5 Macro trends should know before investing

Equity investment is not just about balance-sheets or analysis of a company’s financial performance. It is also crucial to look at the broader picture- the macro-economic factors that may directly or indirectly affect the company whose stock you wish to buy.

Just a few months ago, stocks were quoting at rock bottom prices. Yet not many chased them as the overall macroeconomic picture was still grim. An economic slowdown, if it has implications for you as a salary earner, also has implications for the earnings and margins of companies. Although there are many macroeconomic indicators that are relevant to markets, here are five must-track indicators:

GDP Growth: The GDP growth rate is the most important indicator of a nation’s economic health. If the GDP is growing, so will businesses, jobs and personal income.

If GDP is slowing down, then businesses will hold off investing in new investments and hiring new employees, waiting to see if the economy will improve. If the GDP growth rate actually turns negative, then it means the economy is in a recession.

Inflation: Inflation is an increase in the price of a basket of goods and services that is representative of the economy as a whole.

Inflation is an upward movement in the average level of prices. Its opposite is deflation, a downward movement in the average level of prices. Because inflation is a rise in the general level of prices, it is intrinsically linked to money. It denotes too much money chasing too few goods.

Index of Industrial Production: Index of Industrial Production (IIP) is an index that details the growth in output of various industrial sectors in an economy, for instance, the Indian IIP focuses on sectors such as mining, electricity, Manufacturing & General. Higher IIP indicates that the economy is growing, in case IIP is low or negative, it means the economy is not doing well.

Production of capital goods: It is an important indicator of how industry is faring. Capital goods refer to those items that are used for production of other goods.

An increase in production of capital goods means the industry is in expansion mode as it is adding to its existing capacity.

A decrease in capital goods means that existing capacity itself is under-utilised and indicates slowdown in demand.

Foreign exchange reserves: Foreign exchange reserves are the foreign currency deposits and bonds held by central banks and monetary authorities.

Foreign exchange reserves are important indicators of a country’s ability to repay foreign debt and meet its import requirements. The foreign reserves require proper management as too much or too little reserves can affect the health of the economy.

After understanding the above, let’s look at some practical scenarios wherein the above indicators have been applied. Take, for example, a sector like Steel; demand for steel is closely linked to overall infrastructure building in an economy. If GDP growth does moderate, steelmakers will face a moderation in demand too.

On similar lines, FMCG companies tend to perform well when the agriculture sector shows good growth as a good portion of the demand is from the rural sector. Two-wheeler and tractor sales too are dependent on the same. The banking industry is affected by inflation changes.

In inflationary conditions, interest rates tend to be in an upward trend, resulting in lower credit demand, higher interest costs and possibly lower interest margins for banks. In a scenario of declining inflation, banking stocks are benefited by way of appreciation in treasury investments due to lower yields.

Stocks such as Engineering, Cement are dependent on infrastructure spending. This sector sees good times when there is heavy public expenditure by Government. But where do we get the macro economic data? Not too difficult. Macro economic and industry level data is available from a number of sources such as Government publications, RBI reports, SEBI Bulletin, Research publications of CMIE, newspaper reports, Industry publications, etc.

Hence, it is imperative for investors who directly invest their money in equities to be aware of the macroeconomic picture.

Although it may require a bit of number crunching, it will help you in your goal of wealth creation