Why investors should keep track of macroeconomic indicators - explained
Market participants react quickly to economic news, impacting stock prices. Keeping track of macroeconomic indicators helps optimise stock portfolios for better returns.
Globally the market participants are seen reacting to information very fast.
A positive news update about the economic growth of a country can send stock prices surging whereas negative news around it can see a flight of capital.
In this process prices of a lot of stocks change, impacting the portfolios of many investors.
Here is how one should look at these macroeconomic indicators:
GDP growth
Investors want to benefit from the rising economic activity.
Growth in the gross domestic product (GDP) of a country attracts investors.
As more investors chase stocks, the stock prices tend to go up.
India is going through the phase of GDP growth when many countries the world over are facing challenges to maintain growth or grow.
The Reserve Bank of India (RBI) has projected the real GDP growth at 7 per cent for FY2024-2025, in the last review of the monetary policy in FY2023-2024.
This should make more investors allocate money to stocks, other things remaining the same.
Inflation
Rising GDP typically elevates inflation. Moderate inflation indicates a healthy economy.
An increase in prices in general can loosely be termed as inflation. However, extremely high inflation can severely impact an economy.
High prices tend to adversely impact demand in the economy and in turn, pull down corporate earnings.
Extremely high inflation impacts stock prices in general.
In India, inflation is within the permissible range of 2-6 per cent set by the Reserve Bank of India.
This is another reason why there is buoyant sentiment in the Indian markets.
Sometimes traders wonder why the stock markets go up when inflation is higher than the previous month.
This sometimes can be attributable to better-than-expected inflation numbers.
While trading, market participants need to factor in how much expectations are already built into the market prices.
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Interest rates
Striking a balance between rising economic growth and containing inflation is a dual objective of the monetary policy of most central banks in the world.
One of the key weapons in their arsenal is interest rates.
When interest rates are hiked it tends to pull down the demand for goods and services, and thereby corporate earnings.
The consequence of high interest costs is lower corporate profits. These put together adversely impact stock prices.
Exchange rates
Aside from these domestic macroeconomic factors, investors also need to take into account exchange rates.
When the US dollar strengthens, funds flow from emerging markets to the US.
The opposite is also correct.
Since May 2022, when the US Federal Reserve kept hiking interest rates, there has been a relative preference among global investors to invest in the US by pulling out money from emerging markets.
Indian stock markets were also impacted in CY2022. However, consistent economic growth attracted investors to the Indian markets in CY2023.
Keep track of macroeconomic indicators
It has been observed that positional traders trade into stocks, stock indices and commodities looking at the news flow around macroeconomic indicators.
Investors also need to look at specific factors. For example, persistently high crude oil prices can have a negative impact on the Indian economy.
There are also high-frequency indicators such as power consumption, GST collections, and UPI payments which also indicate the overall health of the economy.
Traders and investors can consider investing in select stocks by looking at the aforementioned macroeconomic indicators.
For example, in an expanding economy, with comfortable liquidity and rising investor participation, a trader may want to focus on momentum stocks.
But when an economy is recovering from a trough, investors may want to stay with upward-trending value stocks in the transitory phase.
In low-interest rates and low growth phases, investors prefer to stick to quality stocks.
All in all, it is vitally important to keep track of macroeconomic indicators to optimise returns on the stock portfolios.
Top-down investors can design their portfolios and sectoral allocations using a macroeconomic setup.
These indicators can not only help an investor participate in the upside but also send signals that can be of great help to avoid big drawdowns when there are more headwinds pushing stocks into volatile zones.
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(The author is the founder & CEO of SAS Online – a deep discount stock broking platform)
Disclaimer: The views and recommendations above are those of the author, not of Mint. We advise investors to check with certified experts before making any investment decisions.
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