Investing goes beyond analysing individual company data; it also involves staying informed about the broader macroeconomic factors and conditions that affect the investment landscape.

Important economic indicators for Australian investors includes:

(1) Interest Rates

Interest rates affect the cost of borrowing money. When rates are low, consumers are more open to spend and take on debt because the cost of borrowing is affordable. This can stimulate spending on discretionary products. Meanwhile, high-interest rates can discourage spending and borrowing.

For many Australians, their largest expense is their mortgage. When rates are low, homeowners have more disposable income to spend on discretionary products or invest in shares, ultimately pushing economic growth and likely pushing share prices up.

When interest rates go up… (and vice versa)

To consider: Higher interest rates benefit financial service stocks. Banks and financial institutions can charge more for loans while their borrowing costs remain low, ultimately boosting profitability. Defensive stocks like consumer goods and healthcare are often stable too, as the demand for food, medical treatment, and groceries remains even during a recession. 

To avoid: Utilities stocks such as electric, gas, water, renewable & independent power companies are typically negatively affected by rising interest rates because they rely on debt financing for capital-intensive projects. Higher interest costs can squeeze their profit margins. Industries such as travel, leisure, subscriptions, fashion, jewellery, and other non-essential sectors also tend to perform poorly when interest rates are high because consumers prioritise saving or spending on essential items instead. Companies with high levels of debt also become riskier. Often this is the case with growth-focused tech companies.

(2) Gross Domestic Product (GDP)

GDP reflects a country’s economic performance, measuring the total value of goods and services produced within its borders during a specific time. Economists can use GDP to determine whether an economy is growing or experiencing a recession. A growing GDP generally signifies a healthy economy.

Investors can use GDP to make investment decisions—a bad economy often means lower earnings and stock prices, but a growing GDP indicates an expanding economy, which is generally favourable for businesses, investments, and job creation. Retail investors often seek to invest in companies and industries that thrive in a growing economy.

A strong GDP also correlates with higher consumer confidence. When people feel optimistic about the economy, they are more likely to spend money on goods and services, thus positively impacting the performance of discretionary and consumer goods industries. 

When GDP (Gross Domestic Product) increases, it generally reflects a growing economy, which can have various implications for different stocks and industries. Here are some considerations for stocks to consider and avoid when GDP is on the rise:

When GDP goes up… (and vice versa)

To consider: Consumer discretionary companies such as retail, automotive, and leisure often see increased demand when the economy is growing. Construction companies may experience higher demand during economic expansion thus benefit from increased activity. Technology stocks also thrive in a growing economy as businesses invest in technology to improve efficiency and innovation.

To avoid: Defensive sectors like utilities, healthcare, and consumer staples may not perform as strongly during economic expansions because they tend to be more stable and less sensitive to economic cycles. Export-heavy industries like agriculture, mining, education, or tourism may be negatively impacted if the domestic currency strengthens during GDP increase as stronger currency can make their products or services more expensive for foreign buyers.

(3) Consumer Price Index (CPI)

A widely used metric to measure the average change over time in the prices paid by urban consumers for a market basket of consumer products. In simple terms, it tracks changes in the cost of living for the average person on common goods and services like food, clothing, rent, healthcare, transportation, and entertainment. It calculates inflation by comparing current prices to those in a base year, showing the percentage change in prices.
When CPI rises, it indicates that the cost of living is increasing. This can erode the purchasing power of consumers’ money, making it more expensive for them to buy the same goods and services. This information can help investors make sector-specific buying/selling decisions.

Moreover, inflation and changes in CPI may impact returns on investments in real estate, bonds, and stocks, among other investment instruments. For example, high inflation can raise construction costs for real estate projects which also raise property values and cut profit margins.

Click here for extra resources on CPI from the Australian Bureau of Statistics (ABS).

When CPI goes up… (and vice versa)

To consider: Industries related to commodities such as oil, gas, metals, and agricultural products often benefit from inflation. Precious metals like gold and silver are often seen as inflation hedges. As the prices of these essential resources increase, companies involved in their extraction, production, and distribution can see improved profitability. Examples include energy, mining, and agriculture-related businesses. Some consumer discretionary companies, especially those with strong brands and pricing power, can pass on higher costs to consumers during inflationary periods. 

To avoid: Rising inflation can be tough on real estate. It often means higher interest rates, making mortgages costlier and homes less affordable. This can slow down the housing market. High CPI also affects industries like retail, leisure, and automotive as people cut back on spending due to higher living costs.

(4) Producer Prices Index (PPI)

In contrast to the CPI which measures price change from the consumers perspective, PPI measures price change from the perspective of the industries at different production stages, from initial to intermediate goods.

Investors can use this data to understand supply chain dynamics, cost pressures, and potential bottlenecks particularly in sectors sensitive to production costs, such as manufacturing, construction, and energy. A rise in PPI means producers face higher costs, which can lead to increased consumer prices, affecting purchasing power and investment returns.

Click here for extra resources on PPI and Final Demand Analysis from the ABS.

When PPI goes up… (and vice versa)

To consider: Producer stocks such as commodities, natural resources, energy, manufacturing, transportation, logistics, utilities, and agriculture may see increased profitability as higher PPI often corresponds with rising raw material prices while in some cases they can pass on the production costs to consumers. 

To avoid: Final product stocks such as airlines, retail, hospitality, automotive, and leisure, may struggle when PPI rises. Higher production and operating costs can lead to price increases for their products and services. While they may pass some of these costs on to consumers through higher sales prices, this shall potentially reduce demand.

(5) Unemployment Rate

One of the oldest economic indicators available and useful to reveal how constrained or tight the labour market is. A lower unemployment rate indicates a healthier job market, which can have a positive impact on consumer spending. It is calculated by dividing the total labour force by the number of persons without a job. High unemployment leads to reduced spending, lower business revenues, and layoffs.

The unemployment rate mostly affects investments in non-essential industries like leisure, travel, retail, and luxury goods. High unemployment can make consumers more cautious about spending, hurting retail sales and profits. Luxury retailers could face greater challenges than discount or essential stores.

Central banks, like the Reserve Bank of Australia (RBA), consider the unemployment rate when setting interest rates. High unemployment can lead the RBA to lower rates to boost the economy, affecting returns on savings and interest-driven investments.

When unemployment rate goes up… (and vice versa)

To consider: Healthcare stocks such as healthcare, pharmaceutical, or biotech, as people continue to need medical services regardless of the economic climate. Online education providers, vocational schools, and test prep services are also worth considering as people look to improve their skills or seek new career opportunities during unemployment. Staffing companies might also observe increased demand as they help connect job seekers with employment opportunities.

To avoid: Retail, personal grooming, fitness centres, subscription services, travel, leisure, and automotives, as unemployment hinders consumers from spending money on non-essentials or big-ticket purchases. Banks and financial institutions may face challenges when unemployment rises, as it can lead to increased loan defaults and decreased consumer borrowing. Elective or non-urgent healthcare services such as cosmetic procedures might also see reduced demand.

Keep in mind that the industries mentioned above are generally more affected or less affected by specific economic conditions. However, how well a company in these industries performs can depend on factors like its financial health, competitiveness, and ability to adapt. 

This information is general, so investors should do their own research, think about their financial goals and risk tolerance, and seek advice from a financial advisor when making investment choices. 

It’s also a good idea to spread investments across different sectors to reduce risks during economic uncertainties.