De-Coding the Macro Economic Factors Which may effect your Asset Class

Macro Economic Factors which are most important that would change your Portfolio :

Note : This Article is just to Provide the Students or Layman For Basic Ideas Of Macro – Economics .So Kindly Dont Dump Formulaes
If a country produced goods And Services worth Rs.100 trillion And the Value Rose to Rs.108 trillion then the country has registered 8% growth for year in GDP.During a recession, growth in sales, production and employment slows down. This affects the performance of companies and therefore equity investments. During expansion, growth is significantly higher than trend rate. Overheating in the economy leads to an inflationary situation. Real estate prices and rentals see a boom as do commodities. Monetary actions,such as increasing interest rates, taken to cool the economy will have a negative impact on bond prices as also equity markets.

2. Inflation –> Rate at which the general level of prices for goods and services increases from one period to another. Inflation reduces purchasing power by reducing the quantity of goods that can be acquired for the same income. Inflation is measured using inflation price indices such as the Wholesale Price Index (WPI) and Consumer Price Index (CPI).High inflation reduces the real return on financial assets and forces investors to turn tohedges such as gold, commodities or real estate.

3. Government Finance –>Government spending has a positive impact on growth provided government deficits are within reasonable limits. An increase in expenditure without a matching rise in revenue collection can lead to large deficits, which are met through market borrowings. Governments may resort to spending or expansionary methods to boost economic growth, as it directly increases demands. A reduction in personal or corporate income tax affects aggregate demand by increasing the amount of income available for consumption or investment. An increase in consumption and demand indicates better revenues for businesses and equity markets respond positively to it. The gap between revenues and expenses, i.e. the (deficit,) is funded by the government through market borrowings. A high fiscal deficit has the effect of crowding out other borrowers, such as companies, from the market. Large government borrowings push up market yields. This affects the profitability of borrowers. The high interest cost burden will take a large chunk of revenues and leave very little for future capital formation. Equity markets will fall in response to expected fall in companies’ profitability and ability to expand operations. The higher yields in the market will pull down bond values. Interest-rate sensitive sectors will see a slow-down in activity.

4.Current Account Deficit –>The current account balance is the difference between total exports and total imports of goods and services. The difference between exports and imports of goods is known as trade balance. Emerging economies often run substantial current account deficits (CAD) because of their need to import commodities and other inputs for economic activity. A CAD means that the country is importing more from the rest of the world than it exports to it, so it is a net debtor of foreign currency. The CAD can be managed in two ways. One, foreign inflows on the capital account (such as foreign direct or portfolio investment) can offset the gap in net exports. Two, if capital inflows are insufficient the country’s forex reserves have to be run down by the central bank. India is a net importer of commodities so the CAD depends critically on the exchange rate of the rupee and world oil prices.

Source : Data From NSE Site

In Next article we will Discuss how to observe them and in which site and timing of markets.

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