Investors have ridden the waves of economic upheaval over recent years as the country has coped with the impact of the pandemic and the resulting surge of inflation.

It was a sharp reminder for anyone who might have forgotten the global financial crisis (GFC) lesson that unforeseen events can disrupt even the best-laid investment plans.

But even in calmer times, the economy can make a big difference to your investment outcomes.

Why do economic indicators matter?

When you’re assessing your investment strategy, it can be helpful to understand the wider picture.

Investors in equities are often putting their money into companies that are experiencing first-hand the state of the economy.

When the economy is doing well, their customers have money to spend and the companies are more likely to deliver larger profits. When it’s not so healthy, profits may be down.

Those in bonds and other fixed-interest assets can feel the impacts of monetary policy. Corporate bonds also have direct exposure to economic factors.

Looking at common economic indicators can help to guide you on what might lie ahead, and whether your investment strategy might need to change.

The key economic indicators that reveal the strength of the economy are gross domestic product (GDP), which reveals how much the economy is growing or shrinking, the unemployment rate, and the consumer price index (CPI), which details how much prices are rising.

There are also regular surveys around business and consumer confidence that can give you a sense of sentiment.

If GDP is down, it’s usually a sign that the outlook for investments in assets such as local equities may be more restricted. If the CPI rate is picking up, it could be a sign of higher interest rates on the horizon. Higher unemployment could mean less consumer demand, which may impact on your investments, too.

In an environment where GDP is growing, it is often the case that the investment outlook improves, particularly for the sharemarket. The size of the economy is increasing, which gives those companies you might have invested in a chance to grow their slice of it.

There can also be geopolitical factors that affect investment outcomes – the Red Sea attacks affected the stock prices of shipping companies at the same time as they pushed up the cost of shipping, stoking inflation concerns, for example. The Russian invasion of Ukraine contributed to increased oil prices, also causing inflation challenges and shaking European equity markets.

Downturn challenges

There are ways to take some of the sting out of a downturn.

One of the most common is to diversify. If you can spread your investment across a range of asset classes, it is less likely that they will all be equally affected by a downturn.

The most recent downturn was unusual in that the sharemarket was cooler at a time while fixed interest returns were also poor – usually fixed interest investments could be expected to act as something of a hedge against market volatility.

Another option that is deployed by some investors is to keep part of a portfolio in stocks such as utilities, which tend not to be as affected by the vagaries of economic movements.

Your roadmap

A SHARE investment adviser can be an invaluable asset to help you navigate economic challenges, both in New Zealand and around the world. Studies have shown that advised investors tend to be better off – probably because they have someone helping them stick to the course even when things are shaky. If you’d like an expert on your team, drop us a line on 0508 2 SHARE (0508 274 273). We’re here to help.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.