Understanding market fundamentals

MARKET FUNDAMENTALS refer to the core economic factors that influence the functioning and valuation of financial markets. These include a combination of macroeconomic indicators, microeconomic variables, industry-specific trends, and company-level performance metrics.

- STEVEN JONES

Understanding market fundamentals is essential for investors, policymakers, and business leaders, as they provide the foundation for making informed decisions regarding investments, strategy, and risk management.

Definition and importance

At its core, ‘market fundamentals’ represent the intrinsic drivers of supply and demand in an economy or market. Unlike technical analysis, which focuses on price patterns and trends, fundamental analysis seeks to evaluate the underlying value of assets based on economic and financial data. By studying these fundamentals, analysts aim to determine whether an asset is overvalued, undervalued, or fairly priced.

Macroeconomic fundamentals

Macroeconomic indicators are among the most influential market fundamentals. They shape broad investor sentiment, and often drive long-term trends in asset prices. Key macroeconomic fundamentals include:

• Gross Domestic Product (GDP): GDP measures the total economic output of a country. A growing GDP suggests a healthy, expanding economy, while a shrinking GDP may signal a recession. Investors track GDP data to gauge the general economic environment.
• Inflation rates: Inflation impacts purchasing power and investment returns. Moderate inflation is generally associated with growth, but high inflation can erode savings and profits. Central banks, like the South African Reserve Bank (SARB), adjust interest rates based on inflation trends.
• Interest rates: Set by central banks, interest rates influence the cost of borrowing and the return on savings. Low interest rates generally encourage borrowing and investing, while high rates can slow economic activity but help control inflation.