Fundamental analysis

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.

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.

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, 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.

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 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.

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.

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.

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.

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.

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.