Equity Indices
The main indices around the world are all compiled of the
biggest firms in the globe. Therefore what moves these assets are the changes
in the business environment, domestically and globally (These firms do business
in all countries across the globe). One of the biggest determinants of equity
indexes is GDP. If spending is increasing businesses are creating more revenue,
this means they are making more profit and growing larger. Other indicators
that suggest a higher spending capacity such as decreasing unemployment,
inflation and consumer sentiment all move this market.
Another important determinant in equities is the interest
rate. If rates are low there is a double effect for businesses; first there is
likely to be more demand in the economy for goods due to cheaper mortgages and
less incentive to spend, the other is that businesses will have a cheaper form
of finance to grow and become more efficient. The opposite will have the
contrary effect on the market.
Investor and public sentiment is also a huge determinant in
this asset class. Some of the greatest bull rallies have been based on
sentiment as opposed to fundamental factors (2000s), therefore understanding
when the market is overoptimistic and pessimistic is a key to making money in
equities. This can be achieved by looking at the P/E ratios of particular stock
markets.
