Financial institutions or fund management companies often engage analysts or investment
experts to carry out intensive analysis to achieve better returns for their investment
portfolios. Economic and sectoral analysis form part and parcel of their analysis
to ensure effective investment decisions and greater returns.
For a fund manager, picking up stocks from a total of more than 550 counters in
the local stock market is certainly not an easy task. Most fund managers conduct
some fundamental analysis in attempting to identify stocks with attractive values.
Just how important is economic and sectoral analysis in selecting individual stocks
for your investment portfolio? Normandy Research believes that both are important
for effective stocks valuation.
Economic analysis is important as stock markets generally tend to perform better
in periods of economic upturn. There is a positive relationship between good economic
performance and strong stock prices. Fund managers are more likely to invest in markets
which show economic progress or positive fundamentals.
Determine the outlook for the domestic economy by analysing important economic
variables such as interest rates cycle and inflation. Stock analysts in a fundamental-driven
market are constantly looking for signs of inflation. Any increase in inflation is
likely to be detrimental to stock investments. Rising inflation means rising interest
rates which will likely depress stock prices.
Inflation tends to peak when the economy grows too strongly or have reached its
peak. An extremely strong-growing economy will likely cause "overheating"
problems and drive away investors from the stock market. Low interest rate environment
usually occur when the economy slows to the extent that it has touched the bottom
or is in the troughs.
But, slowing economy will also dampen stock prices as investors are likely to
express concerns about issues such as lower corporate earnings and dividends.
In general, see whether the economic condition is favourable or unfavourable for
stocks. Here "stocks" referred to are fundamental-driven issues such as
blue chips or fundamentally sound stocks in the main board and not highly-speculative
issues in the Second Board.
On the other hand, in analysing the prospects for a particular business sector,
analysts will normally ask questions concerning the overall health of the sector
like: Is the company in the birth, growth, maturity or declining phase of the industry?
Is the industry subject to any new regulations imposed by the government? Are industry
production costs rising more slowly or rapidly than the domestic inflation rate?