is the one of the important domain that have impact on the business firms and
nation. In the current report emerging growth prospects of developed and developing nations is
evaluated and in this regard some of the statistics like GDP and inflation rate are taken in to
account. These figures for developed and developing nations are analyzed and economic
condition of developed and developing nations is identified. Apart from this, in middle part of
the report oil price movement and its impact on UK economy is evaluated. Detailed study of
commodity market is done in proper manner in respect to global economy and UK. Relationship
between interest rate and inflation rate is discussed in detail and UK outlook for future is
estimated in respect to same. Foreign exchange rate and its impact on the world is analyzed in
terms of positive and negative sides of increase or decrease in values of major currencies on
trade at global level. At end of the report, specific sector that will be selected for investment
purpose are identified and company within that sector in which investment must be made is also
ascertained.
(1)Economic growth prospect of emerging markets and established markets
Economic growth prospect is one of the important factor that need to be taken in to
account while selecting any company or sector for investment purpose. In terms of economic
growth nations are classified in to three categories namely developed, developing and
underdeveloped nations. In developed nations some of the countries can be taken like USA, UK,
Germany, Canada, France and Italy. In developing nations category nations that comes are India,
Philippines, Afghanistan and Bangladesh etc. In order to understand economic growth prospects
GDP of developed and developing nations need to be analysed.
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Figure 1GDP growth rate of nations
(Source: Real GDP growth, 2017)
It can be observed that GDP growth rate of USA is 2.2% and same of UK is 1.7% followed by
GDP of 2% is of Germany. Apart from this, in case of other developed nations like Canada,
France and Italy GDP growth rate is 3%, 1.6% and 1.5%. This reveal that growth rate in case of
these nations is very slow and developed economies are struggling to accelerate and maintain
current growth rate. As it can be seen that 2008 crisis hardly hit global economies. Government
of developed nations make use of quantitative easing programs to bring economy back on track
but still these nations are facing lots of problems in bringing stability in their growth rate (Real
GDP growth, 2017).
In order to understand global economic outlook along with developed nations it is very
important to understand economic prospects of developing nations. In case of India GDP growth
rate is 6.7% which is slightly lower than same of China by just one point. GDP of Afghanistan is
2.5% and same is 6.6% in case of Philippines. Apart from this, in case of Bangladesh GDP is
7.1% which is higher than two major fast growing economies India and China. Nepal is another
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nation whose GDP grow at 7.5%. All these things reflects that developing nations are in much
better condition than developed nations.
It can be said that in developing nations growth prospects are very high because they
have some core competencies on developed countries like cheap labour and production as well
as high quality and large market where demand is on peak. Such kind of factors are attracting
investment in developing countries and lead to acceleration in their growth rate.
Figure 2Inflation rate of nations
(Source: Inflation rate and average consumer prices, 2017)
Inflation rate in case of USA is 2.1% and same in UK is 2.6%. In case of Canada inflation is
only 1.6%. For France and Italy inflation rate is 1.2% and same is 1.4%. All these things reflect
that in developed nation’s inflation rate is in control but low inflation rate cannot be always
considered good for any nation. This is because if inflation rate declined then in that case
situation of deflation may come in existence which may heavily affect nation economy. Apart
from this, if inflation rate remain low then firms earning remain in specific range. Hence, it can
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be said that developed nations are receiving advantage of low inflation rate but same also may
create problems for them.
In case of developing nations like India inflation rate is 3.8% and same is 3.1% in case of
Philippines. Apart from this, for Bangladesh inflation rate is 5.7% and same in case of Nepal is
4.5%. Afghanistan have very high inflation rate of 6%. Thus, clearly difference can be observed
in case of developed nations and developing countries’ economies. It can be seen that inflation
rate is high in these nations which to some extent can be considers good but if inflation rate
further increase in these nations then same will not be good for them (Inflation rate and average
consumer prices, 2017). Hence, it can be said that both developed and developing nations are
facing problem of inflation rate and there must be stability in rate.
It can be said that growth prospects are bright in case of developing countries and in
future also this growth rate may accelerate and can benefit relevant nations. However, curbing of
inflation rate is very important because same have direct impact on growth rate of the nations.
This is because if inflation rate is not in control then in that case price of the products and
services will increase and this will lead to lower demand in the market. This results in decline in
production in the nation and this will lead to decline in growth rate of the nation.
Oil price movement and how it might impact on UK’s economic outlook
On analysis of price movement of crude oil lots of hidden factors can be identified.
Interesting that identified is that 2 to 3 years earlier crude oil price skyrocketed in the market but
from 2014 to 2015 these prices declined sharply at fast pace. However, now trend get changed
and crude oil prices again start rising from Q1 of 2016 (Metcalfe and Miles, 2012). However,
this growth rate is not so high and it can be said that percentage growth in inflation rate is in
control. Oil price movement have impact on the UK economic outlook. It can be observed that
significant oil price decline that was observed in 2014 positively affect UK economy as it can be
seen that due to price decline some of the sectors like agriculture, air transport, coke, refined
petroleum and manufacturing sector positively affected. In these sectors growth rate accelerated
which reflect that oil price decline lead to increase in UK economic activity. However, UK oil
and gas sector to some extent negatively affected by decline in oil price. As due to reduction in
oil prices relevant firms earn low profit in their business. However, in current time period oil
prices are increasing consistently which may have negative impact on the nation economy. This
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is because with increase in price of crude oil directly transportation cost increases which lead to
direct increase in price of commodity in the market (Balta-Ozkan and Baldwin, 2013). This lead
to decline in price of product in the market. Ultimately, GDP growth rate get reduced in the
nation. Thus, it can be said that decline in oil price have impact on UK economic outlook. It is
very important for UK to purchase oil a low price from the market so that building of pressure
on economy can be prevented. In this regard countries like India that enter in to contract with
any other nation for purchase of crude oil at cheaper price UK can also follow same strategy. It
can enter in to special contract with any oil producing nation with which it have friendly
relations. By doing so it can support its economy and can prevent jerks that can be observed in
same due to rise in oil price. Due to increase in oil prices real household income also declined in
the UK which is one of the major matter of concern. Consumption of crude oil cannot be
reduced significantly and due to this reason in order to increase savings people make low amount
of expenditure and this directly hit profitability of business firms (Ward and Rhodes, 2014). In
single line it can be said that increase in cost will lead to decline in expenditure from people side
and earning of less profit by the business firms. Hence, in current time period oil prices are
increasing and if same trend remain continue then in that case UK economy may derailed from
growth track as already there is low GDP growth rate of the nation which is not good for it.
In future time period it is possible that oil price decline because China economy is facing
problems and EU nations are struggling for accelerating growth rate. If China and EU nations
failed to grow at fast rate their economy then slowdown can come in these nations and this thing
may affect growth rate of GDP of entire globe. All these things will result in slowdown in global
economy and decline in demand of crude oil which will ultimately result in decline in oil prices.
Thus, it can be said that in future UK economy may grow at faster rate. There are higher chances
of happening of this situation because currently global economic condition is not so good and
same will have impact on China as it is one of major importer and exporter of several
commodities across globe. If economic growth rate will decline across globe then demand for
China exports will decline sharply and this may lead to decline in economic growth rate of China
(Williams and Martinez, 2014). This will ultimately lead to decline in oil price and same will
benefit UK economy to great extent. Hence, it can be said that in future oil prices are not
expected to grow at sharp rate and it may decline to some extent which will surely lead to strong
economic growth of UK. It can be said that outlook on UK economic growth is positive.
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Commodities price movement and how it might signal the world and the UK’s economic outlook
Commodity prices reflects value at which specific commodity is trading on commodity
market. In every nation there are exchanges where trading is done on commodity exchange.
Commodity price have significant impact on the global economy and it mirror the direction in
which economy is moving around. For example in base metal category varied items comes like
copper, aluminium, zinc and lead etc. All these items are used more or less in construction
industry. Thus, on weekly basis construction related data of UK and China are released and on
the basis of available facts investors make an estimation of likely economic condition of the
nation and on that basis decide whether to hold security or it must be sold in the market. Thus, it
can be said that price movement give a signal to the world. This is because investors on the basis
of information received on research report decide or prepare their investment strategy. Thus,
slight change which may be increase or decrease in commodity price signal the world whether
global or domestic economy is on growing or declining stage (Fankhauser, 2013). It must be
noted that USA and China are two major countries that are larger importer and exporter of base
metals. Thus, if demand of base metals get changed then it means that major global economies
are either in good condition or their economy is not on growth track. For example crude oil price
decline consistently reflect that global production of mentioned commodity is increasing but
there is lack of demand of crude oil in the market due to sluggish growth in the business across
two major global economies which are USA and China. Hence, if consistently crude oil price
will decline then it will means that condition of these two above mentioned nations is not good
and in this way commodity price movement reflect whether global economic is on growth track
or not. In China housing activities are increasing consistently and due to this reason it is assumed
that demand of base metals will increase in near future. Apart from this, many of mines get close
in China and due to this reason supply of base metals will decline in upcoming time and this will
lead to increase in price of base metals in the mentioned market. Thus, imports of base metals
will increase in upcoming time period and this will lead to increase in price of same in relevant
exchange. LME or London metal exchange is one of the main exchange that have heavy impact
on price of base metals. Due to price increase in China investors in UK will be motivated and
they will make more investment in base metals in LME which will lead to increase in its price in
UK (Sundbo and SËrensen, 2013). Hence, it can be said that UK economic outlook is positive as
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with improvement in China economic condition trade will increase across the globe which will
benefit UK. Thus, it can be said that outlook on UK economy is positive.
Hence, it can be said that UK outlook is positive in terms of commodity market but
future trends entirely depends on the condition of economy of USA and China because they are
major exporter and importer of base metals. Apart from this, gold prices are heavily affected by
USA market. In USA investment in gold and silver is considered as safe heaven and when price
of stocks decline consistently investors make an investment in gold and price of yellow metal get
increased in the market. Hence, it can be said that price in UK for yellow metal to large extent
are heavily affected by investors sentiments that are in USA. Thus, UK economic outlook is
positive and it is affected by number of factors.
Inflation and interest rate movement and its effect on UK’s business and economic outlook
Inflation rate and interest rate are interlinked to each other as it can be observed that with
change in interest rate inflation rate also get changed. It can be observed that when central bank
increase inflation rate interest rate get changed significantly. There is close relationship between
inflation rate and interest rate. When inflation skyrocketed the interest rate also get changed.
This is because by making interest rate higher an attempt is made to control inflation to great
extent. For example it can be seen that if inflation rate is high in the economy as supply is low
but demand is high in the market then in that situation inflation rate get increased. Similarly, if
inflation rate is low then in that case people are making large amount of purchase (Downey. and
Mihelj, 2012). Thus, in order to control slow growth of inflation interest rate is reduced and by
doing so inflation rate is being controlled to great extent. It can be said that inflation and interest
rate both are closely related to each other. This is proved from the fact that with change in
inflation rate interest rate also changed significantly. Interest rate change is the one of the
important part of monetary policy of any nation and time to time it is reviewed and changed
consistently by central bank of the nation so as to bring stability in the nation economy. It can be
said that interest rate is the one of the most important tool that any nation have in order to deal
with inflation related problem. In UK also on quarterly basis inflation rate is changed by central
bank.
In the current period of hyper-globalization, there are significant evidences available for
global inflationary cycles as a result of intensifying globalization which leads to promote
common shocks via trade channels and commodities. Inflation can be defined as the rate at
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which prices of goods and services supplying in the economy is rising and consequently results
in lowering purchasing power. In every country, central bank works for controlling high rate of
inflation and protect economy from possible deflation through monetary policies. Inflation and
interest rate are closely related to each other. It is because, when central bank aims to control
inflation for stabilizing prices, they increase long-term interest rates on loan using contractionary
policy which controls the circulation of money in the economy or vice-versa. Central bank also
used open market operations to control monetary circulation through buying treasury bills. There
are many reasons of interest such as rapid increase in demand than productive capacity, high
increase in prices of material, wages cost, transportation and others.
Under the contractionary policy, when bank charges high rate of interest to control the
quantity of money available in the economy to control growing inflation leads to increase cost of
borrowing, bond yields, mortgages and cost of living as well. However, inflation is not always
have damaging impact on the economy, because, when it is controllable at acceptable level, it
help economy to prosper with increased employment, availability of enough money to purchase
products and services. Low rate of inflation help countries to recover from depression or
recession by boosting consumer spending, consumption and less borrowing cost. However, on
the other side, banks may be reluctant to supply loan to the users due to less return. Volatility in
prices of elementary products i.e. food, clothing, housing, education, healthcare also affects
consumer price index (CPI) due to decline in real purchasing power of the currency. Real estate
industry increases with the rising CPI, in contrast, fixed income instruments like certificate of
deposits or treasuries lose their value because yield on such do not increase with the increasing
inflation rate.
After the Great economic crisis in 2008 as a result of bubble peaked in real estate,
dropping house prices and sub-prime mortgage, Federal Reserve had made unprecedented
interventions in their monetary system to recover the economy. Currently, US had low inflation
rate, in which, central bank continuously monitor the economy and change their monetary base
(circulation currency + reserves kept by commercial banks). In US, in 1995 the rate was 9%
dropped to 6% in following decade. Such decelerating policy was accompanied by economic
slowdown due to inflation. As a result, its CPI in 1995 rose to 3.5% which came to 2.5% in 2005
(What’s causing America’s low inflation, 2015). In 2015, its monetary base reported to 17.8% at
a CPI growth of only 1.9%. It is because, when bank increase reserves, then they keep
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themselves more money which means they can make more loans which boost consumer
spending, employment, effective utilization of capacity and upward movement in price and
wages. Afterwards in 2010, coming of Pay interest on excess reserves allowed Fed to purchase
mortgage backed securities and bonds that declined interest rate resultant stock market growth,
recovery of home prices and wealthy customer spending level. Now, the CPI is slightly less
against preceding year due to decline in energy and other gasoline product prices at an inflation
rate of around 2% - 4%. Evidencing it, CPI for energy goods dropped by 19%, conversely, food
prices goes up by 1.8%. It also appreciated dollar value resultant less import cost that pressurizes
domestic firms to decrease their prices. US inflation also affected labor market with the decline
in unemployment rate by 5.1% at higher wages rate.
Figure 3 UK GDP growth rate
(Source: UK economy at a glance, 2017)
Now, coming to UK, with the steady performance, British economy become the second
fastest growing among in G7 countries. Currently, the country noticed a Quarter on Quarter
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(QOQ) GDP growth of 0.4%. Service sector progressed significantly however, construction and
manufacturing companied struggled. Before EU refendum, there was a fear because it was
predicted that vote to Brexit will result in economic recession resultant decline in pound value,
however, after the six month, country showed immense progress.
Figure 4 Inflation rate in United Kingdom
(Source: United Kingdom Inflation Rate, 2017)
Country has low inflation rate of 3% which is highest in the last 5 year and slightly
below the expected inflation of 3.1%. In the corporate sector, housing and utility sector prices
grown up from 2.1% to 2.3%, food and non-alcoholic beverages from 3% to 4%, culture and
recreation from 2.5% to 2.8% and health sector from 2.4% to 3.4%. In contrast, prices remains
steady for hotels, restaurants at 3.1%, tobacco and alcoholic beverages at 4.3%, clothing and
footwear at 3.2%, furniture, maintenance and equipments at 3.1%, communication at 1.7%,
miscellaneous services at 0.9% and education at 2.8%. Inflation @ 3% affects spending power
negatively whilst it is beneficial for pensioners due to increased pension payments.
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Figure 5 UK unemployment rate
(Source: UK economy at a glance, 2017)
However, in labor market, workers are struggling to work hard due to faster growth in
price and decline in their real wages. Unemployment rate fallen from 8% to 4.3% at a quarterly
growth of weekly earning at 2.2% and employment rate of 75%. Monetary Policy Committee
(MPC) of Bank of England (BOE) and Office for Budget Responsibility (OER) were
optimistically expected a growth of 4% proven inaccurate (Blanchflower, 2017).
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Figure 6 Interest rate in UK
(Source: UK economy at a glance, 2017)
In UK, BOE owes accountability to balance the flow of currency in the economy to
maintain reasonable inflation rate. With the fall in sterling as a result of refendum, inflation is
expected to increase, but BOE has managed it effectively and current base rate is 0.5%. After
vote to Brexit, BOE cut its interest rate as an attempt to protect the economy from inflation and
weaken currency value. Denting consumer spending, retailers sales slumped down and pushing
retail sector at a lowest growth in the last 4 years. Although, falling oil prices decline cost of
input for manufacturers, still, weakening sterling value expects cost to rise in future. However,
after few months, retail sales grown up due to larger spending driven by economic recovery.
Evidencing it, in September 2017, retailer sales showed year on year growth (YOY) of 1.2%
because recovery filtered household finance through less interest rate. It helped corporations as
they can borrow money at less rate for meeting their funding requirement.
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Figure 7 Trade balance in UK
(Source: UK economy at a glance, 2017)
Government also introduced number of schemes and put pressure on banks to improve
ease access of funds to the businesses to promote trade. Non-financial companies benefited with
the ultra-low rate of interest to pay off their debt obligations, however, lending to small and
medium sized businesses declined by 0.9%. However, in the housing market, prices have been
increased at a rapid rate than expectations at an annual growth of 9%. Despite numerous efforts,
UK imports more than their exports resultant economic deficit and drag down its position in the
world.
Foreign Exchange rates movement and its impact on the world and UK’s economic outlook
Foreign exchange rate movement can affect world as entire trading is done in the
currency and extent to which major currencies appreciate or depreciate in the global world trade
is impact. Thus, foreign exchange rate have impact on the entire world. For example major
trading across the world is done in USD. If in any condition USD will become weak then in that
case imports will be cheaper and demand of cheapest product will increase in the market.
Similarly, of price of USD increased at rapid rate then import will become dearer and demand of
the product will decline. Hence, it can be said that with passage of time currency exchange rate
get changed and it affects nations as in case of many countries balance of payment gap widened.
It can be said that these exchange rates have significant impact on many nations of the world.
Thus, every nation have to regularly keep an eye on exchange rate and accordingly need to plan
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whether to control import of specific commodity or import must be allowed to any level. It can
be said that exchange rate movement affect the world. Foreign exchange rate can be defined as
the rate in which one country’s currency can be converted into other currencies. In other words,
prices of domestic currency in respect to other nation’s currency is called foreign exchange rate.
It significantly affects the economy to a major extent. It depends upon the value of currency in
relation to the other currencies (Amiti, 2016). It either may be fixed or floating, former accept
fixed exchange rate that is widely accepted where later is just opposite wherein exchange rate is
decided as per market forces. Fixed rate of exchange is not affected by market forces and
reduces volatility and maintains good trading relationships. Unlike it, there are number of factors
that affects exchange rates such as interest rate, inflation, trade balance whether deficit or
surplus, public debt, capital flows, trading terms and policies, technical support, economic
performance, resistance level, political stability and so on.
Currency gyration has a far reaching impact on the world which many companies
do not consider because they operates only domestically and do not involved in cross-border
transactions. It particularly impacts import and export activities between two different countries.
It is also acts as key determinants of central bank’s policy toolkit. In the international trade,
weaker the value of a currency makes imports expensive and stimulate exports and thereby
decline deficit or increase trade surplus.
Economic growth is measured by gross domestic product (GDP) presented below:
Thus, it can be said that rising foreign exchange rate reduce exports and make import
cheaper declined economic growth (GDP) however, weaken currency promote export to other
nations and make import costlier resultant higher GDP. Stable currency also encourages and
attracts foreign investors either as FDI in existing organizations or setting infrastructure
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overseas, however, currency depreciation deter overseas investors. FDI is an important source of
fund for economies like China whose growth rate is declined in case of inadequate capital.
Strong domestic currency leads to tight or contractionary monetary policy at high rate of interest
or vice-versa.
Exchange rate affect domestic product prices and services cost as well. For instance, in
USA, car makers used accessories, car parts, steel, rubber and other material from other nations.
Strong value of dollar benefited the manufacturers with cheaper cost of production (Amiti,
2016). At the same time, importing final goods such as foreign cars will also cost less due to
strong dollar value
Inflation rate which is a key determinant of foreign exchange not only impacts domestic
nation but also affects other countries also due to their inter-relationship. For instance, China is a
major exporter of America in the sectors i.e. clothing, consumer electronics machineries and
others. Similarly, American companies also export raw material to Chinese companies to import
it back at lower cost. Thus, change in dollar value due to inflation affects both the countries.
Increase in dollar value resultant high cost of import for China as they have to pay more money.
Similarly, they receive dollar from America for the goods shipped which is then sent to People’s
bank of China for foreign exchange. It reduces dollar supply and put upward pressure on its
value and decline Chinese currency Yuan’s value. China maintained its currency value within
2% range against weighted dollar value as currency basket to control export prices (Amadeo,
2017). Moreover, China’s slow economic growth and credit issues strengthened dollar value in
2014. After US, it is the second-larger stock trader, however, assets bubble in July caused
damaging impact to the Chinese economy by 30% fall in stock price, as a result, 700 companies
were suspended. It is because, individual investors alone carry out 80% trade and unlike US, and
Chinese government owns largest companies on indexes. It is because of excessive liquidity into
state owned companies and financial institutions. Thus, it makes it necessary for the country to
slow down their economic growth to avoid future collapse and inflation (Hsu, 2017). Country
targets to maintain 3% rate and the current rate are particularly lower.
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Figure 8 Major export products of UK
(Source: UK import and export, 2017)
Figure 9 Import and export of UK
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(Source: UK import and export, 2017)
Referring United Kingdom, many businesses operates worldwide and affects by the
movement in exchange rate. After refendum, depreciated value of pound makes export cheaper
and import costlier. As a result, companies who purchase material from other countries such as
electrical and mechanical machinery, cars, pharmacy products, road vehicles, refined oil and
others got increased. However, exports of services i.e. banking travel and transport, cars,
packaged medicines, medicaments, gas turbines etc. has been increased with a total export of
$404bn.
2 Sector in which investment will be made for next 3 years
Sectors in which robust growth can be observed in next three years is energy sector,
business services and transport as well as communication. There is huge significance of these
industries in UK. There is huge growth potential in these industries but as per requirement there
is need to select specific sector (UK sectoral employment march 2016., 2016). Out of all these
sectors energy sector is selected for investment purpose. This is because it is one of fast growing
domain in the UK. Mentioned industry is selected for investment purpose because UK
government is target to increase its power generation capacity as much as possible. It can be
observed that every nation government wants to increase its self-sufficiency and self-reliance on
energy. By doing so it can be ensure that it will be able to meet its energy needs in easy and
effective way. Thus, in future there is prob ability that many new projects in respect to solar
energy and other sort of energy can be carried out in UK and by making investment in same
business firms can earn good amount of return on invested amount (Balta-Ozkan and Baldwin,
2013). Thus, energy sector is selected for investment purpose. Some of other sectors that are
growing at fast rate are transport and communication as well as business services. There is also
huge potential in transport sector as tourism is increasing at fast rate in the UK. Business
tourism, education tourism and other classes of same are increasing in UK at fast rate. But there
are some of the factors due to which tourism is not selected for investment purpose. This is
because tourism mainly comes from foreign nations. If economic crisis comes again tourism will
decline at fast rate. Due to this reason tourism sector cannot be considered as one of best choice.
Global economic conditions are not certain and due to this reason turmoil can be observed in the
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market. There must be stability in economy which is not currently observed and due to this
reason travel and tourism sector is not selected for investment purpose.
Apart from this, business services is another area where firms are growing at fast rate.
However, this sector is also not selected for investment purpose because demand for business
service is dependent on economic growth of the nation. If economy of the nation is growing then
it is possible that business services sector perform better but currently economic conditions of
the nation are not suitable and due to this reason in case recession comes nation economy may be
heavily affected. Hence, by considering this factor business services sector is not selected for
investment purpose. It must be noted that energy sector is one whose demand will never decline
because energy is the basic need of any nation. With passage of years demand of energy or its
need also increase across the nations. This is the one of the basic point that make assumption
strong that in upcoming time period of three years demand of energy sector will increase at fast
rate and due to this reason it is decided that investment will be made in any firm that comes in
energy sector of UK.
3 Company selected for portfolio and other elements that will be included in it
British petroleum is the company that is selected for investment purpose as it is the firm
that produce crude oil in its business and make available different crude oil related products to
the business firms. Crude oil is one of the energy source and used in all industries of world for
different purposes. British petroleum is selected because it is one of the largest petroleum
company of UK that is operating in UK and other nations of the world. Currently, firm is
performing different operations in its projects and earning good amount of revenue in its
business. Thus, it can be said that firm is in good position and it is best choice for investment
purpose. In the portfolio apart from British petroleum investment can be made in future
contracts or other derivatives. This is because firm major product is crude oil whose price keeps
on fluctuating consistently (Williams and Martinez, 2014). Hence, under derivative contract
investment will be made in options or future contracts and under this specific price will be
locked and by doing so it will be ensured that if stock price declined in the market then there
will be future contracts on which good amount of profit will be earned. Hence, it will be perfect
combination of shares of British Petroleum stocks and future as well as options. Apart from this,
investment will also be made on bonds so as to ensure that some portion of investment will
remain safe and specific amount of return will be fully secured in nature. It can be said that
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company selected is best choice and for securing return perfect combination of risk free and
risky asset is determined. By doing so good amount of return can be earned in the business. In
current time period it can be observed that mutual fund houses are also following same strategy.
They have to strictly comply with rules and regulations and under this they make few of
investment in shares and few of amount is invested in derivative contracts. Amount that will be
invested in derivative contracts will be determined by considering risk that is on amount of
investment made in British Petroleum. Investment in both security and derivative is risky and
due to this reason in order to ensure that specific amount of return will be earned on investment
fixed amount of corpus will be invested in bonds so that specific amount of interest can be
earned in investment amount. Hence, it can be said that appropriate investment strategy is
devised.
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CONCLUSION
On the basis of above discussion it is concluded that there is significant importance of
economic domain for the business firms. This is because economy of the nation to great extent
affect any company. If nation economy is in good condition then in that case it positively affect
business firm. Means that economic environment have positive impact on the business firms. It
is also concluded that before selecting any industry it is very important to do economic analysis
of the nation. This is because by doing economic analysis it is identified that which of the sector
will be best for investment purpose and which of company must be selected for investment
purpose. While evaluating any economy it must be noted that it’s GDP, inflation rate, balance of
payment and currency exchange rate must be evaluated in proper manner. By doing so it can be
ensured that economic condition of the nation is evaluated in proper manner and better choice of
sector is done whose company must be selected for investment purpose.
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REFERENCES
Books and Journals
Balta-Ozkan, N. and Baldwin, E., 2013. Spatial development of hydrogen economy in a low-
carbon UK energy system. international journal of hydrogen energy. 38(3). pp.1209-1224.
Downey, J. and Mihelj, S. eds., 2012. Central and Eastern European media in comparative
perspective: Politics, economy and culture. Ashgate Publishing, Ltd..
Fankhauser, S., 2013. A practitioner's guide to a low-carbon economy: lessons from the
UK. Climate Policy. 13(3). pp.345-362.
Metcalfe, J.S. and Miles, I. eds., 2012. Innovation systems in the service economy: measurement
and case study analysis(Vol. 18). Springer Science & Business Media.
Sundbo, J. and SËrensen, F. eds., 2013. Handbook on the experience economy. Edward Elgar
Publishing.
Ward, M. and Rhodes, C., 2014. Small businesses and the UK economy. Standard Note:
SN/EP/6078. Office for National Statistics.
Williams, C.C. and Martinez, A., 2014. Do small business start-ups test-trade in the informal
economy? Evidence from a UK survey. International Journal of Entrepreneurship and Small
Business. 22(1). pp.1-16.
Online
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RLD>.
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Hsu, S., 2017. This is Why China wants Its Inflation Rate to Pick Up? Available through:
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to-pick-up/#45fb65b318c4.
Amadeo, K., 2017. How Does China Influence the US dollar. Available through
<https://www.thebalance.com/how-does-china-influence-the-u-s-dollar-3970466>.
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United Kingdom Inflation Rate, 2017. [Online]. Available through:
https://tradingeconomics.com/united-kingdom/inflation-cpi.
What’s causing America’s low inflation. 2015. [Online]. Available through:
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Amiti, M., 2016. What Impact Do Exchanges Rates Have on Domestic Prices? [Online].
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UK sectoral employment march 2016., 2016. [PDF]. Available through:<
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