Market pulse

Authored by Shrey Jain, Founder and CEO of SAS Online

Market participants react quickly to economic news, impacting stock prices. Keeping track of macroeconomic indicators helps optimise stock portfolios for better returns.Globally the market participants are seen reacting to information very fast. A positive news update about the economic growth of a country can send stock prices surging whereas negative news around it can see a flight of capital. 

 

In this process prices of a lot of stocks change, impacting the portfolios of many investors. Here is how one should look at these macroeconomic indicators:

GDP Growth

Investors want to benefit from the rising economic activity. Growth in the gross domestic product (GDP) of a country attracts investors. As more investors chase stocks, the stock prices tend to go up. 

India is going through the phase of GDP growth when many countries the world over are facing challenges to maintain growth or grow. The Reserve Bank of India (RBI) has projected the real GDP growth at 7 percent for FY 2024-2025, in the last review of the monetary policy in FY 2023-2024. This should make more investors allocate money to stocks, other things remaining the same.

Inflation

Rising GDP typically elevates inflation. Moderate inflation indicates a healthy economy. An increase in prices in general can loosely be termed as inflation. However, extremely high inflation can severely impact an economy. High prices tend to adversely impact demand in the economy and in turn, pull down corporate earnings. Extremely high inflation impacts stock prices in general.
In India, inflation is within the permissible range of 2-6 per cent set by the Reserve Bank of India. 

Exchange rates

Aside from these domestic macroeconomic factors, investors also need to take into account exchange rates. When the US dollar strengthens, funds flow from emerging markets to the US. The opposite is also correct. Since May 2022, when the US Federal Reserve kept hiking interest rates, there has been a relative preference among global investors to invest in the US by pulling out money from emerging markets. 

Keep track of macroeconomic indicators

It has been observed that positional traders trade into stocks, stock indices and commodities looking at the news flow around macroeconomic indicators. Investors also need to look at specific factors. For example, persistently high crude oil prices can have a negative impact on the Indian economy. There are also high-frequency indicators such as power consumption, GST collections, and UPI payments which also indicate the overall health of the economy. 

Traders and investors can consider investing in select stocks by looking at the aforementioned macroeconomic indicators. For example, in an expanding economy, with comfortable liquidity and rising investor participation, a trader may want to focus on momentum stocks. 

All in all, it is vitally important to keep track of macroeconomic indicators to optimise returns on the stock portfolios. Top-down investors can design their portfolios and sectoral allocations using a macroeconomic setup. These indicators can not only help an investor participate in the upside but also send signals that can be of great help to avoid big drawdowns when there are more headwinds pushing stocks into volatile zones.

Article is also published in Mint - Click here