Economic reports can seem to be all Greek to the uninitiated. However, with these 6 ways, we help you demystify economic terms and information and help you understand how your new knowledge can improve your investing choices. 

As an investor or even as a person who reads business news, you would have come across economic articles and reports. While some readers know what to do with the information, others are still learning.

This article focuses on the latter category of readers who wish to learn more about how to glean information from economic data in order to relate it to their investment choices. Don’t worry, these 6 ways are straightforward and accessible to anyone, even without any basic knowledge in economics.

Way #1. Understanding World Economy

Do not let the word “world economy” frighten you or dull you with visions of grumpy world leaders talking shop.

Understanding world economy is important to gauge the overall sentiment on investments. To put it bluntly, if investors are optimistic, prices will increase, and if they are pessimistic, prices will decrease. Use this framework to build your understanding of world economy.

You do not have to read in-depth into economic reports to understand the world economy. Just reading the summary is enough, and look for wordings that indicate how a certain organization thinks about how the world is doing.

The best place to start is from the International Monetary Fund publications on World Economic Outlook . As intimidating as they sound,  there is a simple and straightforward way of just teasing out the necessary information from them.

For example, from the latest 2021 economic outlook, just read the summary, and the following phrases that are used can be interpreted in the following way.

  • “Recent vaccine approvals have raised hopes of a turnaround in the pandemic later this year”: This is where you can interpret this to be optimistic for investments, and that is enough to understand about the world economy bright points.
  • “Renewed waves and new variants of the virus pose concerns for the outlook”: You can interpret this as an event that can be bad for your investments

Remember, many economic reports will always start with their summary and what they think about prospects in the world. Don’t read too much into their report, rather just determine whether their tone is optimistic or pessimistic.

Way #2. Understanding Malaysia’s Economy

Similar to world economy, understanding Malaysia’s economy can be straightforward if you focus on getting the overall tone.

What you need to understand is that Malaysia sells a lot of its products to other countries, and the performance of the world economy will determine how much Malaysian companies can sell to the world. If the world economy is pessimistic, Malaysian companies will not perform well with lower profits and your investments will lose its value.

The best way to understand the performance of the economy in Malaysia is to look through the economic reports being published by Bank Negara Malaysia (BNM). BNM publishes an annual report and four quarterly reports for the year.

Again, focus on the tone of the report, and don’t be intimidated by the sheer amount of content on the report.

For example, in the latest third quarter 2020 publication, take a quick look at the highlights on page 4 to see how the economy is doing. Don’t spend too much time on this, as you only need to see whether the GDP growth rate is increasing or decreasing. If it is increasing, that’s good. If it is decreasing, that’s bad.

Next, proceed to the section called “Macroeconomic Outlook”, which is normally at the end of the report, and focus on the main sentence describing the Malaysian economy. In this case, Bank Negara thinks “The Malaysian economy in on track for a recovery after a trough in the second quarter of 2020”, which you can then infer as good news for the Malaysian economy. You can read more on the reasoning they have provided but for you, this is enough to form an opinion about your investments. Remember, it is all about the tone of these reports that you should be focusing.

If you have access to research reports published by banks, the guidance is the same. Look for the general tone of the reports to see whether they are optimistic or pessimistic. However, be advised that investors normally take the reports published by government institutions more seriously. That said, banks normally publish their reports more frequently and thus, you can use them as good indications of how the economy is doing more frequently.

Way #3. Understanding Performance of the Ringgit

The performance of the Malaysian Ringgit is for sure one of the more popular, hotly debated economic figures that everyone loves to use and talk about. Many a time, you have heard people use the Ringgit’s performance as a way to describe how the economy is doing.

Let’s start with the wrong way of using the Ringgit to determine your investments.

We begin with the common statement of “The Malaysian economy is doing badly because the ringgit is so weak now”. Let’s put this in a proper context. Many people associate the weak Ringgit to not being able to buy things from overseas as purchasing power is not high, hence they assume this means that Malaysia’s economy is not doing well. However, the truth is that Malaysia’s economy was growing steadily between 2012 to 2019 even when the Ringgit was weak at around RM4 per US Dollar.

The Ringgit does represent the performance of the economy to some degree, but there are many other non-economic factors that influenced it too.

Ordinary Malaysians normally only buy and sell the Ringgit, when they need to exchange money to go overseas for vacations. Businesses need to do this too when they buy and sell something to and from overseas. Traders also trade the currency but they are most often involved in speculative trades that borders on gambling.

Now, let’s talks about the right way to use the Ringgit’s performance to help with your investments.

It depends on the kind of companies you want to invest in. If you have invested in a company that sells their products mainly to countries overseas (think electrical and electronics company), a weak Ringgit is actually good for that company because the products will be cheap to companies overseas, leading to an increased quantity sold and bringing in larger revenue.

If the Ringgit is strong, it could benefit companies that import a lot of products from overseas, where overseas products will be cheaper. Think about companies that sells and distribute overseas products to Malaysian consumers, where their profit margins will then increase.

Investigate whether the company that you have or want to invest in, would benefit from a weak or strong exchange rate.

Way #4. Understanding Government Policies

In these days of the Covid-19 pandemic, various government policies have been introduced to aid the rakyat and boost the economy. However, you might be confused as to how it actually affects your investments.

We will go into detail about what you should understand about the impact of government programs (termed fiscal policy in the media) and interest rates (termed monetary policy).

Firstly, there are many types of government policies that could impact your investments. Let’s focus on the PENJANA program from last year. While there were many types of incentives and cash programs in it, ask yourself only the basic questions of:

  • Does it help you as a consumer?
  • Does it help companies and businesses?

If you answer yes to either question, there is a high chance that the programs are beneficial to your investments. For example, the government gave out cash through electronic payment apps such as Grab and Boost. This helped many consumers in buying basic necessities through the apps, and increased the amount of revenue that the payments apps obtained.

For interest rates, its important also to ask the same questions to yourself and companies on whether it will help. For example, when Bank Negara reduces interest rates, you actually pay less interest for your housing loan and hire-purchase (car) loan. It benefits you as a consumer, as you can then spend more on other things. Businesses are also able to obtain loans at lower interest rates, thereby increasing the amount of investments. However, the banks will be getting less interest revenue, and its performance will decline. You won’t want to be investing in banks if interest rates are declining.

Government policies and interest rates are good or bad to some companies depending on how they are affected.

Way #5. Understanding Inflation in the Economy

This is something that many ignore when making their investment decisions – the effects of inflation on your money.

Consider this scenario where you have RM100 this year, and you put it into an investment that generates about 2% in a year. In a year’s time, you will have RM102. However, the inflation rate was actually 3%, higher than the 2% return. This means your RM102 is actually worth around RM99 only.

It is very important to consider the effects of inflation in eroding your money’s value as investing in asset classes that has returns lower than inflation mean that you are making a loss.

Inflation is essentially the increase in prices of things from the previous year. This includes basic items such as food, water, clothes, and other things that you buy consistently. For example, if the price of nasi lemak increases from RM5.00 to RM5.50, this means you will be spending 10% more on nasi lemak. To cover this increase in nasi lemak prices, your salary or investment would have to increase by more than 10% to cover this increase in cost.

Hence, to determine investments that can cover the inflation cost, you first need to establish how much is your cost of living is increasing in that year. If you see that inflation is 2%, you would need to invest in asset classes that generates returns that are higher than 2%.

Fortunately, many investments do usually generate higher than inflation returns. However, having the context on inflation rate also informs you on the type of returns that you can expect for every year. For example, in 2019, inflation rate was 0.7% which meant that you can easily find any investments that are above that. However, in 2017, inflation rate was actually 3.8%, which means you had to find riskier investments that have a higher return.

Way #6. Understanding Business Cycle and Timing

You are surely wondering what a business cycle means. It is a term that has been thrown around in the media, and gives the impression of being complex to understand.

However, business cycle essentially just means having boom and bust. Boom is when the economy is doing well and growing, where the stock market is booming also. Bust is when the economy is not doing well and is having a recession.

Many economists have investigated these boom and bust cycles. The boom period normally lasts for about 10 years before a bust happens after that for about 1 to 2 years. This means economies will grow strongly for about 10 years before going into a recession after that. The cycle then repeats.

For Malaysia, this cycle has been quite consistent. Malaysia went through a commodity crisis in 1985 to 1986, before undergoing another recession in 1997 and 1998 termed the Asian Financial Crisis. As expected, 10 years after that in 2008 and 2009, Malaysia underwent the Great Financial Crisis and not surprisingly, the Covid-19 recession happened about 10 years after that in 2020 and 2021.

How can you take advantage of this for your investment choices? The Covid-19 recession that is happening now is the boom phase of the business cycle and is probably a good time to invest in the stock market when prices are low. You can expect that the next recession will happen 10 years from now by 2030. You should exit your investments before the next bust phase. For long term investors. the understanding of the business cycle will serve well to determine the timing of entry and exits for investments.

Conclusion

While economics could appear complex to many, you can use these 6 ways to improve your investment decisions. Start by assessing the overall economy in the world, then proceed to Malaysia’s economy. Use the Ringgit’s performance to evaluate your investments, and determine whether government policies will be good for you as a consumer and for businesses. Build your minimum required returns through inflation in the economy, and time your entry and exits according to the business cycle of boom and bust. Looking forward to seeing better investing choices made!

 

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Have other ideas related to economics to improve investments? Let us know in the comments below!