Skip to main content

Macro Economic Data and Its Importance

 

There's a reason why the market is obsessed with IIP, interest rates & inflation numbers. Read on to find out why


   FOREIGN institutional investors (FIIs), we are told, are shying away from Indian equities. Most headlines blame it on inflation and the fall in index of industrial production (IIP). However, there is no denying that the market is in doldrums, which brings forth the importance of economic indicators in the investment landscape. To be sure, the market may defy the underlying fundamentals in the short term, but it moves in sync with the economy in the long run. That makes a strong case for long-term investors to keep track of some of the key economic indicators. That means apart from gleaning the industry and company news, investors should also devote more time to some numbers that impact the fate of the stock market. Here are a few data points that you should always keep an eye on:

GDP Growth:

This is an all-time favourite of analysts. Simply put, the gross domestic product (GDP) of a nation captures the value of all the goods and services produced in that country in a given year. It comprises consumption, gross investments, government expenditure and net exports (exports minus imports). In simple words, it is a measure of the economic activity in a country. The GDP growth rate indicates the pace at which a country's economy is growing. For example, at a time when the world, especially the developed world, is experiencing anaemic growth of 1-2% year-on-year, the domestic economy is growing at an impressive rate of 8%. India is next only to China, which has clocked a double-digit growth rate. The Reserve Bank of India's (RBI) third quarter review of the macroeconomic and monetary scenario published on January 25, 2011 expects the Indian economy to grow at 8.5% in 2010-11.


   But how does it affect you as an investor? Nominal GDP growth has a strong positive correlation with corporate earnings. This means that when the economy grows as a whole, companies will also witness soaring profits. GDP elasticity to corporate earnings in India stands around 1.25%. In other words, for every 100 basis points rise in GDP growth rate, the rate of growth in corporate earnings rises on an average 125 basis points (one percent comprises 100 basis points).


   No wonder, global investors tracks this parameter very closely. Investors investing across the world watch this macroeconomic variable first before committing any money to a country. Needless to say, if India maintains the rate of growth of GDP over the next decade, it can expect to become a superpower. And the best way to participate in the growth story is to own Indian equities with a long-term view.

Inflation:

A lot of noise is made over inflation these days. Inflation – a rise in the general price level — is an obvious outcome of economic growth. Inflation numbers offer cues about emerging trends in the economy to the investing community. Inflation eats into the purchasing power of individuals and brings down consumption.


   As inflation rises, the interest rates also rise. High interest rates push up the cost of funds for companies and pull down profitability. They also affect the demand for housing and discretionary spends funded by loans. In short, high inflation is not conducive to both economic growth and equity and debt investments. Bond investors don't particularly like the phenomenon of rising inflation. As interest rates rise along with inflation, prices of long-term bonds fall, making bond investors lose their money. In the year to January 15, 2011, the food price index rose 15.57% and the fuel price index climbed 10.87%, according to the latest government data. Food inflation is expected to cool off as rabi crops arrive in the market. Though food inflation is expected to fall, investors should watch out for crude prices. Crude oil comprises a huge chunk of Indian imports and if the prices cross the $100-mark per barrel, it can trigger higher inflation in the economy.

10-Year Yield & Yield Curve:

You normally hear this one from debt fund managers and treasury heads of banks. The debt market tracks the yield at which the 10-year government bond trades. It represents the long-term cost of funds prevailing in the market. Some investors look at the benchmark yields to take cues about valuations in equity markets. In classical thinking, a reciprocal of the bond yield should be the price-to earnings (P/E) ratio of equity index. Put simply, if you divide 100 by the bond yield, you will arrive at a number which should be the index P/E. For example, if the benchmark bond yield is quoting at 8% (100 divided by 8), the Nifty index should quote at 12 times the trailing 12 months' earnings. As the yields fall, the market offers higher valuations multiple and vice versa.


   The yield curve comprises the rate of interest payable for borrowing for various tenures — say, from one year to 30 years — by the government. Other things remaining the same, a flat yield curve — when there's not much difference between short-term and long-term interest rates — connotes expectations of a moderate slowdown in the growth in the near future whereas a steep yield curve — low interest rates for short-term and high interest rates for long term borrowings – indicates high expected economic growth.

Index of Industrial Production:

This one captures the status of production in the industrial sector for a given period of time compared to a reference period of time. But many analysts do not consider it to be a good indicator, given the structural issues. Capital goods, a component of IIP, is experiencing extreme volatility and offering a distorted picture for IIP.

Some Other Indicators:

There are many analysts who prefer to look at auto sales numbers. Passenger car sales connote the strength of the 'consumption story' whereas the commercial vehicles sales reflect 'economic growth'. An ear-to-the-ground indicator for the auto industry is the waiting time for the buyer of a car before the car is delivered to him.


   The new phone connections data each month talks about the communication revolution in India, leading to opening of new opportunities. Bank credit growth is one more parameter that analysts follow. Higher credit growth indicates a prospering economy. Cement despatches are tracked by analysts to understand the trends in infrastructure.

Data Sources:

Getting the relevant information has become much easier with the advent of internet. RBI's macroeconomic review can be found on its website. The website of the ministry of statistics and programme implementation is also a data treasure. The Clearing Corporation of India also comes out with useful data points about the fixed income market. Industry bodies such as the Society of Indian Automobile Manufacturers (SIAM), Cement Manufacturers' Association (CMA) and Cellular Operators Association of India (COAI) also offer good data points.

A Word Of Caution:

However, never follow these indicators blindly. Investors must understand the seasonal issues that crop up while interpreting the numbers. For example, El Nino — a climatic phenomenon — impacted agricultural output across the world, including India. It was reflected in rising food inflation numbers. One has to look at the base while interpreting the indicator. Again, looking at the number in isolation can lead to incorrect decisions. Keep them at the back of your mind while taking broad calls, but it will be wiser to look at them closely before committing money on specific bets.

 

Popular posts from this blog

ICICI Prudential Dynamic Plan Invest Online

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   ICICI Prudential Dynamic Plan             Invest Online This fund does remarkably well during falling markets, but fails to show the same prowess during a rising market. The fund sticks to its mandate to adapt to the dynamic nature of the market by shuttling between debt and equity. It takes aggressive asset calls in equity when the market surges by investing in quality mid-cap stocks. At the same time, it adopts a defensive strategy by investing in debt and cash when markets get overvalued, making it a good long-term choice.     For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call     Leave a missed Call on 94 8300 8300   Leave your comment with mail ID and we will ...

Understanding Your Cibil Credit Information Report

   WE ARE all familiar with the anxiety and uncertainty that we feel when applying for a loan. After all, it's the lender who decides whether we can own our dream home, our first car, or whether our children can pursue higher education. In a nutshell, a better life depends on the lender's decisions.    While other factors do play a part in the lender's decision, the Cibil Credit Information Report ( CIR ) plays a crucial role in a lender's decision to approve a loan application.    Previously, lenders would treat all loan seekers equally. Each applicant, if approved by the lender's internal credit policy, would be charged at the same interest rate for a particular loan size and purpose. The lenders would charge a higher interest rate to all the borrowers, in order to compensate for the possible default of a small portion of the loan disbursed. In other words, it's like a professor (the lender) punishing an entire class (borrowers) for the mischief played b...

Financial Planner - Do Integrity & Dependability Check

How does one can find value proposition when it comes to financial planning, which is a new area? There is nothing to benchmark it with. So, how does one figure what is the right fee to pay? Look at what you want. You probably want to hire a financial planner to get a blueprint for your life ahead and want to know how to achieve your goals. For creating a tailor-made financial plan, our experience is that it takes 25-30 man-hours in all. Taking an average of Rs 500 per hour for hiring the services of a qualified financial planner like one who has a CFP(CM) certificate, the fee would come to Rs 12,500 to Rs 15,000. But the per-hour rate can be higher or lower depending on the process adopted, the experience and expertise of the planner, etc. That's how planners arrive at their fee. Now, is that value for money? For that you need to find out what benefits you would derive by engaging them. The financial plan will give you clarity, direction and pathway to achieve your goals. Th...

About CRISIL IPO Grading

CRISIL IPO (Initial Public Offering) Grading is an opinion on the fundamentals of the graded issue that reflects CRISIL's independence and expertise. This opinion is expressed as a relative assessment in relation to other listed equity securities in India. The assessment is based on a grading exercise carried out by industry specialists from CRISIL Research. A CRISIL IPO Grade 5/5 indicates strong fundamentals and a CRISIL IPO Grade 1/5 indicates poor fundamentals. CRISIL IPO Grading reflects its assessment of the graded company's equity fundamentals as distinct from an assessment of debt fundamentals. A CRISIL IPO Grade should not be construed to mean a comment on the price of the graded security nor is it a recommendation to invest or not to invest in the graded security. However, this grade is not an opinion on whether the issue price is appropriate in relation to the issue fundamentals. The grade is not a recommendation to buy / sell or hold the graded instrument, or a comm...

Mutual Fund Review: ING Dividend Yield

  ING Dividend Yield's small assets enable the fund manager to churn in impressive returns… Strategy The aim of the fund is to invest in stocks which offer a high dividend yield. This fund deploys a value based strategy which aims to gain from investing in fundamentally strong and free cash flow generating businesses. The scheme focuses not only on growth but also on the cash generated by the business, which mostly leads to stable returns even in volatile markets. This fund has a low volatility because of its investment in high yielding stocks. The scheme tries to include stocks that yield dividend above the dividend yield of the Nifty and stocks with liquidity, which throws up a universe of 150 stocks.   Our View Launched in October 2005, this fund invests at least 65 per cent of its assets in high dividend yield stocks. The fund has consistently maintained a mix of stocks across varying market capitalisation, with a higher tilt to mid caps compared to small caps. Howev...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now