Fundamental analysis examining various events such as natural disasters, terrorist attacks, and so on. He recognizes his task of predicting the impact of these events and, in particular, the impact on the prices of currencies in the foreign exchange market.
Such events can have a significant impact on Forex prices, so it is good to see when they work in this market. It is also good to keep in mind that when there are more than one events, they can neutralize their results with each other. In this matter, there is a wide range of events that are well understood in order to accurately predict price directions in the foreign exchange market.
Here are some of the key macroeconomic indicators that are best familiar to any aspiring beginner:
Gross domestic product
The indicator is calculated as a percentage based on the last three months and on the basis of the last calendar year. Adjustments affect the trend in the international market. The deflator of the gross domestic product is taken into account. This indicator calculates the market price of products and services that are produced in a specific country, regardless of the nationality of the company. GDP has four main components: consumption, investment, government spending, and import-export.
The first value depends on the percentage growth in the first three months compared to the last three months. The indicator is one of the most commonly used to analyze the economy as it covers all of its sectors.
Producer price index
It calculates the monthly change in wholesale prices and includes products, industry and production levels. It precedes the significant consumer price index. Market analysis usually excludes food and energy in order to understand the potential inflation rate.
Personal income and personal expenses
The personal income index reflects changes in compensation that citizens receive from all possible sources: labor income, rent, dividends and interest, social security, social assistance and unemployment benefits. The personal value index expresses changes in the market value of products and services to be consumed by citizens. This is the most important element of GDP.
These two measures express the amount of savings equal to the difference between personal income minus taxes and consumption divided by disposable income. Continuous savings on savings is a very important indicator that needs to be analyzed, as it expresses the relationship in the spending of citizens.
Sales Managers Index
It finds popularity for calculating business confidence in an economy. Countries such as the UK, Germany and Japan include manufacturing and service sectors. This index reflects business activity and expectations, prices for arrivals, building new facilities and the level of new jobs. In other words, it illustrates whether the business is developing and improving.
Retail sales
This indicator is calculated as a percentage of the change each month in the income of individual owners of durable and short-lived products. This is very indicative of the general consumption of the population in the country. His point is that it excludes services, insurance, legal fees, etc. Moreover, it is based on nominal conditions, not real ones, and does not reflect inflation. The index could be significantly adjusted even if car sales are excluded.
Fundamental analysis is used by investors to assess the value of a company (or its shares), which reflects the state of affairs in the company, the profitability of its activities. At the same time, the financial indicators of the company are analyzed: revenue, EBITDA (Earnings Before Interests, Taxes, Depreciation and Amortization), net profit, net worth of the company, liabilities, cash flow, the amount of dividends paid and the company's performance indicators.
"Intrinsic value" in most cases does not coincide with the price of a company's shares, which is determined by the ratio of supply and demand on the stock market. Investors who use fundamental analysis in their activities are primarily interested in situations when the "intrinsic value" of a company's shares exceeds the price of shares on the stock exchange. Such shares are considered undervalued and are potential investment targets. When buying undervalued shares, investors expect that in conditions of market inefficiency, the price of shares on the stock market will tend to "intrinsic value", that is, in the case of undervalued shares, it will grow. This statement is the opposite of the postulate of technical analysis, which states that all material information is immediately and fully reflected in the market price of securities. And this principle negates the idea of fundamental analysis.
The American school of fundamental analysis is based on the classic work of Benjamin Graham and David Dodd, "Security Analysis", published by them in 1934. Graham himself used fundamental analysis in practice and was a successful investor. One of the most famous of Graham's followers using fundamental analysis is Warren Buffett.
Fundamental analysis is based on macroeconomic indicators and business activity indices.
For example, fundamental analysis of the market value of gold is based on the assertion that “as you know, gold is a countercyclical commodity that rises in price during periods of low rates and becomes cheaper during periods of rising rates”, usually, an increase in the US FRS rate and strengthening of the dollar against major world currencies causes the drop in the exchange value of gold, similarly reduces the cost of gold, the absence of global risks (gold always grows on fears of wars and conflicts), thus, a scientifically substantiated analysis of these and other factors known to the researcher allows predicting the price of a gold futures.
Criticism
The criticism of fundamental analysis as a whole boils down to two statements: that, firstly, it is unrealizable, and secondly, even if it is nevertheless feasible, it is superfluous and therefore unnecessary.
The impracticability of fundamental analysis is argued by the fact that a huge number of factors, including random and unpredictable factors, affect price formation, and it is impossible to take into account all factors in principle, especially since it is not known in advance what effect this or that event may have on the price (for example, a spontaneous the disaster, on the one hand, damages the national economy, which should lead to a depreciation of the national currency, and on the other hand, it is an incentive for the economy, since new jobs will be created to overcome the consequences of the disaster, orders are made, etc. contributes to the growth of the exchange rate).
The assertion that fundamental analysis is unnecessary is directed mainly against the assertion that fundamental analysis makes it possible to identify the dominant trend (trend in the market: if the price tends to rise or fall, this is already evident from the stock charts, if there is no trend at the moment, then fundamental analysis is useless.
It is impossible to assess the quality of the fundamental analysis of the market situation done, because if the fundamental forecast is justified, it may simply be the result of accidental luck, just as the fallacy of the forecast can be the result of accidental bad luck.
