What is Macro Fundamental Analysis
Macro fundamental analysis is the study of geopolitical, economic, industry and market related factors to determine trends that influence the stockmarket. The most important factor that influences the market is the economy.
Our economy goes through cycles much like our stock market, we call this the economic cycle. A bullish economy is characterized by strong business growth, and therefore share prices, property price appreciation and rising interest rates.
Fundamental analysis aims to analyze economic indicators to determine the future direction of the economy. One single indicator does not give us a clear picture, and therefore several indicators are used.
An Introduction to The Australian Economy
The Australian economy is comprised of the following sectors; household, business, finance, government, and non-profit organisation & overseas. A healthy economy is usually regarded as one where everyone who wants to work is employed plus there are sufficient goods & services to provide everyone with a satisfactory lifestyle. In order to assess whether an economy is growing or shrinking, the society needs to settle on and define appropriate measures such as the GDP (gross domestic product). In addition to trade, Australia looks to the rest of the world for investment funds as a source of both debt capital and equity capital. The health of the Australian economy is strongly affected by the state of the global economy.
Monetary policy & objectives:
We need economic growth to exceed population growth if everyone is to be employed. The RBA uses monetary policy (rise & fall of interest rate) to stimulate or depress the economy. It is difficult to predict whether the RBA will rise or lower interest rates or how far and how quickly, in response to new economic data. For example, if interest rates rise it will considered tightening of the monetary policy leading to a lower stimulus or interest rates might be cut with intention of encouraging spending and capital investment, thus stimulating economic growth.
Role of government:
Governments in Australia play a substantial role in the economy. The federal government and to a lesser extent, the State government also implement legislation affecting the operation and ownership of businesses. Changes to taxation law often have the most direct effect on general investment activity in Australia. The GST, which discourages spending and encourages saving, is one example.
Financial Markets and Types:
The term financial market refers to markets for financial products-typically products designed for the primary purpose of channelling funds from the savers in the economy to entities looking to raise capital in their operations. The main exchange-based financial markets in Australia are the:
• ASX Equities market
• ASX Exchanges Traded Options market
• ASX Warrants market
• ASX Futures market
• ASX Interest Rate market
Primary and secondary markets:
• Primary market is when a company issues new securities shares or unit to investors
• Secondary market, is subsequent trading of those securities between buyers & sellers
Market Regulators:
The three regulatory agencies involving regulatory framework include:
• RBA (reserve bank of Australia)
• APRA (Australian prudential regulation commission)
• ASIC (Corp regulator & consumer watchdog)
What is a financial product?
Financial product can refer to any instrument, usually of a contractual nature, used for the transfer or accumulation of monetary wealth. Negotiable instruments such as currency, shares, managed trust units and certain interest rate securities are more easily traded. As a result they are often traded on financial markets such as the OTC (over-the-Counter).
Liquidity:
While cash investments are sometimes promoted as offering a better return than a bank saving account, liquidity is usually an important feature in which investors are interested. The liquidity of any particular form of cash investment is affected both by the terms and conditions of the investment and by whether is a ready market for it.
The different indicators that analysts take into account are:
- Leading Indicators (for e.g. job advertisements, housing finance commitments, consumer sentiment)
- Lagging Indicators (for e.g. lagging indicators generally trail the economic activity or business activity by six to twelve months)
- Co-incident Indicators (for e.g Non-farm payrolls, industrial production, personal income or sales from manufacturing.
Economic Indicators
Leading Indicators are indicators aiming to predict or anticipate the trend and future level of economic activity. These are generally more important to the fundamental analyst. Lagging and coincident indicators are primarily used as a confirmation of the previous predictions by the leading indicatorsof the trends.
Why use Economic Indicators?
Economic Indicators are used to forecast short and medium term trends in the Australian and overseas economies, with a view to predicting the direction and movement in financial asset prices and thereby contributing to asset allocation decisions.
No single indicator is consistent in it’s lead or lag time.
Economists are constantly analyzing movements in numerous indicators to try and obtain a clear picture of the economy.
Commonly used indicators that measure or effect the economies perfomance
• Exchange Rates
• Consumer Price Index
• Index of Consumer Sentiment
• Survey of Business Confidence
• Gross Domestic Product
• Interest Rates
• Commodity Prices
• ABS Business Investment Spending
• Overseas Economies
• Labour Market