8.8 Factors affecting different industries

INDUSTRY ANALYSIS

It is very difficult to give specific examples to pinpoint factors and their direct relationship with an industry’s performance. However, this session is to familiarize you to think out of the box and start observing the factors which directly influence industry and ultimately the stock prices. For example, you know that in India the IT industry is directly linked to exports and if the Indian rupee depreciates against the dollar then it is advantageous to IT industries and vise versa. These examples are, however, very general and not thumb rules.

Commodity Driven Industries

There are many sectors that are dependent on raw costs. For example, the scrips of any business that uses plastic in its manufacturing process should be sold if the resin costs (cost of plastics) rise. Chemical companies use a lot of natural gas in their production process and therefore the scrips should be sold if the price of natural gas rises above a certain expected level. Similarly with metals, companies that rely on cheap iron or copper prices should be sold if these commodities become more expensive.

Fiscal/Government Policy Dependant Industries

There are many industries that rely on government spending and therefore different political parties winning seats will have a major affect on stock prices. For example, in India the influence of the Left in governance affects companies as this is mostly tied to the liberalization policies of government. Recall here that the Congress-led government hiked Foreign Direct Investment (FDI) to 49 per cent from its earlier level of 26 per cent. This has attracted more investment in the private insurance sector. There are other sectors those are directly dependent on government policies such as those of infrastructure, construction and machinery. Further, transportation companies should be looked at with care. What kind of goods and services do these transportation companies deliver? If the demand for the goods is subject to the economic cycle then the transportation company will also be affected by it because it is a derived demand. More important is to gauge the perception that the market carries on what type of company it is. For example, the airline sector had been bleeding very badly in recent times because of the steep hike in oil prices. However, the companies’ performance substantially did not improve even after the prices came down. That is because it then became dependent on the general economic situation – that of reduced traffic due to economic slowdown etc.