Macroeconomic factors and international industry returns

The aim of this article is to examine the global sources of risk in 38 international industries for the period 1987:3-1997:10. Past studies on industry returns and risk have been performed at a national level. However, given the global integration of various industry sectors, it would be interesting to examine the importance of international industry stock returns at the global level. The investment implications of this article, therefore, are that investors could make capital gains by timing their investments, and/or adjust the degree of their portfolio diversification, not only across industries domestically or across countries, internationally but also across global industries. A unique database compiled by Morgan Stanley Capital International on 38 international industries is used. The return on the world equity market portfolio and innovations in the following pre-specified set of global macro variables are employed in the analysis: (i) industrial production, (ii) inflation, (iii) oil prices, (iv) fluctuations in exchange rates against the US dollar, and (v) a measure of credit risk. The most important finding of this paper is that the long run impacts of macroeconomic news have different effects in different industries.