Macroeconomic conditions impact your investments—so due diligence is more important than ever
In the present moment in Australia, headline inflation is just coming down from a height that’s not been seen since the 1990s. Unsurprisingly, the blunt instrument of monetary policy has been whipped out and employed in hopes of taming it, so the cash rate is also soaring for the first time in decades. We also have a relatively tight labour market, and a rate of wages growth that’s been making economists around the country nervous.
From this information, we can conclude that the economic landscape in Australia is challenging for everyone, but particularly for those businesses that might be less established and may not have had the opportunity to reinvest their profits into their business to develop its resilience. The combination of high inflation, wages growth, and high interest means that services and materials are expensive to source, good help is expensive to hire, and questions are necessarily being raised about the ability of businesses to service their loans.
Meanwhile, the consumer is encouraged to spend less on discretionary goods, which will exert a downwards pressure on sales figures.
This is a challenging situation not just for businesses, but for their investors, too. There’s no shortage of advice for investors out there, although it is variable and occasionally contradictory. The two key tenets remain constant, though: know your own appetite for risk, and diversify your portfolio.
But the risk with defensive investments is that inflation will outpace their growth, and medium- and higher-risk options seem fraught as well: the real estate market is less reliable than it once was, and with business collapses rising and insolvencies higher than they have been since 2015, how do we determine what gets included in that diversification process?
Well, when you’re looking at businesses across different—and perhaps unfamiliar—industries and sectors in which to invest, the best approach might be research-based. Your research is unlikely to yield a single objective truth that will tell you whether or not something’s a good investment opportunity, unfortunately, but gathering data points and analysing them will still get you a lot closer to making an informed choice.
Some of the key items to review are broad macroeconomic conditions, as well as a specific business’s financials, its leadership team, and its competitors.
For information about broader macroeconomic trends, there are news media sources, but certainly don’t forget to check the Reserve Bank of Australia’s quarterly Statements on Monetary Policy.
Financials will include things like credit histories and year on year revenue. This is information that tells you whether or not the company has serviced its debts and how well it’s been performing in the market over the past years.
Doing a bit of research into a prospect’s leadership team is only sensible. If executives have held roles in which they’ve had a lot of experience, or been especially successful, that might indicate the ability to steer their current organisation through choppy economic waters. Likewise, a string of company collapses in their rear-view mirror could recommend a less optimistic outlook.
A competitor review doesn’t need to go as deep as your research into your own prospect, but it’s worthwhile to look at other companies in the market to fully understand the context.
All of this information will help you determine how much risk an investment entails, which you can consider in the scope of your own tolerance. As economic pressures develop and evolve, due diligence will become more necessary than ever to ensure a portfolio prospers.
