CIO Insights: Macro Factors vs. Bottom-Up Research

Bottom-Up Research


Even before the Brexit¹ vote, global equity performance has been driven by key macroeconomic factors. Two such examples are the actions of the U.S. Federal Reserve (Fed) and China’s economy. With global factors increasingly driving markets, bottom-up investors have been forced to keep one eye on the macroeconomic environment.

Read Creveling’s full Q3 2016 CIO Insight:
Macro Factors May Be Driving Global Markets, but Bottom-Up Research Drives Individual Success

Global equity markets may be more focused on the U.S. central bank and China’s central policy committee than on the performance of the underlying companies in those markets. As such, investors’ anticipation of what the Fed is going to do next—and when—and whether China can regain some of the high growth momentum seen earlier in this decade is having ripple effects on the world’s markets.

The Oversized Effects of China and the Fed

The magnitude of China’s growth has profound effects on global commodities, energy, and industrial goods prices. We have seen the ongoing results of the slowdown in Chinese growth since 2010. Currently, investors seem skeptical that the tools at the government’s disposal to invigorate the economy and stabilize the stock market can be effective.

Meanwhile, divergence in central bank policy continues to dominate economic headlines. The U.S. dollar corrected off recent peaks as investors questioned the Fed’s resolve to tighten amid global weakness. Market volatility after the Brexit referendum then cast serious doubts on whether the Fed will be willing or able to raise again this year.

This uncertainty, while most other central banks continue accommodative measures, has kept global markets on edge. Continuing divergence could pressure U.S. corporate earnings, which have recently begun to improve after several quarters of contraction.

Despite dovish comments after disappointing employment data in early June, the Fed seems intent on another interest rate increase in the next few months. The probability of such a move remains dependent on economic news and data, however, including how China is doing and how the world is reacting to that.

Another Fed hike could reinvigorate the dollar. It could also help to settle the U.S. market, which appears to be calling for a normalization in U.S. rates. The net effect of these two seemingly conflicting results remains to be seen.

Macroeconomic Effects Don’t Eclipse the Importance of Fundamental Research

So, what does all this mean for the bottom-up investor? The interaction of these two major macroeconomic drivers, and the ripple effects on Europe, Japan, Asia, and the emerging markets, cannot be ignored. It is clear that global markets are being increasingly driven by global factors and that this trend trickles down to the level of individual stock performance.

Nonetheless, we believe that the added layer of macroeconomic “noise” is making it difficult for investors to objectively evaluate individual securities. This only reinforces the importance of active management, solid proprietary research, and dedicated bottom-up stock picking.

As fundamental bottom-up investors, we remain focused on the characteristics that make each company unique and provide the potential for an inflection in earnings growth. While it may be more difficult to uncover such opportunities in a market driven by overlapping macroeconomic forces, we believe such consistency will serve our clients over the long-term. Thus, we are maintaining our approach, and continue to focus on the fundamental case for each company.

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¹Brexit refers to the exit of the United Kingdom (Britain) from the European Union.

The opinions expressed are those of Keith Creveling, CFA, and are no guarantee of the future performance of any American Century Investments portfolio. International investing involves special risks, such as political instability and currency fluctuations.

For educational use only. This information is not intended to serve as investment advice.