Question

What types of companies would have less exposure to broad economic conditions?

Answer 1

The extent of exposure to the broad economic conditions of a company depends on several factors.

The sector in which the company operates - This is the most major factor. A company operating in sectors such as food, power, and daily essentials- is lesser vulnerable to broader economic conditions. This is because the demand for such essentials remains irrespective of the market conditions. Such a company is known as defensive sector companies. Conversely, a discretionary spending sector, such as luxury items and entertainment is cyclical in nature and is prone to market conditions.

Financials of the company - A company that has less leverage ie. less debt in its capital structure would have less exposure to broad economic conditions. This is because the market interest rate affects the yields, resulting in a higher cost of debt. Also, companies that have higher promotor shareolding, have less exposure because the capital has a lesser probability of withdrawal when an adverse market condition takes place.

Operations - A company which runs efficient operations and have lesser exposure to a single market and sector is less exposed to broad economic conditions. The point highlighted here is of diversifying. Company has less exposure to broad economic conditions if it operates in negatively correlated sector. This ensures that if one of the company's sector is impacted adversely from due to adverse market conditions, the other sector is benefitted from the same adversity.