For some top-down investors, it stops here. They would then choose an ETF or other security that tracked their chosen geography and industry as a whole. But others may drill down and choose a few South Korean car companies that seem like they have bright futures or simply buy a few of each.
What characteristics do top-down investors look for?
Just like bottom-up investing, top-down investors often have their own favorite indicators that they lean in on. In general, a few you might consider would be:
Gross domestic product. The gross domestic product (GDP) of a country can tell you if the economy is growing, shrinking, or stagnating, which can also tell you a lot about whether or not its industries will be able to perform over the longer term. A country that's had steady GDP growth over a long period is a country that's likely growing at a sustainable pace.
International trade balances. Trade balances are tricky things, but they're one way to help gauge the reliance of one country on others. In general, if one country is very heavily dependent on a single trade partner for particular goods or materials, that can cause serious problems if its trade partner's crops fail, raw minerals dry up, or manufacturing processes slow.
For example, if the South Korean car industry was heavily dependent on microchips from Japan and had no other reliable sources for these chips, a bad year for shipping in Japan could hurt the South Korean car industry, too. However, if South Korea has multiple trading partners that can supply those chips, it's not great for Japan to have a bad year distributing its goods, but it won't badly affect the South Korean car industry since it will still be able to get its necessary components.
Internal political upheaval. No one wants to think about another country on the brink of civil war, but it's important for top-down investors to consider. If the country you're looking at is not politically stable, the country may soon experience issues like massive drops in employment, out-of-control inflation, and even draconian rulemaking that limits or destroys entire industries.
