InvestorQ : What are some of the macro economic factors that influence stock prices?
Arti Chavan made post

What are some of the macro economic factors that influence stock prices?

Dia Deshpande answered.
3 years ago

A key influencer of equity values are macro events. These macro events have varying impact on the equity values. Typically, it is not just the positive or negative value that influences the equity but the gap between expectation and reality. For example if the expectation of inflation was 3% and it comes out at 4% then stocks will react negatively. On the contrary, if the inflation expectation was 5%, but it comes in at 4.5% then stocks are likely to react positively. This may sound ironic but it is exactly how stocks react to macro data flows…

Institutional flows include flows from Foreign Portfolio Investors (FPIs) and Domestic Financial Institutions. Higher and consistent net positive investment has a positive impact on stocks while the reverse has a negative impact. Till 2015, Indian stocks were purely impacted by FPI flows. But over the last two years, domestic flows have become larger than FPI flows and are able to largely negate the impact of FPI selling.

It is said that when the global markets sneeze, the entire world catches a cold. This is especially true of critical markets like the US, Europe, Japan and China. For example, since November 2016 global markets have been doing well on the hope that Trump will keep his promise of cutting taxes and spending on infrastructure. Similarly, global metal stocks have been rising on expectations that Chinese industrial demand will pick up.

Monetary Policy is the bi-monthly announcement by the RBI on rates and other monetary variables. Since October 2016 rate decisions are not taken directly by the RBI but by a Monetary Policy Committee (MPC) with representatives from the RBI and the Ministry of Finance. Normally a rate cut is positive for equities and a rate hike is negative for equities.

Inflation can be seen as retail inflation (CPI) or as wholesale inflation (WPI). Normally high inflation is negative for any economy as it reduces the purchasing power of the people. Also high inflation means higher rates and low inflation means low rates. Normally, equities react positively to low inflation and negatively to high inflation. However, very low inflation can also lead to deflation and that can be disastrous for equities. CPI and WPI inflation are announced each month.

Index of Industrial Production (IIP) is a measure of how the industrial production has been growing. A positive IIP number with an upward trend is a sign that production is picking up. This also means that company top-lines and bottom-lines is likely to benefit. It also has positive ramifications for the overall GDP growth number. IIP is typically announced with a one-month time lag.

Purchase Manager Index (PMI) is a measure of the optimism of purchase managers of corporates. The cut-off for PMI is 50. A PMI of above 50 is a sign of expansion while a PMI of below 50 is a sign of contracting. There is a separate PMI that is put out each month by the Markit Economics for Manufacturing and Services. India’s PMI manufacturing and PMI Services have been normally above 50, although the PMI Services has come under pressure after the demonetization.

The Union Budget is an annual exercise which lays out the broad reforms trajectory for the economy. A reformist budget which is likely to spur infrastructure spending and generate investment demand is seen as positive for markets. Typically, a budget that is too populist and is likely to widen the fiscal deficit of the government is seen as negative for the equity markets.

Corporate earnings are more dependent on expectations. It is not just the growth and margins but also the quality of earnings that are evaluated. Greater growth from core operations is seen as positive compared to greater growth coming from non-core activities.

Sectoral events are specific to industries. Donald Trump putting restrictions on H1-B visas for Indians is negative for Indian IT industry. Similarly, the constant scrutiny of Indian pharma companies under Form 483 of the US FDA is considered negative for the pharma industry.