Chapter 7 - Economic Analysis : Introduction

ECONOMIC ANALYSIS

The stock market does not operate in a vacuum. It is an integral part of the economy of a country, more so in a free economy like the United States of America and to some extent in a mixed economy like India. After the new liberalised economic policy implementation, say after 1991, India is also emerging as a free economy. To get an insight into the complexities of the stock market, one needs to develop a sound economic understanding and be able to interpret the impact of important economic indicators on stock markets.

As discussed in our earlier chapter, the first step in a topdown approach in fundamental analysis is the analysis of the overall economy. For example, a good investor will first see what the overall health of the economy for investments is. So let's start with economic analysis. This is the process of understanding the developments, trends and major policy decisions in an economy to get a clear picture of the macroeconomic situation in the past, present and anticipated future based on the past and present economic scenario. How good a company is performing or an industry is progressing becomes irrelevant when the economy is in a bad shape.

The Indian stock market is an example which started experiencing shock waves from January 2008 onwards. At this juncture it is important to know about the economic trends and developments before selecting a stock and making an investment decision.