A company operates in a dynamic global environment which affects it’s operations. It may be positive or negative, temporary or permanent and recoverable or non-recoverable.
In this article we will explain you, how to analyse the effect of macro-economic changes on your investments.
Firstly, you must understand that the macro-economic factors are external to the company and are beyond it’s control to a great extent.These changes in the past have made some companies from rags to riches, for instance HEG and Graphite India. But some have done the exact opposite; Essar Steel and Bhushan Steel.
So the question is how to analyse?
To make things easier, we have given a step by step procedure.
1.) Find out the macro-economic event.
Firstly, you must read and find out what is going to change or trigger an event. A macro-economic event doesn’t happen in a day, it takes a lot of time to build up and then becomes a reality. You must read newspapers on daily basis. It has been observed that till the date the event has not occurred there are small snippets in the newspapers regarding the story, which is generally ignored by the masses. These little snippets carry a lot of importance as they are the future headlines. Secondly, if the frequency of the topic is increasing in the news articles and media, then it is a clear sign that something is cooking up, and will take shape very soon. Sometimes, renowned persons give some hint about the event in their messages, tweets and social appearances. Once you get a hint of it, Google it to find out everything related to it.
2.) Look for the cause
Everything happens for a reason, and is true for economic events too. Here, you have to find you what is the cause behind it, clear knowledge of the cause will assist you in measuring the impact. There is no smoke without fire. Rupee depreciation had several causes behind it, like rising crude oil prices, continuous selling of securities by FII’s during, rising inflation, widening current account deficit, etc. all this was happened for around 6 months before rupee saw a sharp decline. This reflects the importance of the cause for the event. It all happens around us, but we never give it the importance it deserves.
3.) Analyse the Event
This is the most important part in the analysis. Once you know the cause, start connecting the dots. A good investor should think two steps forward and not just one. Once you know the event think about its effect on the economy as whole, and then its effect on your stock. How will the event affect your stock’s top line (revenue) and bottom line (profit). Go through the company’s conference call minutes and notices to find out the effect on the company’s operations. Find out the relations between the product sold by the company and the event. For example: Electric Vehicle Revolution will create a spurt in the demand of batteries, thus companies dealing in batteries have seen their share prices skyrocketing. (Amara Raja Batteries)
4. ) Time frame
There may be a huge benefit to a company from a particular event, but if the event is short lived then the gain may be temporary. For example; Rupee depreciation, it is a temporary event that may affect the company’s results for some quarters but not more. Look out for matters to ascertain that whether the change is tenable or not. If the event is occurring because of the strong determination of governments and authorities, then the event is likely to have a long term impact. Further, if there are time frames attached to the event, then there is a high probability that it will be there for quite a some time. However, some global turbulence and natural disasters are short lived and may not affect the business in the long term. For instance, Recent floods in Kerala have lead to an exorbitant rise in rubber prices, which is a basic raw material for tyre companies. Hence, Tyre stocks have fallen miserably in the past few weeks. But, is it permanent? The answer is no and provides a decent opportunity for long term investments in tyre companies.
5.) Monitoring the event
In a constantly evolving market, nothing is permanent. If you are bang on some event, then monitor it closely, a miss of any small news of the event can cost you heaven. Regularly update yourself about the event, if you see any reversal in the course, then unwind your position immediately. Don’t let your ego come in between. For instance, there was a big conception in 2010 that Congress will not return, many investors were bearish on the market because of the fear of hung parliament but nobody was sure with 100% conviction. Proving, everybody wrong Congress returned with a majority and bears saw their biggest nightmare. Thus, never bet big on any macro economic event without 100% conviction. Timely monitoring of updates will either give you conviction or will lead to a change of thought.
That marks the end our blog, we hope you enjoyed it and learnt some valuable lessons.
Guys, Do follow us on Facebook, Instagram and Snapchat for interesting market facts.
Do not hesitate to contact us for any clarification. We will be more than happy to hear from you.
You can email us on firstname.lastname@example.org
#Keep Investing #Stay informed