Sunday, May 10, 2015

Factors that affect share market.

What makes stock market go up and down?
There is no precise answer to this question. Though fundamental analysis and technical analysis are used to predict market behavior and lots of research and study has been done in this regard, stock market experts have found it extremely difficult to fathom the reasons which
cause a change in stock market. Nassim Taleb has gone to the extent of writing in his famous book “ Fooled by Randomness” that only lucky idiots make money in the stock market thereby
signifying the fact that money made in stock market is based on not what you know but how lucky you are. There are different schools of thoughts which have specified different factors that make an impact on stock market; one common factor which often comes out from all this analysis is the role of macro-economic factors in shaping the stock market. How can we forget the day when Iran threatened to close the Strait of
Hormuz? The news sent stock markets across world shaking as oil supply was likely to get cut because of Iran’s move and also there was a sudden increase in geo-political tension in the world. Can stock market investors forget the
day when the UPA (United Progressive Alliance) government came back to power in 2009 and market got frozen on the upper circuit? Suddenly everything stated looking hunky-dory for the stock market because an expectation was
created that economic reforms will continue and will help stock markets. Similarly when the government announced FDI in retail last year,
price of various stocks in retail went up
suddenly. There are several such events which prove the fact that macro-economic factors make impact on stock markets. But all these factors look momentary and their impact may not be everlasting. There are some factors which have their long-term impact and shape the growth path of stock market. Post
2008 the stock market in India has not seen the best of the times and these factors are responsible to a great extent for shaky performance of the stock market. There are three critical macro-economic factors which have impacted stock markets in India since 2008
crisis. Let us look at how these factors have impacted stock markets in India.
Monetary policy and repo rate hike
Changes in the repo rate have haunted banks for quite some time. Thirteen consecutive hikes in the repo rate have impacted the market badly. Every time when the Reserve Bank of India (RBI) hiked the repo rate, market reacted
negatively and went down. Only after the pace of increase of repo rate slowed down market, breathed a sigh of relief. In fact, such has been the impact of the series of monetary policy
measures that the stock market in India pays more attention to the moves of RBI than its own regulator SEBI. The table below shows the relationship between stock market performance and repo rate hike. Source: (All changes in Sensex rounded off)
As an investor, one needs to take note of this important factor which makes an impact on stock market movement. It is, in fact, not just the repo rate hike but the entire monetary policy of the central bank which has a bearing on the performance of stock market. International crude oil price and inflation Crude oil prices are tracked in the Indian economy with lots of curiosity. Since India imports around 80% of crude oil from the international market, any significant change in price of petroleum makes an impact on inflation
numbers which in turn impacts the stock
market. Inflation numbers send the market up and down whenever they are announced. Post 2008, there has been a consistent inflationary pressure on the Indian economy which has created trouble for the stock market in India.
RBI data shows that the period 1995 to 2008 was the best for the Indian economy when inflation overall was just 5%. Between March 2008 and January 2012, it went up and overall inflation number touched 7.6% while primary group had
the highest inflation of 13%. Source: RBI
Policy announcements of the government
The market, which was disappointed with the policy paralysis of the UPA-2, got a sudden boost with hike in diesel price and FDI in aviation and retail. The government became the darling of the market suddenly and it went up by close to 1,000 points within a few days. Whether it is GAAR or power sector reforms, the
market monitors every move of the
government. While the government provides strength to the market through regulations, it provides growth impetus with policy announcements.
There is no denying the fact that almost every factor having economic characteristics makes an impact on the market but there is no denying
the fact these three factors have been a
companion of the stock market for the last five years. The performance of the stock market is positively related to these factors. As these factors become better, market will continue to perform better.