GDP Impact On Stocks

What is Gross Domestic Product (GDP) ?

Gross Domestic Product (GDP) represents the economic health of a country. It presents a sum of a country's production which consists of all purchases of goods and services produced by a country and services used by individuals, firms, foreigners and the governing bodies.

Importance of GDP

• GDP consists of consumer spending, Investment expenditure, government spending and net exports hence it portrays an all inclusive picture of an economy because of which it provides an insight to investors which highlights the trend of the economy by comparing GDP levels as an index
• GDP is used as an indicator for most governments and economic decision-makers for planning and policy formulation
• In case of GDP, each component is given the weight of its relative price. In market economics it clicks as prices reflect both marginal cost of the producer and marginal utility for the consumer, i.e. people sell at a price that others are willing to pay
• GDP helps the investors to manage their portfolios by providing them with guidance about the state of the economy
• Calculation of GDP provides with the general health of the economy. A negative GDP growth portrays bad signals for the economy. Economists analyze GDP to find out whether the economy is in recession, depression or boom
• Gross Domestic Product is good measure for an economy and with improvement in research and quality of data, statisticians and governments are trying to find out measures to strengthen GDP and make it a comprehensive indicator of national income.

GDP Impact on Stocks

GDP has a massive impact on almost all the economic factors in a country. Even a small change in GDP can have far reaching affects on the economy. Stock market investors and traders use GDP data to help evaluate corporate profit levels in the past quarter and in the future.  Strong economic growth generates more business profits, and can lead to higher stock prices.  Weak economic growth adversely affects corporate profits, and can apply downward pressure to stock prices.

The impact of increasing and higher GDP growth rate leads to rise in stock prices. With a growing economy, India has seen higher employment opportunity for the people which have led to an increase in their disposable income. With higher demand in place, companies have seen a surge in their profits leading to a rise in their stock prices. To cater to the increasing demand, companies have also increased their investment activities adding new plants, factories, offices etc. This adds to the future expectation of revenue growth of the companies which if sustained can lead to further increase in the stock prices.

Now a booming economy with consistent high GDP growth rates is what attracts foreign investment in the form of FDIs and FIIs. With one of the highest GDP growth rates over the last few years, India has also experienced one of the highest Net FII inflows in the world which has led to stock market surging from 6000 level in early 2000 to present level of 20000. 

By Ruchita Gajjar– Research Associate – Concept Securities Private Limited

(Source :moneyworks4me)