Need and advantages of economic analysis

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Need and advantages of economic analysis

In equity research, economic analysis involves an analysis of national and international economic conditions and different economic aggregates to determine the investment worthiness and timing of investment in a particular share or in an industrial sector. Detailed and in-depth analyses of the indicators assist in predicting the expected shape of the economic trends and the growth in different sectors of the industry. The process of economic analysis takes place through various phases.

Study of economic aggregates

The Following economic indicators are usually covered.

  • Gross domestic production (GDP)
  • Index of Industrial production (IIP)
  • Investment in Infrastructure sector
  • Foreign trade
  • Inflation rate
  • Timing of monsoon
  • Government policies
  • International developments

Classification of indicators

The economic aggregates are classified into.

  • Leading indicators
  • Coinciding indicators
  • Lagging indicators

Forecast about the economy

With the help of the indicators, forecast of the expected economic scenario is drawn by using quantitative models such as Time Series analysis, Delphi technique etc. The economic indicators acting as signals of the expected economic scenario help in achieving the fundamental objectives of identifying the sector-wise grow potential and timing of investments. Economic analysis involves analyzing the state of economy at both macro and micro levels.

Macroeconomics deal with aggregate variables of an economy like the output, its composition and rate of growth, level and growth rates of money supply, employment, investments, exports, imports, interest rates, inflation rate, government finances, public borrowing and others.

At the micro level industry and company analysis are performed. Industry analysis involves the study of the factors that make the company competitive and forecasts growth cycles in the industry. Company analysis encompasses analysis of financial statements of a company, ratio analysis, discounted cash flow analysis and dividend discount models under different scenarios.

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