ECONOMIC ANALYSIS:
Economic
analysis occupies the first place in the financial analysis top down approach.
When the economy is having sustainable growth, then the industry group
(Sectors) and companies will get benefit and grow faster. The analysis of
macroeconomic environment is essential to understand the behavior of the stock
prices. The commonly analysed macro economic factors are as follows.
Gross domestic product
(GDP): GDP indicates the rate of growth of the
economy. GDP represents the value of all the goods and services produced
by a country in one year. The higher the growth rate is more favourable to the
share market.
Savings and investment: The economic growth results in substantial amount of domestic savings.
Stock market is a channel through which the savings of the investors are made
available to the industries. The savings and investment pattern of the public
affect stock market.
Inflation: Along with the growth of GDP, if the inflation rate also
increases, then the real rate of growth would be very little. The
decreasing inflation is good for corporate sector. Interest rates: The
interest rate affects the cost of financing to the firms. A decrease in interest
rate implies lower cost of finance for firms and more profitability.
Budget: Budget is the annual financial statement of the government, which
deals with expected revenues and expenditures. A deficit budget may lead
to high rate of inflation and adversely affect the cost of production. Surplus
budget may result in deflation. Hence, balanced budget is highly favourable to
the stock market.
The tax structure: The tax structure which provides incentives for savings and
investments. The balance of payment: The balance of payment is the
systematic record of all money transfer between India and the rest of
the world. The difference between receipts and payments may be surplus or
deficit. If the deficit increases, the rupee may depreciate against other
currencies. This would affect the industries, which are dealing with foreign
exchange.
Monsoon and agriculture: India is primarily an agricultural country. The importance of agricultural
in Indian economy is evident. Agriculture is directly and indirectly linked
with the industries. For example, Sugar, Textile and Food processing industries
depend upon agriculture for raw material. Fertilizer and Tractor industries are
supplying input to the agriculture. A good monsoon leads better harvesting;
this in turn improves the performance of Indian economy.
Infrastructure: Infrastructure facilities are essential for growth of Industrial
and agricultural sector. Infrastructure facilities include transport,
energy, banking and communication. In India even though Infrastructure
facilities have been developed, still they are not adequate.
Demographic factors: The demographic data provides details about the population by age,
occupation, literacy and geographic location. This is needed to forecast
the demand for the consumer goods.
Political stability: A stable political system would also be necessary for a good
performance of the economy. Political uncertainties and adverse change
in government policy affect the industrial growth.
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