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No company operates in a vacuum. It is more likely for a company to perform well if the overall sector prospers. One must analyse the sectors' prospects as a favourable economic outlook is not necessarily a "blessing" for all the industries.

Different industries tend to show a different set of performance under the same economic environment. History have shown that stock prices in market-oriented economies have fallen during periods of economic expansion and rose sharply during periods when all the economic numbers were bad.

It has been forecasted that the Malaysian economy will likely experience a slower growth in 1997 after eight straight years of spectacular performance. The local interest rates have peaked and are expected to come down gradually later in the year.

The gradual diminishing impact of "overheating" economy which have beleaguered the local stock players for the past two years is more positive for the general stock market outlook.

Normally, the ability to accurately forecast economic progress in the medium-to-long term will more likely lead to attractive gains from investments. Investors who invest heavily on anticipation that there would be gradual economic expansion with low interest rates and inflation in the future are likely to obtain hefty gains from their stock investments if the predictions come true.

For economic analysis, massive amount of economic statistics and data such as the economic growth in real GDP, inflation indicator such as Consumer Price Index (CPI), unemployment data and so forth are available. It is important to interpret these slew of economic data carefully.

Economic and sectoral analysis is not an easy task. The best experts in this field have spent their professional lives perfecting their skills. Different experts interpret differently from a same set of economic data.

This article aims to give you, the investor, some simple insights of how to generate investment forecasts (in this case, the economic and sectoral analysis). As an investor, you need to know roughly whether the economy is growing slowly or rapidly.

In conclusion, it is rather "inappropriate" to say that the fortunes for companies are not linked in anyway to the overall economic and industrial conditions. The behaviour of individual stocks can be explained amongst other things by various variables such as interest rates, inflation, earnings and dividends.

 

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