InvestorQ : Can you explain how the top-down approach is actually applied?
Moii Chavate made post

Can you explain how the top-down approach is actually applied?

Priyanka N answered.
3 years ago

In a top-down approach, you essentially adopt an EIC (Economy, Industry, and Company) approach to investing. E refers to the Economy and you first take a call on whether the domestic and global economic scenario is conducive for investment. Once the Economy condition is satisfied then you assess the” I”, which represents the Industry in which the company operates. This is also referred to as the Sector in which the company operates. You look at factors like how the industry is growing, what are the input costs, what are the output price trends, entry barriers in the industry etc.

Once the investor is convinced that the strengths and opportunities outweigh the threats and weaknesses of the industry, then you move to the last step. C refers to the specific company where you propose to invest and that which has passed the Economy and Industry test. Here you look at the financial and non-financial aspects of the specific company. Then you drill down to financials like profitability, solvency, liquidity, efficiency, valuations etc. It is based on this EIC approach that the top-down approach is implemented.