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Macroeconomic Factors

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Economics is the social science that deals with the production, distribution, and consumption of goods and services, or the material welfare of humankind.

Companies and businesses thus are closely linked to the Economy for making profits.

When we are investing in companies, as investors, we need to keep in mind the economic environment, both globally, nationally and locally.

Types of Economics

Economics is a very large subject and contains many dimensions.

Broadly speaking, there are two type of economics that we need to study:

  1. Macro Economics
  2. Micro Economics

What is Macro Economics?

makro = large

Macroeconomics is the branch of Economics that deals with the performance, structure, behavior, and decision-making of an economy as a whole.

Macroeconomics analyzes the entire economy (meaning aggregated production, consumption, savings, and investment) and issues affecting it, including unemployment of resources (labour, capital, and land), inflation, economic growth, and the public policies that address these issues (monetary, fiscal, and other policies).

Macro Economic factors are those factors that are generally outside the scope and influence of individual companies.

A Research Analyst has to constantly keep a tab on various macro economic factors such as:

  1. Gross Domestic Product (GDP)
  2. National income, Inflation, Interest rate and Unemployment rate
  3. Change in prices of various essential and non-essential commodities
  4. Fiscal and Monetary Policies and their impact on the economy
  5. Flows from Foreign Direct Investment (FDI) and Foreign Portfolio Investors (FPIs)
  6. Savings and investment patterns
  7. Global factors that impact the GDP growth based on export and import transactions
  8. Macroeconomic policies such as Monetary policy, fiscal policy etc

Sources of data for Macro-economic research

  1. Government statistics
  2. Reserve Bank of India
  3. International Monetary Fund (IMF), Asian Development Bank (ADB) and other Global Development Financial Institutions
  4. Industry-specific journals and publications may be used to collect information on industries/sectors

Rule 35: Invest in a company when macro factors support the company / industry

Now that we have a broad understanding on Macroeconomics, let us focus on our new rule:

Rule #35: Rule #35: Invest in a company when macro factors support the company / industry

We already know that factors, news and information that is outside the purview of the company are called Macro factors

When investing in a company, we need to see that the company, its sector as well as the economy in general show be supporting.

It is not wise to invest in a company when the economy is not encouraging.

Further, it will not make sense to invest in sectors / companies when they are not in a supportive macro environment.

Example 1: Demonitization of Currency

Indian Government demonitized old Rs. 500 and Rs 1000 currency notes to weed out black money (Nov 2016)

Sectors such as Realty and Jewellery use a mix of white and black money in their businesses.

Hence, it is wise of us to stay away from sectors.

Delta Corp is a listed company that runs a luxary casino at Goa. Casinos run on large money and need higher denomination currency. Hence, expect the company to report less revenue in the next quarter.

Other sectors who might report lower revenues are Hotels, fashion and luxary / lifestyle goods etc. where large amount of cash would be used.

On the brighter part of it, companies into digital currency, payment gateway and online transaction management companies will get increased revenues.

Example 2: Supreme Court makes Toll-free

The DND flyway connecting Delhi and neighbouring Noida was made toll free for commuters by the Supreme Court.

Noida Toll Bridge is the company that was involved in construction and maintenance of the tollway and in is allowed to collect toll fee. However, with the Supreme Court ruling, almost 80% of the income will now see a dent.

Example 3: War-tensions between North Korea and US

In August / September 2017, tensions arose between USA and North Korea with both the countries and few of their allies (such as South Korea and Japan) increasing their miliary watch and testing of their arsenel.

Tensions between the two countries has lead to a fall in global stock markets.

The Indian stock markets that are already expensive at the time (Nifty PE is at around 24 and 25 levels) took sharp cuts with Nifty falling by over 100 points and Sensex by over 300 points.

This fall is the single biggest fall in near to 10 months.

Other Examples

  • Merging of several small indirect taxes into Goods and Services Tax (GST) (2017)
  • Reduce usage of coal and fossil fuels in favor of renewable energy for power generation (Positive for Suzlon Energy Limited and negative for Coal India Limited) (2017)
  • Moving towards electricity powered vehicles (Positive for automobile companies such as Ashok Leyland Limited and power-storage and battery companies such as HBL Power Systems Limited) (Sep 2017)
  • Move towards Electronic Payments and E-Governance (Positive for card-swipe machine makers such as TVS Electronics Limited)

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