28 August 2011

4 Components of Economic Growth (August 2011)

So far, equity markets are down anywhere between 10-20% and bond yields in a number of major markets are reaching historic lows. Although it is difficult and nerve racking, investors should understand some of the forces behind what's creating this volatility and how they're likely to play out in the near term.


When will market rebound?
Again, we simply cannot answer that million-dollar question. If I know, I won't be writing this article here telling you all stories and facts. We should have a longer term view, especially during volatile times when fears dominating the marketplace.

So, what are some of the driving forces behind?
If we go back to basics, the 4 components that really drive economic growth are Government, Consumer, Corporate, Import & Export. If we look at each individually, we can do better opinion, by analyzing them.

Government:
Since 2008, governments have played an increasingly dominant role in the markets that we're familiar with. They are expanding monetary policy, expanding fiscal policy, bailing out companies, regulating companies or buying companies. Who else can replace the government now? Of course, NO one. The government are now a fact of life in the markets and investment as we know it. Example, the Citigroup bailout had actually turned out to be a very profitable investment for US Government. Undeniably, we have to understand each movements of government in order to make returns from.


However, Government cannot runaway from political issues which may confused the markets. Everyday, we guessed what is Obama or Bernanke going to say next, what's ECB going to do, when is our next general election? As the market continues to test Governments and its policy continue to evolve, we are due for continued uncertainty and volatility in the market.

Consumer:
We as a consumer are going through a difficult time, especially in developed markets. We faced with higher taxes, unemployment and inflation, all eroding our disposable income which in turn makes spending power and confidence lower. Market falls because of lower consumption/retail figures, and this will further enhance fear in the eyes of the consumer in return.

Investment:
This is what ETP of Malaysia means: Private investment with Government facilitation. However, corporates is talking about managing their costs and having a good solid balance sheets with cash to avoid problems in downturns. Right now, they are the healthiest of the 3 domestic components towards economic growth. Government is indebted more than corporates. Companies with strong balance sheets are in a better positions in expanding, be it organically or through acquisitions, like what Google doing right now (taking over Motorola).

Picture taken from www.money4invest.com
Export-Import:
Lastly, developing countries are the main growth drivers in international trades. Still, they are growing, albeit slower pace. We need to keep an eye of it and it's impact between developing and developed countries.

In summary, we should not over-react given the volatility of the market. In fact, we should take this as an opportunity to take on good solid companies for long-term investing. I still see a lot of good companies trading at single digit P/E, some with good dividend yield too. Should you forego the chances?

1 comment:

  1. hi, i'm looking for good solid companies for long-term investing.
    Can you recommend me some?

    ReplyDelete

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