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
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.