Deciding on a share or even a market sector – such as retailers, property developers, engineering manufacturers or financial companies – involves a second level of investigation. It means looking at the economy as a whole and then the way it affects the constituent parts.
Forecasting the economy can be a mug’s game. Governments are substantially worse at forecasting than the Met Office. Harold Macmillan complained when he was prime minister that national figures were so out of date it was like driving a car looking only in the rear-view mirror. It has got little better since. Most big companies do some forecasting, the major financial institutions such as banks have substantial economic departments focusing on that, and there are any number of specialist economic or econometric organizations. The projections seldom agree and if any of them is right it is more by luck than by judgement. Fortunately however, the individual investor does not need to get into the sort of complex detail those institutions attempt, and common sense tempered by personal observation will usually help.
Factors that can affect investment tactics include:
- the rate of inflation – both the Retail Prices Index (RPI) and the Consumer Prices Index (CPI);
- the general health of economy – whether it is rising, falling or on the turn;
- the exchange value of the pound – against the euro, dollar, yen or trade-weighted;
- industry trends – eg growth in retail spending, housebuilding and prices, engineering concerns suffering from exchange rate movements.
On most of these one can get a pretty good feel from reading the newspapers and keeping an eye on what is going on at the local high street estate agents, for example. One can get it wrong, but then so can the pundits holding forth from parliament or on television. And the stock market itself will give a pretty good indication of what the rest of the investment world thinks: if it is falling people expect trouble, if a sector is shunned there is a reason (and it is worth investigating if only to see whether you agree), if share prices are rising optimism abounds (and even then it is worth checking whether you think such euphoria is justified).