News, statistics and graphs are everywhere. With the advancement of technology, it changes the way you consume news. Information is pushed to you every single day, whether you like it or not. And deep down, you know that there are some factors that have more impact than others. As an investor with limited time, what are the important macroeconomics factors needed to make your investment decision?
Here are the 3 key economic factors which you should look into, above the rest of the factors if you’re looking to invest i the Asian markets in 2017:
1. Economic Growth
Economic growth, often measured by the GDP growth, is an excellent indicator for the health of the economy. Not only it provides gleams on the outlook for an economy, a growing economy would usually translate into a better business outlook for companies, thus giving you the assurance of topline growth.
Diving deeper, you should be looking at the sectors which are contributing to the economic growth, hence investing in these sectors. As such, indicators such as Purchasing Managers’ Index (PMI), Retail Sales Index and Consumer Confidence Index serve as good leading indicators for manufacturing, retail and services sectors. Unlike GDP growth, these indicators are released on a frequent basis (often monthly), hence it allows you to adjust your investment strategy accordingly throughout the year.
It is also worth noting that market usually factor in their expectations (be it their own forecast or estimates by the analysts) before the release of the data. After which, they will adjust their portfolio if the results are not in line with their expectation. Hence, the market will not be volatile unless the news is significantly beyond estimation.
Besides looking into the country you are investing in, the economic health of the major trading partners is also important. This is especially so if the country relies heavily on exports. For instance, Singapore is highly affected by external demand and the current slowdown in global trade has beaten down Singapore’s GDP.
2. Formation of Bubble
A sector that is growing too fast may risks forming a bubble that will have crippling effects on the economy. An indication of a bubble can be seen through the rise in prices of goods within the sector, using price indices. It provides an insight of the demand (be it real demand or speculation), relative to the supply in the market.
For instance, the Subprime Mortgage Crisis of 2007 was brewing for years before the crisis. In the US, sales of a new home as well as home prices to income soared in the 1990s until early 2000s. This was indicative of high demand of houses during the period, which could be indicative of a formation of a bubble in the housing market.
Moreover, the fact that home prices rose faster than income in the early 2000s should have been an alarming sign to investors, shown by a home price to income ratio of greater than 100. The data simply suggested that people are buying houses that are way beyond what they can afford. These data imply that there are high credit risk mortgages, a huge time bomb waiting to be exploded.
Therefore, any bubble should never be underestimated given the interdependency of countries. This is especially so for major economies such as the US and China.
Yes, the bubble burst. And not only it affects the housing market, this bubble burst the financial sector, crippled the US economy and eventually affected the global economy.
3. Economic Policies
Investors should always be updated with the latest policies implemented as it will affect business conditions of companies. This will in turn affect their earnings and thus, affecting the stock prices. Sometimes, the change in policy is significant enough to affect the exchange rates.
It is not enough to consider just one country’s policies when making investment decisions. China, Japan, the US and the EU’s economic policies and direction are the things you should look out for as well. These policies include fiscal (how government plans to inject capital into the economy) and monetary (how central banks plans to adjust the country’s exchange rate and interest rate).
For instance, a rise in interest rate might not good news for the stock market. With the risk-free interest rate increasing, investors will now adjust their risk-return appetite which will cause funds to move out of the stock market and into other asset classes. The rise in interest rate would also affect interest rate sensitive sector such as REITs, thus the impact on the REITs sector’s stock price will be greater.
In addition, the rise in interest rates would also cause an appreciation of USD. This will, in turn, boost trade demand for the Asian markets.
With a rise in US interest rates, aside from the aforementioned effects, there will also be an appreciation in the US Dollars, which in turn benefit the Asian markets. This is because the policy signals that the US economy has been performing well and along with a stronger US Dollars, trade with Asian markets will be boosted. This is with the assumption that Trump’s presidency would not bring about any negative effects on the Asia-Pacific region.
In conclusion, these are the 3 most important factors to take note of before investing. You should continue to monitor the changes in these factors when you are in an open position.