Should macroeconomic factors impact your investment portfolio?
Have you ever wondered how macroeconomic factors affect the financial markets? The stock market is influenced by many factors such as economic, political, and a lot more. Investors tend to buy or sell their securities/investments based on these factors.
Today, we’ll talk about these macroeconomic variables, how they impact the stock market, and whether investors should worry.
What are macroeconomic factors?
Macroeconomic variables/factors are the ones that affect the economy of a country as a whole rather than a specific sector of an economy. Macroeconomic factors include inflation, employment levels, international trade, and national income. These factors can be political, social, geographical, or even natural.
Factors affecting the stock market in India
● GDP: Gross Domestic Product is the total value of all the finished products during a specific period. The GDP of a country signifies the overall health of the economy. When the GDP of an economy rises, the overall growth of all the industries is expected to be on the positive side. In such situations, investors tend to buy investments. Alternatively, investors hesitate to invest when GDP lowers.
● Inflation: Like GDP, inflation is also considered an important variable affecting the stock market. Inflation refers to an overall increase in the price of all the goods and services supplied in the economy or when the money supply increses. Rising inflation gives rise to increased volatility in the stock market. If we look at stocks, increasing inflation causes a decline in the market price of such dividend-yielding stocks. However, the value of value stocks tends to rise with rising inflation. Though volatility increases, investors’ portfolio gets affected only due to monetary policies of the government and how hedged the portfolio is.
● Unemployment: High unemployment in an economy means people have less money to spend, and businesses’ sales and profits go down. Generally, increasing unemployment means an overall decline in interest rates and investment returns.
● Industrial production: Industrial Production is considered an essential factor affecting investments in an economy as it covers major production in an economy, such as mining, manufacturing, gas, electricity and so on. As industrial production of an economy rises, GDP is expected to rise, and hence the value of investments in an economy is expected to grow. Alternatively, a decline in industrial production can cause the value of investments to fall.
● Interest rates: Changing interest rates affect the money supply in an economy. High-interest rates make borrowing expensive, and hence the supply of money decreases. Hence it can be said that the lower the interest rates, the higher the expectations for investments to grow. In such cases, short-term debt funds perform well, but that’s not the case with equity investments, unfortunately.
Should investors worry about macroeconomic factors?
Investors should know macro variables and how they can impact their investment portfolio but should not worry about changing figures. The GDP of an economy tends to vary significantly across years. For an economy to be in a healthy condition, a reasonable amount of inflation is also required. But does that mean a negative impact on investment portfolios? Certainly not.
As per financial experts, investors should not worry about macro variables affecting their portfolios. Success in investing lies in not leaving the investment game too early and having a diversified portfolio with proper asset allocation. Diversified investments across different types of assets, regions and sectors ensure that overall risk is reduced and your investments do not face a significant setback when the economy is weak. Hence, being patient, aware and consistent can help you achieve your desired financial goals.
