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What is PEST Analysis

Industry analysis is a very crucial element in the investment process. Consultants are hired by companies to do a lot of industry analysis work to ensure that money is spent in the right place. Before investing in certain stocks or companies, one must be sure that the overall industry is growing rather than shrinking. The primary goal, starting with a Macro economic analysis is to identify the threats to the industry. One of the methods that is used is called PEST analysis:

  • Political:
    This is the primary factor in the industry analysis process. Government policy has serious and significant impact in general on any industry but
    even more so, on certain industries such as natural resources, telecommunication etc. In such industries, government policy could have huge impact
    on the number of industry players, influencing strategic planning, financial performance and stock price of those companies. The effect of
    government policy can be felt most obviously in Emerging Markets. For example, in China, foreign investors are not eligible to hold controlling
    interest in financial institutions, but the government encourages foreign investors to invest in retail chain business.

  • Economic:
    Economic factors typically include economic growth, tax policy, interest rates, exchange rates and the inflation rate. Some industries are more
    influenced by some factors, for example, financial services industry is pretty sensitive to change in interest rates and companies having 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.