Macro-Economic Indicators and Challenges in using it for Investment Portfolio

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Stock market is driven by Earnings and Change in how investors are willing to pay for those earnings

Quite a few times we hear or read following sentences in financial media –

“India’s GDP growth slows down to 6.6% in December quarter, fails to meet expectations”

“S&P expects RBI to cut rates on falling inflation”

Often one wonders how these things affect my investment portfolio.

We need to understand that capital market is integral to the overall economic activity. For this reason, most of the major macroeconomic indicators are very important pieces of data for the outlook of the market.

PERCEIVED IMPACT

GDP is a primary indicator of an economy’s overall health. So, when business sectors report an increase in earnings and production, the economy will reflect a positive movement in the GDP and vice-a-versa. Stock market is driven by Earnings and Change in how investors are willing to pay for those earnings. When GDP is rising, market participant extrapolates good performance and assume that economy will do good till eternity. This usually leads to extreme exuberance and ultimately leads to bubble.

Inflation is a situation of consistently rising prices in the economy. Although inflation up to a certain level is considered desirable for growth of the economy, above certain level it becomes a Curse. Inflation higher than desired level leads to higher interest rates which in turn hampers companies’ earnings as their cost of borrowing increases.

CHALLENGES

Although Macro-economic indicators can provide broader framework to better understand the economy and in-turn company’s performance, there are quite a few challenges in actual utilization.

  • These indicators are pieces of ever evolving puzzle and one needs to think of these data points from various aspects for better understanding of this puzzle.
  • Different Macro indicators can at times provide contradictory signals about economy.
  • Indicators can be leading or lagging, hence understanding leading-lagging effect also poses challenge.
  • Often there is series change or methodology change which makes use of this data even more difficult
  • Impact of Macro indicators on particular sector needs more in-depth understanding and skill.
  • To comprehend interrelations of a single country’s Macro indicators with those of other economies is another challenge.

To conclude, Macro Indicators are definitely useful piece of information which can provide substantial understanding of economy, sector in which one needs to invest.

But it is equally important to have someone who understands this and has experience in solving this puzzle.

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