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As part of a new feature, you can track and view leading indicators on the market and economy that we think matters to the investor. Click on the links within the article to get detailed explainations on why these indicators were used.
Leading
economic indicators give a
picture of where the economy is headed in the next 6 to 9 months.
Unlike market
leading indicators, which can give a sense of where equity markets are
heading,
economic leading indicators give a sense of how the economy will
perform. First
and foremost, we would like to
identify three main types of indicators: leading indicators, coincident
indicators and lagging indicators. There are uses for each.
Respectively, they
give us an idea on predicting when the economy will go through a
downturn, reaffirming
the economy’s growth or recession, and confirming that the
economy is moving
out of an expansionary or contractionary phase. We
focus on leading economic
indicators because we believe that these indicators can give us an
accurate
picture of when the economy will start turning around. Equity markets
typically
start to recover even before the economy gets out
of the doom and gloom
of
recession. That would mean that leading indicators could potentially
give us an
indication of a more sustainable recovery in equity markets. We
have selected quite a number of
leading indicators for investors to track. But we think that the more
common
and easily understood ones would include:
OECD
India Composite Leading
Indicator The
OECD composite leading indicator
(CLI) is designed to provide early
signals of
turning points (peaks and troughs) between expansions and slowdowns
of economic
activity
The Indicators turn downwards a few months before the economy actually
takes a
downturn and turn upwards
a few months before the economy actually
becomes
progressive. The
component series
used in the composite indicator compilation are:
Money
Supply The
Money supply that we are looking at would be the M2
category of money supply. There are several categories of money supply
and M2
is a broader classification of money than M1. It consists of Currency
with the
public + Deposit money of the public (Demand deposits with the banking
system +
‘Other’ deposits with the RBI) and Savings deposits
with Post office savings
banks. Money supply tells economists and analysts how the current
fiscal and
monetary policy affects interest rates and growth. Growth in M2 means
that
there is a greater circulation of money in the market and economy.
Under normal
circumstances, rate of credit growth will increase as money in
circulation
increases. As credit growth improves, it could mean that business can
make use
of credit for business expansion. When M2 rises sharply and demand for
money is
stable, it signals rising inflationary pressures in the economy. Wholesale
Price Index The
Wholesale Price Index measures inflation. Very high values
indicate high inflation. Any economy aims to have moderate inflation,
and either
low or high inflation prompts the Reserve Bank to take action. It would
increase
or decrease liquidity in the financial system by lowering or raising
interest
rates, which in turn affects the debt and lending markets. This affects
the
debt mutual funds and the economy as a whole. Purchasing
Manager Index The
Purchasing Manager Index (or PMI) is often used as a gauge
of optimism or pessimism in the manufacturing industry. The numbers are
usually
arrived at through a series of questions regarding Business Activity,
New
Business, Employment, Input Prices, Prices Charged and Business
Expectations.
Typically, a score greater than 50 indicates an expansionary economy,
while a
score below 50 forecasts a sluggish economy for the next three to six
months. Conclusion Using
what we have compiled, we would like to help investors
get a feel of the future direction of the economy. As always,
information is
power. Before the next recession or economic slowdown, tracking these
forward-looking
indices could be a better bet to understanding the intricacies of the
relationships between individual economic indicators and the general
economy
itself.
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The Research Team is part of iFAST Financial India Private Ltd. |
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iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's offer document/scheme additional information/scheme information document. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer in the website. |
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