Basic economic fundamentals every investor should keep track of..
Daily we are fed with so much news, views and ideas on markets and economy via news Channels, Newspapers or the Broker/Bank channels that we get confused and our eyes pop out. Though we made our investment plan for the long term but due to all the confusion we panic in the short term and dump our plan. We rightfully forget that we are investors and not traders.
I have come across this type of confusion with lot of my clients and I have spent long time in teaching them to filter the incoming news and views.
So we come to our main question, How to filter all the news?? What to keep track of??
Many a times you would have noticed that any movement in the stock market in the short term is mostly unexplained by lot many experts because in short term it’s the fear or the sentiment which works. Its something like in short term the heart thinks and in long terms the brain. That’s the reason why we advise that the investment plan should be properly diversified across asset classes, as it will help in lower volatility in the plan.
For an Investor its compulsory that he understands and track some key fundamentals of the markets, which will help him cool down during high volatility (as is expected in the near future)
So what are these key fundamentals??
Keep a check on the inflation numbers: I will not go into detail as to what is inflation but we should know that its an index of some important goods with different weight attached and calculated taking into consideration the base year. So ideally it means that if the price for any particular good with higher weight age increases then it will have an adverse affect on inflation.
Check out the article on what is inflation published in The Hindu.
Ideally each growing economy will have a bit higher inflation which if increased further might lead to overheating and the economy might collapse. What we should take note of is the way inflation is moving and the measures being taken by RBI which will have adverse effect on it.
My next point focuses on these measures. Here we should understand that if any of the below said rates are increased it will help in checking inflation but will also have adverse effects on the companies and various industries as they mostly borrow from banks and indirectly it will have adverse affect on our investment plan returns.
Repo rate: It is the rate at which RBI lends short-term money to banks. If the repo rate is increased it means that banks will think twice before borrowing from RBI and instead they will try to use their own funds thus restricting the money supply to the market, which might bring in inflation
Reverse Repo: It’s the opposite of repo rate. It is the rate at which banks park their short-term excess liquidity with the RBI. So what does it mean is that if this rate is increased the RBI is trying to suck the excess liquidity in the market as banks will be tempted by the higher rate and park funds with RBI.
CRR: Also known, as Cash reserve ratio is the amount the banks have to always maintain with RBI, which is a percentage of the total time and demand liabilities of the bank. Say for example the banks total time and demand liabilities is Rs 100 and CRR is Rs 7 then bank has to maintain Rs 7 with RBI and the rest it can lend at the lending rates.
If the CRR is increased it means that RBI is trying to control the liquidity in the market as by doing so banks will not be able to lend all of their money. This might lead to higher loan rates and the companies who operate on loans will have a hit though it might control inflation, as liquidity will be sucked.
Understand where the economy is headed: It’s very important for an Investor to understand whether the economy will maintain the same pace as last year or grow more than that. Analyze all the news and opinions from various agencies on their projection on our economy and their views on the GDP.
GDP: GDP or Gross domestic product shows the output of the economy. If its growing it means that businesses are expanding, consumer spending is increasing, more jobs are being created and income is increasing which all leads to strong economy & market and in the long run strong investment plan returns.
Consumer spending: Keep a tab on the data on consumer spending as more spending means more goods to be produced which means more production and higher returns from the economy.
Income / Salaries: Increasing income/salaries indicate that more and more people will have higher disposable income which might hit the market.
Understanding the World market: Just keep a tab on the happenings in the world markets and tracking indexes like Nikkei, Dow, Nasdaq, FTSE and asian indices like hangseng as all the markets have become interlinked to some extent. If there is a fall in an international market and our market doesn’t have any support factor then it might come down too. We can keep a tag on the international news & views from international news site like Reuters.com or bloomberg.com.
Understanding the Currency movement: Rupee is appreciating to dollar what this means is that the market is looking attractive to the FIIs as they will get the returns from the growing economy as well as the currency.
Check out my article on the appreciating rupee- reasons and impact
Understanding the FII and FDI inflow: These inflows will indicate the confidence of the world in our economy. The day these inflows reduce the markets too will fall as we have very little domestic support due to poor number of domestic citizens investing into the markets.
In the end I would like to add that the short-term volatility should not bother us and we should look for opportunities where we can make long-term profits. If your investment plan is proper stick to it and don’t panic.
Lets Invest & Keep Reading...
I have come across this type of confusion with lot of my clients and I have spent long time in teaching them to filter the incoming news and views.
So we come to our main question, How to filter all the news?? What to keep track of??
Many a times you would have noticed that any movement in the stock market in the short term is mostly unexplained by lot many experts because in short term it’s the fear or the sentiment which works. Its something like in short term the heart thinks and in long terms the brain. That’s the reason why we advise that the investment plan should be properly diversified across asset classes, as it will help in lower volatility in the plan.
For an Investor its compulsory that he understands and track some key fundamentals of the markets, which will help him cool down during high volatility (as is expected in the near future)
So what are these key fundamentals??
Keep a check on the inflation numbers: I will not go into detail as to what is inflation but we should know that its an index of some important goods with different weight attached and calculated taking into consideration the base year. So ideally it means that if the price for any particular good with higher weight age increases then it will have an adverse affect on inflation.
Check out the article on what is inflation published in The Hindu.
Ideally each growing economy will have a bit higher inflation which if increased further might lead to overheating and the economy might collapse. What we should take note of is the way inflation is moving and the measures being taken by RBI which will have adverse effect on it.
My next point focuses on these measures. Here we should understand that if any of the below said rates are increased it will help in checking inflation but will also have adverse effects on the companies and various industries as they mostly borrow from banks and indirectly it will have adverse affect on our investment plan returns.
Repo rate: It is the rate at which RBI lends short-term money to banks. If the repo rate is increased it means that banks will think twice before borrowing from RBI and instead they will try to use their own funds thus restricting the money supply to the market, which might bring in inflation
Reverse Repo: It’s the opposite of repo rate. It is the rate at which banks park their short-term excess liquidity with the RBI. So what does it mean is that if this rate is increased the RBI is trying to suck the excess liquidity in the market as banks will be tempted by the higher rate and park funds with RBI.
CRR: Also known, as Cash reserve ratio is the amount the banks have to always maintain with RBI, which is a percentage of the total time and demand liabilities of the bank. Say for example the banks total time and demand liabilities is Rs 100 and CRR is Rs 7 then bank has to maintain Rs 7 with RBI and the rest it can lend at the lending rates.
If the CRR is increased it means that RBI is trying to control the liquidity in the market as by doing so banks will not be able to lend all of their money. This might lead to higher loan rates and the companies who operate on loans will have a hit though it might control inflation, as liquidity will be sucked.
Understand where the economy is headed: It’s very important for an Investor to understand whether the economy will maintain the same pace as last year or grow more than that. Analyze all the news and opinions from various agencies on their projection on our economy and their views on the GDP.
GDP: GDP or Gross domestic product shows the output of the economy. If its growing it means that businesses are expanding, consumer spending is increasing, more jobs are being created and income is increasing which all leads to strong economy & market and in the long run strong investment plan returns.
Consumer spending: Keep a tab on the data on consumer spending as more spending means more goods to be produced which means more production and higher returns from the economy.
Income / Salaries: Increasing income/salaries indicate that more and more people will have higher disposable income which might hit the market.
Understanding the World market: Just keep a tab on the happenings in the world markets and tracking indexes like Nikkei, Dow, Nasdaq, FTSE and asian indices like hangseng as all the markets have become interlinked to some extent. If there is a fall in an international market and our market doesn’t have any support factor then it might come down too. We can keep a tag on the international news & views from international news site like Reuters.com or bloomberg.com.
Understanding the Currency movement: Rupee is appreciating to dollar what this means is that the market is looking attractive to the FIIs as they will get the returns from the growing economy as well as the currency.
Check out my article on the appreciating rupee- reasons and impact
Understanding the FII and FDI inflow: These inflows will indicate the confidence of the world in our economy. The day these inflows reduce the markets too will fall as we have very little domestic support due to poor number of domestic citizens investing into the markets.
In the end I would like to add that the short-term volatility should not bother us and we should look for opportunities where we can make long-term profits. If your investment plan is proper stick to it and don’t panic.
Lets Invest & Keep Reading...
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