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Obtaining a macro-economic view

This article is part of
Guide to macro-economics and investment portfolios

Peter Rutter, global equities manager at Waverton Investment Management, says most investors and commentators generate a macro-economic view by using a combination of inputs.

A ‘top-down’ approach is reached via an analysis of macro-economic data released by government institutions and other data providers.

For example, Mr Rutter says the inflation data from the Bank of England is currently closely monitored.

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A ‘market observed’ approach is where some investors may base a view on market implied expectations, which themselves are based off economic agents, for example oil price futures giving an indication of what buyers and sellers of oil think the price will be in 12 months time.

A ‘bottom-up’ approach is the gathering of real time information from companies and participants in the aggregate economy.

For example, Mr Rutter says an employment agency may experience a significant increase in business activity suggesting unemployment is about to fall.

He says this may be apparent before aggregate government data on unemployment is collected, processed and reported.

A ‘theoretical’ approach is where macro-economic views are generated by utilising various economic theories such as purchasing power parity to form a view on whether a currency is over or under valued.

For active funds, Eric Clapton, managing director of Wellian Investment Solutions, says the extreme view is that of ‘bottom up’ where the investment fundamentals for each stock selection considerably outweigh the macro view, as the managers take an unconstrained view as is often the case with special situation funds.

In most cases, Mr Clapton says fund managers will blend both top down and bottom up approaches, with their strategic style overlaid by a tactical bias depending on current circumstances.

The top down macro approach will tend to bias towards sectors or assets where better prospects are anticipated, he says.

Mr Clapton says this is done by screening out fundamentally good stocks in areas that are not in favour.

Such funds may remain invested in those areas even as valuations become stretched, he adds.

Alternatively Mr Clapton says a bottom up fundamentalist may continue to hold stocks that remain undervalued because their sector or country is out of favour.

He says: “With both styles strong valuation processes and trading disciplines should offset those weaknesses.”

Louis Coke, senior investment manager at Charles Stanley, says ultimately a macro-economic view can be obtained any way you like.

But he points out most economists and fund managers place a high degree of emphasis on economic numbers, either ‘leading’ or ‘lagging’ indicators.

Layered on top of this, Mr Coke says some fund managers, himself included, then look at company, sector and country specific attributes, and decide if they want to be involved in that economic area.

According to Emiel van den Heiligenberg, head of asset allocation at Legal & General Investment Management, the most naive technique to get a macro-economic outlook is adaptive expectations or extrapolation.