Traders use two primary methods to build their portfolios when they look to finding the most profitable source of investment from the millions of trading opportunities. This is a beginner’s guide to Global Macroeconomic Trading Strategy for 2019.
- Top-Down: Analyse the most lucrative area for growth and then find the companies within the zone.
- Bottom-Up: Study the microeconomics of a single company to find its investment potential.
This article will give beginners an introduction into Top-down trading; winning strategy used by Stanley Druckenmiller when he worked for George Soros Quantum Fund in the 1992 billion dollar trade that almost sunk the Bank of England.
How to Start Top-Down Trading Analysis
When you start Top-down trading analysis, you need to find macroeconomic trends within the global economy.
The comprehensive, global analysis begins with a study of the Gross Domestic Product (GDP); look at both the emerging and developed markets, and in this, the geopolitical and inflationary risks should be included in the analysis. When you start an investigation to study the global economies, the inflation, GDP deflator will indicate those countries that have performed better than others and usually the reasons why this has been the case. This will be the broadest or macro view, and from this perspective, you narrow your investigation down to the regional level.
Source: World Bank https://data.worldbank.org/indicator/NY.GDP.DEFL.KD.ZG?locations=CN-JP-US
The next set of figures to study is the CPI (Consumer Price Index)/ or PPI (Producer Price Index) for the region or local economy that you decide to follow.
For example, inflation in the United States is measured by combining the PPI (Producer Price Index) with the GDP and implicit price deflator. The PPI is the final demand price given to the sectors measured.
The CPI is indicative of price charged for goods and services to the urban consumers and the GDP, and implicit price deflator is a measure of price changes in products and services to the entire national spending pubic, which includes government, producers, and business, but does not include the price of imported goods and services.
The GICS [Global Industry Classification Standard]developed by S&P [Standard & Poor’s], and MSCI [Morgan Stanley Capital International] in 1999 is a taxonomy of 11 registered asset sectors and is used as a benchmark of public companies and financial market indexes in which each company is categorised in a sub-industry or business sector. This is much like ICB [Industry Classification Benchmark] a similar classification configuration maintained by the FTSE Group corresponding with Dow Jones Indexes.
The GICS Energy sector encompasses the oil and gas, coal and fuel companies and everything relating to the equipment and services such as construction and machinery, which is used in the entire energy related business.
Corporates such as ExxonMobil, Halliburton, Kinder Morgan, Schlumberger, and others have been closely associated with oil and gas industry generating billions of dollars to the stock markets over many generations.
The asset and equity values of companies listed in this sector are closely associated with the price of crude oil: if the crude oil price fluctuates, it has a strong bearing on the companies listed in the energy sector.However, the major corporations have always managed to maintain their stability, although, with the introduction of renewable energy, and the move away from fossil fuel, the companies that have remained the bedrock of the energy sector could find that they have to diversify to a different asset base to stay viable
The basic materials sector is the stock category for companies involved in the innovation, development, and supply of raw materials. They range from forestry and chemical products to mining and metal refining. Most of the companies listed in this group supply materials for the construction industry, however, since many of the commodities supplied within basic materials fit with raw materials, oil, gold, and stone fit into the category.
Therefore, they are susceptible to changes in the economy where these products are used, and sectors will determine their price within the housing and construction industries, which are affected by consumer spending and interest rates.
However, there are anomalies such as paint additives and industrial fertilizers, which fall into pharmaceutical or cleaning products. Also, although a mining company is considered the processor of a primary material [gold or iron ore], a jeweller and metal fabricator, fits in to the supply chain as the user.
The Industrial Goods Sector is a wide ranging category of listed companies that produce goods for use in manufacturing and construction: defence and aerospace, building and development which includes prefabricated housing and metal fabrication as well as the cement and lumber used, waste management and industrial machinery.
The market indicators for this industry relate to supply and demand in commercial, residential and industrial construction and real estate, as well as the consumer demand for manufactured goods. Therefore, consumer-spending power leads the market cycles within the industrial goods sector analysis.
The wide-ranging subsectors within the industry sector provide excellent investment opportunities and a steady area of revenue generation with many years of sustainable revenue generation, such as waste management and industrial construction.
On national levels, Bureau of Labour Statistics [BLS] in the USA and the Directorate General for Economic and Financial Affairs for the European Union provide a valuable source of information for investors.
Companies that perform well in this sector are those whose names are a constant on the Fortune 500 list, and in this regard, General Electric continues to feature in asset portfolios.
The consumer discretionary sectors are goods and services that are considered non-essential but where a great deal of money is spent in retail items, such as cars [automobiles], hotels and restaurants, leisure activities and media, clothing and household items.
The companies associated with this sector would include Amazon, Starbucks, motor manufacturers, hotel chains and airlines, etc.
The financial performance of companies in the consumer discretionary sector is linked to the state of the economy and therefore, to future economic conditions and their stock market value.
The demand for consumer goods and services is dependent on consumer spending/consumer confidence, which relates to discretionary income. If the economy is not doing well, and unemployment is high, people do not have discretionary income, which puts pressure on the companies’ financial performance and share/trading price.
In Europe, the ESI [Economic Sentiment Indicator] shows a marked decrease in June 2019, which is indicative of consumer confidence for the region.
Consumer staples form a group of essential products and services; items that people cannot do without or are unwilling to cut from their budgets; such as food and beverages, feminine hygiene products, alcohol, and tobacco.
Companies listed on the stock market within this sector remain impervious to trends due to the continuous demand for their products, regardless of their retail price and form around 70% of gross national product for a country such as the United States of America. Consumer spending is cyclical and shows economic growth within a region, however, consumer staples, being non-cyclical and therefore always in demand, regardless of the state of the economy or the cost to the consumer of the product.
Economists consider the companies in this sector resilient even in an economic downturn. Companies such as Proctor & Gamble, Estee Lauder, Anheuser-Busch InBev, Coca-Cola, Post Holdings, Nomad Foods, and others all continue to show excellent stock prices because people cannot do without their products.
This wide-ranging sector is covering healthcare services, equipment, and pharmaceuticals. Fortune 500 companies such as AmerisourceBergen, United Health Group, CVS Health, McKesson, Express Scripts Holdings, Walgreens Boots Alliance and others around the globe, including household names like Johnson & Johnson and GE Healthcare fit the category of Healthcare Sector.
As investors and traders have found over many years, this industry division shows high ROI and will continue to do so because there is always a need to medical and pharmaceutical care – from the cradle to the grave!
The Financial sector ties in to interest rates with links to banking, insurance, mortgage, and real estate. When interest rates increase, banks and other parts of this sector make more money and vice versa.
Central Banks hold the key to investment within this sector; traders such as George Soros and Stanley Druckenmiller by going after the Bank of England in 1992 and Bank of Thailand, which rewarded Soros’ Quantum Fund with billions of dollars. In 2013, Soros earned $4billion by going short on the Japanese Yen.
The Tech Sector covers companies that supply IT including software and electronic equipment [hardware]; Communication and IT services, Data Processing, and semi-conductors. Companies like Microsoft, Visa, and MasterCard, Adobe, Intel, and others around the globe.
The growth of the Tech Sector has been bullish over the past 20 years, and with new developments and consumer demand, the ROI for investors continues to grow.
There are just under 200 major companies listed worldwide with little cyclical growth. The competitive market means that companies like AT&T, Verizon, Sprint, Netflix, and others have cyclical revenue earnings through customer contracts. Google and Facebook rely on regular and repeated advertising revenue.
For investor traders finding value in this sector comes from analysing companies with diverse portfolios of products and services such as China Mobile, TELUS Corporation, BCE Inc. and one or two others.
Conservative investors favour utility stocks due to their non-speculative growth potential: Companies providing basic needs of water, sewage, electricity, and gas for industrial and domestic consumption and therefore referred to as a defensive sector.
The utility companies are often highly regulated because of their public service association, which keeps their practices under governmental scrutiny at all times.
However, the sector continues to change with government regulations limiting expansion in fossil fuel and supporting expansion in other forms of power; the industry does allow for modest and reliable profitability. The development in the provision of utilities using latest technology has brought change, and with these innovations, the risk and reward investment opportunities are small and long term.
The real estate sector covers Real Estate Developers and REITs [Real Estate Investment Trust companies].
The public companies listed in this sector develop and manage office and apartment blocks, shopping malls, retirement complexes, and whole sub-divisions of new development in the domestic housing market.
For investors, real estate fits well for long-term investment, where revenues to the holding company come from increased property prices and monthly rental income. Shareholder dividends come from 90% of taxable profit sharing, which make them a sound long-hold investment.
Once a trend has developed in a specific sector on a global scale, the next step is to determine national trends. For example, the rising middle class Chinese has led to China becoming one of the world’s major food importers.
The next step is for investors to analyse those imported foods by comparing staples: Pork, chicken, beef, grain, oil-seed goods, and dairy products.
Once the investor has ascertained which categories are on the “high imports” list, they analyse the demand for products that contain the main ingredient [pork or beef or oil-seed, etc.] and then find the companies responsible for importing the packaged articles. Investing in companies that already have a market share can lead to short-term trading gains.
Alternatively, if there is a high demand for imported goods and a large domestic consumer market, there is always a long-term opportunity to invest in a start-up company with high growth potential.
Specific Stock Analysis
Getting down to specific stocks is the next step of investor analysis. Investment in Industrials in the USA starts with the MSCI USA Industrials Index where average gains between 2010 and 2015 showed 10.5% annual growth.
The technical level analysis comes from looking at assets with rising prices to find assets to trend trade. The fundamental trading analysis comes from finding undervalued assets that fit in local and international markets, and that share the same asset class to ascertain whether the stock price is fair or not.
When measuring asset value, it is essential to look at financial earnings ratios from price book [P/B] and price earnings [P/E], revenue growth and free cash flow of the company for a period of three to five years.
The final part of the investigation comes from careful consideration of the expense ratios accompanying international Exchange Traded Funds [ETFs] and other sector specific funds, which often come with a more significant price tag.
Key Takeaways for Top-Down Trading and Investment Analysis:
- Top-down investing starts with an analysis of a country within the global economy, followed by identifiable industry groups or sectors and then individual assets within a specific category.
- The investor analysis should include risk factors: Geopolitical risks and asset evaluation based on regional economic growth potential.
- The best evaluation exercise will involve a combination of fundamental and technical analysis to determine relative and accurate comparisons.