Bureau of Statistics Economic Conditions

Discuss about the Bureau of Statistics Economic Conditions.

Introduction:

Investing in the stock market is no doubt a risky business. It requires a comprehensive understanding of the stock market and its trends and also requires daily awareness of the highs and lows of financial markets globally. It goes without saying financial markets are unstable and possess a huge risk to anyone especially to a newcomer who is not familiar with the ups and downs and the signs of turmoil in the market. There are certain instruments which are relatively safer to invest in like fixed income instruments (Pandya, 2014). The stock market however is not one of such instruments. One would take care to study the stock market religiously before choosing to invest in. It is always better for an investor to take guidance of an expert on the matter or which stocks to invest in and for how long as they might be able to mitigate the risks of the return. So it is necessary to take help of a financial advisor or a stock broker or both (Beattie, 2017). They might also be able to help pick out the right mix of assets and stocks so as to make the portfolio as safe as possible and as uncorrelated with the market and thus the fluctuations in the market as possible. However, even taking all of this into account it might not be able for the investor to hedge risks of the stock market completely due to various economic factors it faces.

Economic conditions facing first time investors:

One of the biggest issues that investors going into the stock market right now would be facing is the changing demographics of the world today. In most advanced countries due to the increasing life expectancy and the low rates of fertility, there is a problem of the older half of the demographic being heavier than the younger half (Holodny, 2016).

There has been a study done by the researchers at Yale University and by the ones in University of California which state that shifts in the population have significant effects on the behaviour of the investor and the values of equity. The group that actually invests the most is set to move into retirement and thus largely out of trading in equities with the baby boomer generation going over sixty five in large droves and moving the bulk of the investment opportunity with them (Bloch, n.d.). Thus the new crop of investors is likely to face a market where there is dearth of demand for the bonds and thus might lead to unfavourable market conditions. However the age demographic in the new investors is also important. Younger people tend to be borrowers and in general have less money to invest than middle aged people who are more sure footed and can thus carry out heavier transactions in the markets (Clements, 2014). It might also be wise to not invest in countries where the demographic is aging and the domestic people don’t invest much in the country. Thus there is a relation between demographic trends and the stock market which a first time investor must take into account.

Then there is the topic of economic growth. Economic growth in the short run is very much affected by new investment. New investment helps in raising the capital stock of the economy which is turn leads to economic growth (Jones and Vollrath, 2013). This growth in the gross domestic product of the country is also related to the increase in the corporate earnings and other such measures which might be able to give positive benefits to those investing. In the long run however nothing except technological progress is able to sustain the growth of the economy. Investing in the stock market thus might not be useful in this regard. Again more growth in the economy might be able to translate into higher income in all groups of people thus leading to more investment in the stock market and in larger volumes. A growing country is also generally considered to be a safe market to invest. So if the country is growing one would expect that the economy is not going to go into a crisis soon.

Inflation which is the general increase in the price level of the economy is something which in general lowers the purchasing power of the people. It causes people to be more cautionary with their money. Expected inflation also has this effect as people tend to think that the price levels in the economy are high and are extremely conservative with how they spend. Thus there is a good chance if there is expectation of high inflation investors who are new to the stock market which is again a risky thing might be hesitant to go forward with their investments in stocks (Ong, 2014). It has been found that expected inflation have not produced any conclusive result on the stock market as it is largely dependent on the ability of the government to hedge this risk and on the monetary policy of the country. However, stocks are one of the instruments that might provide some hedging against the inflation as the company profits must also rise along with the price levels once some period of adjustment is allowed. There is clear evidence that value stocks perform better in high inflation and growth stocks are the one that perform better during low inflation. The new investors must choose accordingly.

Monetary policy is also one of the instruments that very much affects the stock market and how investors-old and new perceive it. The new investors might be able to make their portfolios such that they can benefit from the policy. This of course would require one to assess their level of risk taking and also depends on the investment horizon. During the periods of accommodative policy, the ones with larger investment horizon and good degree of risk taking might be able to benefit heavily by investing in the riskier assets such as stocks. As monetary policy starts getting restrictive it might be a good idea for these to lower the share of stocks in their portfolio. This obviously is not something that is possible for the more conservative of the investors and should thus refrain from investing in stocks in periods of tight monetary policy. 

When the central bank of the country is announcing the change in the benchmark rates there is a short term flow either inflow or outflow depending if there was a rate hike or a rate cut. 

This liquidity movement is caused by Foreign Institutional Investors (FIIs), who park their funds in ETFs, money market instruments & Sovereign bonds. If it is such that there has been slashing of interest rates these people move back to their own countries or look into investing elsewhere so as to reap better returns. This is not permanent and is a short term phenomenon and this this leads to volatility of returns n the market. Thus the first time investor must be sure to protect his or her investments when the monetary policy is being announced.  Also the valuation of the companies changes because there is change in the discounting rates of the company and this might affect the decisions of the new investors.

Conclusion:

There is a rising cry that the thing which is to affect the stock market in the years to come would be the fiscal policy and not the monetary policy (Lun, 2017). The policies of the government to protect the financial market from crashing during times such as when the Brexit inevitably happens is what would guide the trend of the stock market return and not the policies of the central banks which had been on the forefront since the Global Financial Crisis of 2008 (Ho, 2016). If this is true that remains to be seen and the impact of these policies and their effectiveness in being able to shield the investor specially the new ones who are unfamiliar with the intricacies of the riskier markets such as the stock market as the world goes through a period of deblobalisation is something only time will tell.

References:

Abs.gov.au. (2016). Australian Demographic Statistics, Jun 2016. [online] Available at: http://www.abs.gov.au/ausstats/abs@.nsf/0/1CD2B1952AFC5E7ACA257298000F2E76?OpenDocument [Accessed 4 May 2017].

Beattie, A. (2017). 6 Dangerous Moves for First-Time Investors. [online] Investopedia. Available at: http://www.investopedia.com/articles/basics/11/dangerous-moves-first-time-investors.asp [Accessed 4 May 2017].

Bloch, B. (n.d.). Demographic Trends And The Implications For Investment. [online] Investopedia. Available at: http://www.investopedia.com/articles/pf/06/demographictrends.asp [Accessed 4 May 2017].

Clements, J. (2014). Will Demographic Trends Slash Stock Returns?. [online] WSJ. Available at: https://www.wsj.com/articles/will-demographic-trends-slash-stock-returns-1403396390 [Accessed 4 May 2017].

Ho, K. (2016). 2017 Stock Market Outlook: Why You Need To Be Cautious. [online] Forbes.com. Available at: https://www.forbes.com/sites/trangho/2016/12/17/2017-stock-market-outlook-why-you-need-to-be-cautious/ [Accessed 4 May 2017].

Holodny, E. (2016). We're about to see a mind-blowing demographics shift unprecedented in human history. [online] Business Insider. Available at: http://www.businessinsider.in/Were-about-to-see-a-mind-blowing-demographics-shift-unprecedented-in-human-history/articleshow/51635639.cms [Accessed 4 May 2017].

Jones, C. and Vollrath, D. (2013). Introduction to economic growth. 1st ed. New York: W. W. Norton.

Lun, E. (2017). Monetary policy is dead. [online] The Telegraph. Available at: http://www.telegraph.co.uk/money/planning-for-the-future/fiscal-policy-effect-on-investments/ [Accessed 4 May 2017].

Ong, H. (2014). How does inflation affect the stock market?. [online] Business.inquirer.net. Available at: http://business.inquirer.net/178899/how-does-inflation-affect-the-stock-market [Accessed 4 May 2017].

Pandya, A. (2014). Are you a first time investor? Here are investing options. [online] Moneycontrol.com. Available at: http://www.moneycontrol.com/news/business/personal-finance-business/are-youfirst-time-investor-hereinvesting-options-1173569.html [Accessed 4 May 2017].