For equity and bond investors alike, today’s many macro issues may not be the primary focus – but they should not be ignored.
In recent months ‘macro risk’, a term that covers both political and macroeconomic risks, appears to have spiked, through channels as diverse as the UK’s relationship with the EU, interest rate policy, and the US presidential election.
Moreover, there is little doubt that macro risk has had a significant impact on the prices of risk assets. Thus Brexit developments have cut the global value of sterling significantly, and central bank policy has pushed global bond yields to record lows. Macro factors appear to be in the ascendant.
This raises important questions for investors. Put bluntly, if macro risks are driving markets to such a great degree, shouldn’t they also be driving investment decisions?
“It does seem that macro is playing a big role just now,” says Ken Broekaert of Burgundy Asset Management. “But we don’t do forecasts of GDP, of inflation, of interest rates, of sector-by-sector, or of country-by-country and then decide, based on our macro forecasts, which companies we’ll pick. We don’t try to project how markets will go – we’re a bottom-up company.”
Given how mistaken the pollsters and bookies have often proved to be in recent years, such an approach is understandable – and it is widely shared by other senior fund managers, in bonds as well as equities.
“We are very cognisant of developments from a macroeconomic perspective,” says Sandro Näf of Capital Four, co-manager of the St. James’s Place International Corporate Bond fund. “However, we don’t try to forecast and take bets in the portfolio on these types of developments.”
But if macro forecasting should not be the basis for investing, macro events and themes still demand consideration, and can provide exceptional opportunities. The UK referendum result provided one such opportunity, although it was vanishingly brief.
“We especially found [this kind of opportunity] after Brexit,” says Broekaert. “We don’t try to project these things, but we do like to capitalise on them, and it was a very short window. We were able to add two European holdings and didn’t even get to [add] that much because [the time] was so short. The first quarter was a longer period that allowed us to capitalise on more things.”
Yet while some macro events can provide short-term opportunities, in other cases macro risks need to be understood simply so that exposure can be minimised.
“Since we take a bottom-up focus in the portfolio, what we want to know is how companies are potentially impacted by macroeconomic developments,” says Capital Four’s Näf. “We want to pick the right companies that can withstand the challenges [posed by] political changes. In our current portfolio that means we are really overweight parts of Europe that are having an easier time growing their local economies, and where companies are better protected from negative developments.”
On the other hand, of course, any company that is highly exposed to a particular macro outcome may be too risky to countenance.
“We don’t want macro events or political events to ruin a bottom-up investment thesis on a company,” says Broekaert. “If there’s a company where the thesis could be completely derailed by macro or political events, we avoid it. We make sure we own companies that are not dependent on how an event would play out. For example, we don’t own companies [for which] we’d really need to have a view of what Brexit means.”
The importance of macro lies not simply in events, but also in the broader political and economic landscape. It is here that you might include the long-haul decline in bond yields and the crescendo of political risk in the developed world.
“Political risk increases depending on where you are in the credit cycle,” says Polina Kurdyavko of BlueBay Asset Management. “Given that emerging markets are entering the new stage of the credit cycle, where we expect to see further deleveraging and a relatively calm environment on the political front, [then] by default we expect political risk not to be the main driver of performance. Besides, over the last couple of years we have seen elections in major emerging markets – Brazil, South Africa, Turkey, Colombia, whereas in the next 12 months they are in the developed world – the US, France, the Netherlands and Germany.”
In the developed world, moreover, the economic climate is one of low inflation and low growth. That poses companies the challenge of how they can create value for shareholders.
“[In such an environment], being efficient with margins is crucial,” says Burgundy’s Ken Broekaert. “It’s really important to do company-by-company analysis on where you really think there is margin improvement potential."
The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The opinions expressed are those of BlueBay Asset Management, Burgundy Asset Management and Capital Four Management, and are subject to change at any time due to changes in market or economic conditions. This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any strategy. The views are not necessarily shared by other investment managers or St. James's Place Wealth Management.