Most value investors are good at doing bottoms up research, finding undervalued/overvalued securities and such, but struggle at incorporating macro ideas into the security selection process. I think we could get better returns by utilizing macro themes. In case people are interested, let’s look at a couple of macro themes and trace their secondary and tertiary effects to generate investable ideas.
The first macro theme I think of is oil/gas production by US putting downward pressure on oil prices.
Primary effects: Oil/gas/alternatives/nuclear energy prices are all pushed down.
Secondary: Industries that are leveraged to oil/gas like drilling, oilfieldd services, sand mining(fracsand) should head lower.
Tertiary: Countries that are major exporters of oil, like Russia, Arabs, Norway face declining export revenues and narrowing of trade surplus which leads to weaker currencies, which is bearish for assets priced in them. So perhaps Russian equities would face downward pressure. etc etc.
had I did more macro research i would not have gotten killed on the Santander…
so how would you allocate your time really is the question and keep in mind and how relevant that data point really is for long term investing…
you’re referring to shale gas and not oil specifically…oil consumption will increase over time around the world…that is pretty much all i’m certain of…not whether prices will rise cause the supply side of the equation is pretty much guesswork and debatable by the best oil/gas economist out there…
I’m pretty sure I remember looking into oil prices and that when adjusted for inflation, they had not changed much (except a few periods, which were spikes then reverted back to the mean). I could be mistaken, this was like a year or so ago.
It’s not the biggest but since that’s what’s in the news these days, it’s probably even more important to look at other macro themes that aren’t on the front pages.
I’m thinking on the bearish side, apart from lower oil prices, India’s economic slowdown’s effect on gold prices is a big one IMO. I think India’s heading towards US-style stagflation. Gold being a consumer good is going to suffer when it’s biggest consumer buys less…
you could argue the US 10yr bond is up there with the Euro as the only “macro themes” that matter.
If you make a prediction right now that the Euro heads to parity in the next 18 months, that has vast implications to every other investment thesis… (potential Eurozone breakup, worldwide economic slowdown, lower energy prices (commodity complex lower), US companies lower overseas proft, all other foreign currencies weaker ex JPY)
i do not consider this a macro theme per say (IMHO)… WTI/Brent have had huge volatility with ranges of over 25% in the past 12 months and US oil production is very low on a list of “why” oil prices are where they are right now.
it is certainly an important factor relavent for many other investment buts it is a strech to connect US oil productions to Russian equities. Certainly the headline number production/inventories will move the market on the trading day.
global macro hedge funds will trade any instrument in the world, but that does not mean trading any particular security is a macro trade in an of itself.
The point of this thread is not to come up with macro “trades” or worry about what “global macro hedge funds” are going to trade, nor is it to come up with obvious trade ideas. Rather the goal is to increase the understanding of macro themes and how they affect asset prices so value investors can understand why intrinsic values can differ from market prices and in the proces not get slapped by macro events and look for potential catalysts.
With that in mind, I’d keep an eye on daily asset flows in and out of ETFs. The risk-on/risk-off trades that have plagued fundamental investors for the last 2-3 years are continuing and can best be seen in ETF flows. For example, when some piece of bad news hits the wires and we go “risk-off” there’s mass selling of ETFs. This leads to high correlations and a harder environment for active investors to be rewarded.
