Macroeconomic Indicators affecting Stock Markets
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Finally, we have summarized the key takeaways from this module:
- High crude oil prices: When there is a rise in the global crude oil price, it is a negative point for India, as our country is a net importer of crude oil. It puts inflationary pressure on the economy & worsens the fiscal balance. Both central & state governments might be forced to reduce the tax to relieve consumers. But a lower crude oil price is favorable overall.
- Technological changes: The effect is quite neutral, but it depends on how the companies adapt to the changing landscape.
- Gross Domestic Product (GDP): When there is a rise in Real GDP, it means outputs are expanding, which is positive for stocks as earnings increase.
- Expansionary Monetary Policy: There is a positive effect on the stock market as companies borrow more to invest in business at low-interest rates. Also, some of the increased money supply might find a way to equity markets as fixed income instruments go out of flavour.
- Contractionary Monetary Policy: It has a negative impact as higher interest rates increase the hurdle rate for investments. Also, borrowing cost increases for companies, and people may shift to the debt market.
- Inflation: Equity as an excellent hedge against inflation. A moderate amount is positive, but anything in excess would signal brewing trouble in the economy.
- Exchange rate movements: A depreciating local currency is positive for export-oriented sectors & negative for importers. Foreign investors favor countries with strong governments & stable currencies. A fall in the value of domestic currency lowers the real rate of return for offshore investors.
- Expansionary Fiscal policy: It is positive as the money supply increases, corporations benefit from tax cuts & transfer payments stimulate demand.
- Contractionary Fiscal policy: It is negative as decreased money supply affects overall demand. Corporations, as well as individuals, defer purchases due to lower disposable income (higher taxes), which has a ripple effect on the economy.
- Bond Yields: Soaring bond yields in the developed markets might lead to a gush of capital outflows from emerging markets ( better opportunities in the home country coupled with an increased cost of borrowing). Domestically too, an investor may prefer bonds over equities given the return on these investments- negative.