Fundamental analysis
As in any market, in the capital and money markets, investors put their money at risk by evaluating future returns and risks
Evaluating
Market participants are constantly evaluating both the potential profits
that can be made from these investments and the
risk that must be taken into account.
Result
The result of this valuation is influenced by new information coming into
the market all the time. Changes in the
estimate of profit/risk balance is the result in changes in trading assets in the markets.
What information is worth following?
Monetary policy
Monetary policy maintained by central banks directly affects capital
and money markets because it regulates the supply
of money and thus directly affects its value.
Economic relations have a major impact on how investors perceive local markets. If a country has a strong trade relationship, investors view that country as economically stable with the possibility of increased profits.
Situation in other markets
The situation in other markets is important when considering an
investment decision as to where and when funds should be
transferred between countries. When capital markets in one country move in the opposite
direction of the trend,
investors begin to incur losses, capital will move out of the country, and may also trigger a
depreciation of the local
currency.
Situation/company reports
One important factor affecting capital markets is the current economic
conditions of individual companies. A company’s
positive economic situation can encourage investors to invest their capital in its stock. A bad
economic situation, in
turn, causes investors to move their assets to other companies and/or eventually withdraw
capital from that country.
Legal Acts and Taxes
Legal acts, whether local or international, can have medium- and
long-term effects on capital markets. Legal acts can
create barriers, or vice versa, act as an impetus for foreign economic investment.
Weather conditions
The weather directly affects commodity prices, which in turn affect the
companies that use these commodities as raw
materials. An increase in the price of commodities also increases the cost of production. This,
in turn, depending on
the type of business and company, leads to lower profits and has a negative impact on the
company’s accounts. The
deterioration of the economic situation leads to a drop in stock prices, which in turn forces
investors to withdraw
capital from that company.
Political situation
Political situations or conditions have a significant impact on capital
markets. When a country has a stable political
situation (foreign or domestic – international politics), investors are comfortable investing in
that country. On the
other hand, in times of political instability, traders may react by withdrawing money from that
market or region.
Economic downturn
An economic downturn can have different sources. It can be financial
(such as a banking crisis), commodity-related (such
as an oil crisis), political, or other. It is common that during a downturn people tend to
withdraw capital from the
market in order to “save themselves from the worst moment. Therefore, the areas most exposed to
risk are banking and
finance, travel, automotive, etc.
Economic growth
The economic growth situation in a country or region is favorable for
companies that sell their products to consumers in
that area. Economic growth generally means that customers are more optimistic and in a better
economic position, thus
able to afford more, and predisposed to make real purchases. The expected increase in profits of
companies selling more
and more of their products can attract both local and foreign investors who create demand, the
consequence of which is
an increase in the company’s share price.
Confidence
The confidence indicator reflects the overall picture of how a
country’s residents perceive the outlook for the future.
It is also one of the factors central banks take into account when shaping their monetary
policy. In general, high
customer confidence means that customers are more optimistic and willing to spend more on
consumption, and as a result,
companies will be able to sell more products and earn higher profits. Consequently, companies’
attractive prospects may
attract investors, believing that share prices will rise in the future.
Events
One-time events can have a significant impact on capital markets. A
good example is the organization of the Olympic
Games in a given area, which requires large investments in infrastructure to attract tourists to
the region, and which
has a positive incentive for the companies involved. On the other side of the scale, there are
negative events such as
terrorist attacks. These are of course rare cases, but shortly after the September 11 terrorist
attack in the United
States – the major stock markets were closed due to the dire consequences for the capital
market. Events in one company
generally do not affect the general markets, although there are exceptions. An example of such
an exception would be the
Enron case, where more than 20,000 employees were laid off because of allegations of financial
fraud, after which ENRON
went bankrupt.
The importance was not in the number of employees laid off, but in the scale of the company, which was one of the major energy companies.
Investors should follow events carefully, because the consequences in capital markets cannot always be predictable.
Expert predictions
Experts’ forecasts can match or contradict investors’ expectations.
They do not usually have a direct impact on capital
markets, but market sentiment can be affected when “experts” represent national authorities –
either political or
monetary authorities. When monetary authorities make statements about the economy as a whole,
they can give signals
about future speeches or hints about the future of monetary policy. This in turn can affect the
supply of money and the
interest rate (the latter being the most interesting factor to foreign investors). Please seek
advice from an
independent financial advisor if you have any doubts about the specification of instruments and
market mechanisms.