Transcript MICEP – Macroeconomics I

Macroeconomic Strategy Primer
October 25th, 2016
Presented by: Omar Hashem
McMaster Investment Council
Agenda
I.
Performance Attribution
II. Macroeconomics 101
III. Key Indicators
IV. Creating Links & Avoiding Common Errors
V. Top-Down Analysis
Tuesday, October 25th, 2016
McMaster Investment Council
2
I
Performance Attribution
Performance Attribution – Asset Allocation
Why does macro matter?
•
•
•
•
•
Studies show asset allocation accounts for the majority of portfolio performance.
Decisions become more important the vaster the investment universe.
Similarly active sector management can be more important than stock selection.
Most investment managers don’t like to report on this.
For small funds with limited holdings this decision will likely be made involuntarily.
For Example:
Overweight
• Thriving customer base
• Regulated cash flow (yield)
Tuesday, October 25th, 2016
Underweight
• Political uncertainty
• Appreciating USD
McMaster Investment Council
4
II
Macroeconomics 101
Macroeconomics 101 – Supply & Demand
Macro vs. Micro Models
• We are looking at the aggregate demand and supply in an economy.
Where:
Y = C + I + G + (X - M)
Supply curve differs depending on scope.
Factors Effecting Supply
• Productivity / Technology
• Resource / Capital availability
• Trade / Policy
Tuesday, October 25th, 2016
Factors Effecting Demand
• Real wealth
• Interest rates
• Consumer sentiment
McMaster Investment Council
6
Macroeconomics 101 – Money & The Banking System
Fractional Reserve Banking
• Fiat money is not backed by anything.
• Money is mostly in the form of credit.
• Creates money multiplier effect.
Monetary Policy
• Open market operations
• Reserve requirements
• Interest rates
Tuesday, October 25th, 2016
McMaster Investment Council
7
Macroeconomics 101 – Cycles
Business Cycle + Credit Cycle
• Many business cycles may fall within a long-term debt cycle before a deleveraging.
• Interaction of credit and business cycles can have large effects on asset prices.
Tuesday, October 25th, 2016
McMaster Investment Council
8
III
Key Indicators
Key Indicators – Leading Indicators
Consumer Confidence
Index
Available Monthly
• Survey data, not adjusted for seasonality.
Available Monthly
Manager Purchasing Index
• Based on five major indicators: new orders, inventory levels, production,
supplier deliveries and the employment environment.
Available Monthly
Building Permits
• Points to intention to develop real estate.
Available Monthly
Manufacturing Activity
Inventory Levels
Tuesday, October 25th, 2016
• Private survey gauging manufacturing activity. Also see transportation
volumes.
Available Monthly
• Private data looking at inventory trends.
McMaster Investment Council
10
Key Indicators – Coincident / Lagging Indicators
Available Monthly
Unemployment
• Breakdown by province and type of employment.
Available Monthly
Consumer Price Index
• Measure of inflation based on fixed basket of goods.
Available Quarterly
Real GDP (& Revision)
• GDP growth derived from this, takes time to calculate and is often revised.
Available Monthly
Loans
Retail Sales
Tuesday, October 25th, 2016
• Private data, usually provides breakdown of debt categories.
Available Monthly
• Consumer spending constitutes roughly 2/3 of GDP.
McMaster Investment Council
11
IV
Creating Links
Creating Links – Common Mistakes
Don’t Paint with a Broad Brush
• Research how the data is compiled & calculated.
• Be specific and deliberate with your assumptions.
Tuesday, October 25th, 2016
McMaster Investment Council
13
V
Top-Down Analysis
Top-Down Analysis – Process
Theory
Process
Macro Trend
• Identify economic trends and form a
hypothesis using data and evidence as
support.
Sector Analysis
• Narrow down to specific sectors,
industries or business models that will
thrive in this environment.
Company
Research
Tuesday, October 25th, 2016
• Analyze the competitive environment
and determine which specific
companies are positioned to best
exploit this trend.
McMaster Investment Council
15
Top-Down Analysis – Example
Ex: Canadian Equities & The Business Cycle
Macro
• Consumer credit
trending up since crisis,
backed by inflated
residential housing
• Private credit also up,
yet investment is falling
below 2008 levels
resulting in $700B of
idle liquid assets
Sector
Companies
Characteristics:
Characteristics:
• Defensive Skew
• Dividend Yield
• Capital Spending
• Low exposure to real
estate prices
• Favorable competitive
environment
Contenders:
Contenders:
• Consumer Staples
• Utilities
• Telecom
• Sustained low
inflation, low interest
rate environment
Tuesday, October 25th, 2016
McMaster Investment Council
16
Questions?
McMaster Investment Council