Macro Directed Markets

Few macroeconomic trends resonate in our current investment climate and with the stock markets being driven by Marco-economics rather than valuations, it is important that we seek to understand where the macroeconomic tides are headed. Government policy, emerging market health, interest rate movement and geopolitical risk affecting commodities are all important macroeconomic themes to be explored further in this climate. Most are interrelated and should be considered in whole when making investment decisions.

Perhaps most observable quantifiable is the government policy and interest rate climate we are in. The loudest macro theme seen for the better part of 4Q 2013 into Q1 2014 is government policy impacting interest rates. Recent trouble in emerging markets has forced central banks of emerging economies such as the Reserve Bank of India, the Central Bank of the Republic of Turkey, and the South Africa Reserve Bank to implement emergency rate hikes as their currencies tumbled. Strangely enough, these interest rate hikes are being touted as consequences of the loose interest rate policies most mature economies have enacted over the previous years. These rates are being increased in order to combat weak economic conditions – not growth. The move precipitates the continued chatter of global monetary policy tightening spanning from the U.S to China. The below chart shows the top 20% of the world’s GDP and their recent monetary policy decisions.

Source: Business Insider

Beyond government policy and interest rates, the U.S jobs numbers puts together an interesting macroeconomic story. Though we have seen a general decreasing unemployment trend in the US over the past year, December numbers reported in January proved to be uninspired, thus giving the market and economists reason to question the FED’s decision to taper its bond buying program. A non-voting member of the Federal Reserve stated “even as the 6.5% unemployment threshold approaches, labor-market conditions remain far from where they would need to be in order to justify raising short-term.” Furthermore, North America is experience record lows in the number of unemployed who are not actively seeking jobs, the labour participation rate in Canada and US have been well below 70% for over a year now, indicating the true unemployment rate is well above the reported 6.6% in US and 7.0% in Canada.

Source: www.fxstreet.com

The economic calendar shows that while the unemployment rate that the Federal Reserve bases its interest rate and monetary policy judgement is moving in the expected direction, non-farm payroll growth is underwhelming as is the job participation rate.

In general, we are seeing aversion to risk in the capital markets. We are experiencing a softer stock market, a recovery in commodities, increasing interest rates, and less accommodation monetary policy. All these add up to a reversion to the capital markets norm, where monetary policy was not the sole driving factor in the direction of capital markets, and company performance was the deciding factor in asset pricing. We are experiencing the return of growth in the developed markets with the U.S at 3% and the U.K at over 2%, and the cooling of emerging markets after a period with low yields and a quest for performance. The climate is clearly one for flight to quality, so consider quality in all your portfolio decisions.

For portfolio advice and more insight checkout my affiliates HMS Asset Management. We have an in-depth look at emerging markets, macro environment and micro environment weekly.

Look for cheap stocks with a solid balance sheet and a viable business strategy. exercise patience as the market takes a breather, then pounce once the timing is right.

Trade Well
-F