Thursday, January 12, 2012

Economic Factors, Micro and Macro

There are four main factors that contribute to the returns your company can expect to garner in terms of equity. These factors range from topical, local, and highly specific issues related to the internal workings of a company to macroscopic international factors that affect the entire global economy. Here's a quick informational breakdown of the major economic factors that affect equity returns:

The Strength of the Company
The strength of a single company depends on countless factors: the costs of resources and resource allocation; whether or not the company is a non-cyclical, defensive industry that remains relatively unaffected by economic factors; the company's debt burden, by which analysts can look at its capital and the history of its debt ratio divided by total assets; and whether or not the company offers healthy dividends to its investors. All these elements combined will tell you the story of a company's financial health.

The Strength of the Industry
Even if a particular company is flourishing as far as sales revenue, a down time in its particular industry can lead to adversities in the market that will bring down its stock value. For example, in the past year or so the rise in energy prices led to sluggish growth in the manufacturing sector. While some manufacturers, particularly ones specializing in overseas computer sales, reported good overall quarters, the industry as a whole has been stagnant, causing many industry leaders to call for expanded efforts to increase innovation and strategic partnership across the board.

The Strength of the National Economy
The relative strength of our national economy affects everything from currency exchanges, stock markets, interest rates, and the ability of banks to loan money. Even a well-run company in a flourishing industry can face financial crickets if the country's economy is weak. This is because weak economic conditions create an atmosphere of tepid investment, weary banks, and frugal consumers. On the other hand, if the national economy is thriving, credit lines open up again and both investors and consumers pour money into the markets.

The Strength of the Global Economy
The global economy affects all national economies the same way global climate change affects all the planet's ecosystems. In fact, an economy is a kind of ecosystem, and it can be affected by something as little as a trade embargo and as big as an earthquake. The global economy affects how countries contribute to international markets and geopolitical conditions determine how markets react to industry changes. And vice versa.
These are the four major economic factors that determine equity returns. The circles of influence overlap and change overnight, which can make it virtually impossible to predict growth or decline with any kind of certainty. This is why market analysis is such a valued profession.