Some interesting observations on macro investing from an article in Investment News:
Ignoring macro is like ignoring the seasons when trying to predict the weather. Any December day in New York City is likely to be a cold one. The “macro” backdrop dictates wearing a coat instead of shorts. The “stock-specific” issues determine whether that coat should be a winter parka or a lighter jacket. It’s possible to decide incorrectly on the choice of coat, but regardless, one is usually better off wearing a coat than shorts in December in New York City.
Macro trends influence everything that happens in the markets, but the extent of its sway probably is a surprise even to those who embrace these trends. Investors who actively harness the powerful influence of macro and use it to their advantage can set themselves apart from the pack.
Investors often have a difficult time explaining the performance of their stock picks. This is largely because they underestimate the influence that macroeconomic forces have on individual stocks. They search for a connection between returns and earnings or management strength, but the truth is that an overmost stock performance is explained by forces that go beyond the income and cash flow statements. In fact, the data show that historically, 71% of equity returns could be explained by macro trends. This means that all of the time stock pickers spend poring over balance sheets and talking with company management gives them only a third-better chance that the stock they choose will perform well. How many investment managers would willingly admit that they are investing blindly with respect to two-thirds of the factors driving their portfolio’s return?
One of the prevailing trends over the past several years has been the heightened influence of top-down analysis and a renewed focus on macro. While some stock pickers may have been fortunate enough to pick winners that outperformed their benchmark indexes, most stocks’ relative performance trends have been whipsawed by the macro-induced market peaks and troughs. Since late 2008, the percentage of equity returns explained by macro forces has risen steadily and reached a record high 90% by the end of 2010. Getting the “big picture” right has become a necessity for top performance results.
The influence of macro factors over the past several years may change at some point, but it may well be one of the factors currently driving investors into Global Macro-type portfolios. It seems that global uncertainty, especially the uncertainty added by political intervention in financial markets, has caused investors to become increasingly aware of macro factors. Watching the relative strength change among global asset classes may certainly aid in getting the big picture right.
