1. Macroeconomic Strategy Primer
October 25th, 2016
Presented by: Omar Hashem

2. 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

3. Performance Attribution

4. 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

5. II
Macroeconomics 101

6. 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

7. 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

8. 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

9. III
Key Indicators

10. 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

11. 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

12. IV
Creating Links

13. 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

14. Top-Down Analysis V

15. 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

16. 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

17. Questions?