Macroeconomic Strategy Primer October 25th, 2016 Presented by: Omar Hashem https://scs.fidelity.com/common/application/markets_sectors/business_cycle/Business_Cycle_Sector_Approach.pdf http://www.macleans.ca/economy/economicanalysis/the-most-important-charts-for-the-canadian-economy-in-2016/ https://www.economy.com/dismal/tools/global-business-cycle-map

McMaster Investment Council Agenda Performance Attribution Macroeconomics 101 Key Indicators Creating Links & Avoiding Common Errors Top-Down Analysis Tuesday, October 25th, 2016 McMaster Investment Council

Performance Attribution

Performance Attribution – Asset Allocation Why does macro matter? Studies show asset allocation accounts for the majority of portfolio performance. Decisions become more important the vaster the investment universe. Similarly active sector management can be more important than stock selection. Most investment managers don’t like to report on this. For small funds with limited holdings this decision will likely be made involuntarily. For Example: Includes being aware of timing. Overweight Underweight Thriving customer base Regulated cash flow (yield) Political uncertainty Appreciating USD Tuesday, October 25th, 2016 McMaster Investment Council

II Macroeconomics 101

Macroeconomics 101 – Supply & Demand Macro vs. Micro Models We are looking at the aggregate demand and supply in an economy. Where: Y = C + I + G + (X - M) Supply curve differs depending on scope. Just theory. Non-exhaustive list. Factors Effecting Supply Factors Effecting Demand Productivity / Technology Resource / Capital availability Trade / Policy Real wealth Interest rates Consumer sentiment Tuesday, October 25th, 2016 McMaster Investment Council

Macroeconomics 101 – Money & The Banking System Fractional Reserve Banking Fiat money is not backed by anything. Money is mostly in the form of credit. Creates money multiplier effect. Monetary Policy Open market operations Reserve requirements Interest rates Think of money market as any other free market. Tuesday, October 25th, 2016 McMaster Investment Council

Macroeconomics 101 – Cycles Business Cycle + Credit Cycle Many business cycles may fall within a long-term debt cycle before a deleveraging. Interaction of credit and business cycles can have large effects on asset prices. Tuesday, October 25th, 2016 McMaster Investment Council

III Key Indicators

Key Indicators – Leading Indicators Consumer Confidence Index Available Monthly Survey data, not adjusted for seasonality. Manager Purchasing Index Available Monthly Based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. Building Permits Available Monthly Points to intention to develop real estate. Manufacturing Activity Just a sample. Available Monthly Private survey gauging manufacturing activity. Also see transportation volumes. Inventory Levels Available Monthly Private data looking at inventory trends. Tuesday, October 25th, 2016 McMaster Investment Council

Key Indicators – Coincident / Lagging Indicators Unemployment Available Monthly Breakdown by province and type of employment. Consumer Price Index Available Monthly Measure of inflation based on fixed basket of goods. Real GDP (& Revision) Available Quarterly GDP growth derived from this, takes time to calculate and is often revised. Loans Just a sample. Available Monthly Private data, usually provides breakdown of debt categories. Retail Sales Available Monthly Consumer spending constitutes roughly 2/3 of GDP. Tuesday, October 25th, 2016 McMaster Investment Council

IV Creating Links

Creating Links – Common Mistakes Don’t Paint with a Broad Brush Research how the data is compiled & calculated. Be specific and deliberate with your assumptions. Tuesday, October 25th, 2016 McMaster Investment Council

Top-Down Analysis V

Top-Down Analysis – Process Theory Process Macro Trend Sector Analysis Company Research Identify economic trends and form a hypothesis using data and evidence as support. Narrow down to specific sectors, industries or business models that will thrive in this environment. Analyze the competitive environment and determine which specific companies are positioned to best exploit this trend. Tuesday, October 25th, 2016 McMaster Investment Council

Top-Down Analysis – Example Ex: Canadian Equities & The Business Cycle Macro Consumer credit trending up since crisis, backed by inflated residential housing Private credit also up, yet investment is falling below 2008 levels resulting in $700B of idle liquid assets Sustained low inflation, low interest rate environment Sector Characteristics: Defensive Skew Dividend Yield Capital Spending Contenders: Consumer Staples Utilities Telecom Companies Characteristics: Low exposure to real estate prices Favorable competitive environment Contenders: *Explain how TRP made it through although classified as Mid-stream Energy Tuesday, October 25th, 2016 McMaster Investment Council

Questions?