Fundamentals of Asset Classes
There are many asset classes, and the performance of each asset class relies on its fundamentals. By understanding the basics of assets’ fundamentals, investors can more effectively make investment decisions. The failure to acknowledge fundamentals is a surrender.
Fundamental analysis determines the value of an asset based on the underlying factors that impact its future. By using this technique, investors examine an asset’s economic health, rather than just its price movement. In addition, fundamental analysis also helps in determining whether an asset is undervalued or overvalued, which means that its price is lower or higher compared to its intrinsic value.
Methods of Fundamental Analysis of Asset Classes
Qualitative and quantitative analyses are two fundamental methods of collecting and interpreting data. Since both methods have the same objective, they can be applied independently or simultaneously.
Quantitative Analysis — A Numbers Game
Quantitative fundamental analysis helps investors understand an asset’s financial performance by examining a few numerical values. The investor can then compare these figures with historical data and with assets from a similar industry. Quantitative analysis uses a variety of data including historical investment and market data to analyze future trends.
Quantitative Analysis — A Soft Metrics
Qualitative fundamental analysis takes into account every aspect of the asset that is not quantifiable but significantly impacts the performance and the value of an asset. The qualitative information includes competitive advantage, brand value, stakeholders satisfaction, ethics, quality of management, etc. Soft data can also be called qualitative information.
Types of Asset Classes and their Fundamentals
Among the five main asset classes are fixed income, equities, real estate, commodities, and cash and cash equivalents. Asset classes have their characteristics, and fundamental indicators determine their performance in the future.
A fixed-income investment refers to as debt investment. When an investor buys a fixed income asset, the investor expects to receive scheduled interest payments of fixed amounts at fixed times. At the end of the term, you will get your invested money back. Fundamentals indicators to gauge the risk and future performance of fixed assets include interest rates, inflation, default, and credit risk. In a rapidly changing interest and inflation rate environment, fundamental analysis of fixed income assets can provide valuable insight into long-term returns.
This asset class consists of apartments, plots, commercial buildings, villas, etc. There has been an increase in interest in real estate investments over the decades, but real estate funds, equities, and ETFs are now also enabling retail investors to access one of the oldest asset classes. The performance of the real estate sector depends on factors such as macroeconomic environment, financing costs, tax rates, and government policies.
In determining the underlying value of equities and its potential for growth, fundamental analysis observes factors such as revenues, earnings, return on equity (ROE), future growth, and profit margins, among others. Economic and industry factors are also taken into account in the fundamental analysis of equities. Fundamental analysis of equities also includes market competition, economies of scale, and brand recognition.
Commodities are also among the oldest asset classes in the world. Commodities include gold, silver, energy, minerals, and agricultural products. Investors can use various routes to invest in this asset class such as futures contracts, stocks, and physical ownership. The fundamentals of commodities are based on their supply and demand dynamics. The price of commodities soars when demand rises while price falls when supply exceeds demand. The global macroeconomic environment and business growth activities also play a role in the price movement.
Cash and Cash Equivalents
Cash and cash equivalent assets consist of liquid and current assets like certificates of deposit, treasury bills, short-term government bonds, which can be converted into hard currency immediately. It is also used by portfolio managers as an effective asset allocation tool. The rate of interest and inflation are the key fundamental indicators to look at when investing in cash and cash equivalents.
To sum up…
A basic understanding of the fundamentals of various asset classes helps to generate robust returns and avoid excessive risk taking. In general, it is used for long-term investments to determine the price at which an asset may ultimately trade. Fundamental analysis is also helpful for investors who seek to invest in multiple asset classes and build a well-balanced investment portfolio.
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