Investment Strategy: Top-down Approach

In top-down approach, one understands the business sector as a whole without considering the performance of the individual companies in that business. I consider the following while analysing the sector using top-down approach:
1) Growth rate of the economy. If a business is export-oriented, I consider the growth rate of the importing countries as well. Higher growth rate translates into higher money supply in the economy.
2) Government policies for the business sector. Eg: Lower taxes, tax holidays, Limit for Foreign Money if there is scarcity of money in the home country
3) Demand-Supply equation. Eg: higher steel demand due to more construction activities in the home country and abroad, higher demand for mobile telephones due to growing salaries and higher affordability
4) Strength of the competing business model. Eg: Mobile Telephone Vs Fixed Telephone, Fruit Juices Vs Colas
5) Cost competitiveness of the industry in a country. Eg: Cost of a BPO worker in India Vs Cost of a BPO worker in US, Cost per metre for textiles in India Vs Cost per metre for textiles in China
6) Inflation. Higher inflation would affect the demand to a great extent. But inflation is good when it is low and the economy is in a growth path. Eg: A bicycle that was sold at Rs.1000.00 could be sold at Rs. 1200.00 due to inflation. This would provide more money to the manufacturer who would inturn invest this money for expansion or the manufacturer would provide this money to shareholders as bonus or he would hike the salary of his staff or he would use the money to retire his debt. All these are good for the economy. I believe now one could understand the effects of negative inflation which is called deflation.
5) Bank rate. It implies the availability of cheap money which inturn increases the money supply. There are other factors that affects the money supply.
6) Fiscal policy of the country. It is the same as budget prepared by a country. A caveat here. The willingness and the ability of the government to implement a good fiscal policy is more important than a good fiscal policy.
7) Current phase of the business-cycle. The various phases of business cycles are Recovery (Growth), Peak, Recession and Depression.

The above listed items are inturn related to one another. One should definitely use these tools before investing their money in the companies. This helps in understanding the business.

Some follow only top-down approach while making an investment. If the sector is performing good or going to perform good or will keep performing good, the "top-down approach" investors would simply allocate more money to the so-called (historical) star performers (companies) in the business sector and less money to the other companies. In this kind of investment, one doesn't carefully analyse the financials or the business strategies of a company.

The bottomline - "Don't invest in a company if you don't understand its business".