Fundamental analysis

Monetary policy maintained by central banks directly affects capital and money markets because it regulates the supply of money and thereby 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 potential for increased profits.

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 shares. A bad economic situation, in turn, forces 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- or long-term effects on capital markets. Legal acts can create barriers, or vice versa, act as an inspiration for foreign economic investment.

The weather has a direct impact on commodity prices, which in turn affects the companies that use these commodities as raw materials. Rising commodity prices also increase 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. A worsening economic situation leads to a fall 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 recession can come from many different sources. It can be financial (e.g. banking crisis), commodity-related (e.g. oil crisis), political, etc. 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 situation of economic growth in a country or region is favourable for companies that sell their products to consumers in that area. Economic growth generally means that consumers 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 taken into account by central banks 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 consequence, companies will be able to sell more products and generate higher profits. Consequently, companies attractive future prospects can attract investors, believing that share prices will rise in the future.

Onetime events can have a significant impact on capital markets. A good example is the organisation of the Olympic Games, 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 there are negative events, such as terrorist attacks. These are of course rare events, but shortly after the September 11th terrorist attack in the US – the major stock markets were shut down due to the dire consequences for the capital market. Events in one company usually do not affect the general markets, although there are exceptions. An example of such an exception is the Enron case, where more than 20,000 employees were laid off because of allegations of financial fraud, after which ENRON went out of business. What matters is not the number of employees laid off, but the scale of the company, being one of the major energy companies.Investors should follow events carefully, for the reason that the consequences in capital markets may not always be predictable.

Experts’ predictions may match or contradict investor 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 may affect the money supply and interest rate (the latter being the most interesting factor to foreign investors). Please seek advice from an independent financial adviser if you have any concerns about the specification of instruments and market mechanisms.