How Global Markets Influence Business Finance

Thursday 12th of September 2024

Business Studies

Syllabus Topic

HSC topic: Finance

role of financial management

global market influences - economic outlook, availability of funds, interest rates

INTRODUCTION

In today’s interconnected world, financial management within businesses is heavily influenced by global market conditions. The ability of businesses to successfully navigate these external factors is crucial in shaping their financial strategies. The HSC Business Studies syllabus highlights Global Market Influences as a key consideration for financial management, focusing on three main aspects: Economic Outlook, Availability of Funds, and Interest Rates.

ECONOMIC OUTLOOK AND INTEREST RATES

Forecasts of economic performance help businesses anticipate demand for products and services. A robust global economy enhances consumer confidence and spending, directly benefiting businesses. A positive economic outlook additionally provides businesses with more opportunities to expand, secure loans, and invest in growth. It is essential for safeguarding trade, supporting green and digital transitions, delivering debt relief, and improving food security. Companies aligning their strategies with global trends are better positioned to navigate the complexities of the international market.

Stabilized Global Growth: Despite recent challenges such as the pandemic, energy crises, and inflation, global growth has stabilized, projected to hold at 3.2% over the next two years.

Inflation Trends: Inflation peaked at 9.4% in 2022 but is expected to decrease, creating a more stable environment for businesses.

Ongoing Risks: Economic growth faces threats from rising oil prices, persistent inflation in services, geopolitical tensions, trade fragmentation, prolonged high interest rates, and climate disasters.

Emerging Markets and Developing Economies (EMDEs): Public investment in EMDEs can boost productivity and attract private investment, promoting long-term growth. Advanced economies like the US have surpassed pre-pandemic growth levels, while low-income countries are still recovering, affecting demand and financing conditions.

CASE STUDY – AMAZON:
- Global Commerce Demand Driving Growth: Amazon’s success is linked to rising global e-commerce demand. Post-pandemic, e-commerce is expanding rapidly, expected to represent 23% of retail purchases by 2027. Amazon, capturing significant market share, is well-positioned to leverage this trend.

- Global Logistics Network: Amazon’s extensive logistics network, including warehouses and delivery vehicles, supports its global dominance. Efficient logistics meet international market demands, enhancing Amazon's competitive edge.

- Global Value Creation through Prime and Beyond: Amazon Prime’s extensive value-added services like fast shipping, Prime Video, and grocery delivery bolster customer loyalty and create competitive barriers.

- Impact of Global E-Commerce Trends: With 60% of consumers planning more online shopping post-pandemic, Amazon is set to benefit from increased global e-commerce demand, particularly in high-growth digital shopping and logistics sectors.

Interest Rates Trends:
- Global Interest Rates: Recent months have seen significant fluctuations in global interest rates, especially for long-term government bonds. Yields on 10-year US Treasuries, for instance, are climbing again after a previous pullback.

- Emerging Market Resilience: Emerging markets have shown milder rate changes compared to advanced economies. The average sensitivity of 10-year sovereign yields in Latin America and Asia to US interest rates has decreased significantly during the current tightening cycle.

- Resilience and Insulation: Major emerging markets, particularly in Asia, have been more insulated from global interest rate volatility than historically observed. Foreign investors have maintained their bond market presence despite fluctuations, indicating resilience.

AVAILABILITY OF FUNDS

Liquidity and availability of funds: The ease with which businesses can access capital in international financial markets. This involves assessing how readily companies can obtain financial resources from banks, investors, and financial institutions across different countries to support operations, growth, and investments.

Increasing Global Liquidity:
- There is a growing availability of capital in financial markets, enhancing businesses' access to funds.
- Companies are increasingly delaying their initial public offerings (IPOs), with 37% opting to stay private longer. This shift is driven by increased liquidity and the expansion of private capital markets, reflecting a change in funding and growth strategies.

Rise of Venture Capital:
- Venture capital is expanding, with a greater focus on funding early-stage and high-growth companies.
- The growth of secondary markets in venture capital provides more flexible liquidity options, offering alternative ways to provide liquidity to employees and shareholders. This supports financial stability and growth prospects for companies.

Case Study: Qantas:
- During the pandemic, Qantas leveraged international funding to manage financial challenges and support recovery.
- The airline implemented a $1 billion COVID recovery plan, which was crucial for stabilizing operations and planning for future growth.
- Despite global economic uncertainty, Qantas reported its first full-year profit since FY19, with an Underlying Profit Before Tax of $2.47 billion and a Statutory Profit After Tax of $1.74 billion.
- Key investments included ordering 24 new aircraft and integrating Sustainable Aviation Fuel (SAF), highlighting how strategic use of international funds can drive recovery and long-term growth.