The global macro analysis (stage 1) of our investment process aims at generating and maintaining our firm’s baseline macro-economic view for the global economy. We accomplish these tasks through fundamental analysis of the macroeconomic data from across the world’s principal economic blocs. While arriving at this baseline view, the risks around the baseline case are also identified and updated. In turn, our firm’s global macro views are contrasted against the markets’. We extract the markets’ implicit ‘global macro views’ through the regular monitoring of market prices (both cash and derivative markets) from across various asset classes, including Developed Equity indices, fixed income, currency and commodity markets. In identifying areas of differences between our firm’s global macro views and the market’s we generate a set of broad global macro themes that we draw upon to determine the country and sector-level tilts we wish to reflect in our Emerging Market, GTAA and EAFE portfolios.
The themes that emanate from our global macro analysis stage are implemented both at the country and sector level. For each country tilt the underlying sector / industry exposure is decomposed and analyzed. The themes are also compared against the fundamental views of our sector analysts as it relates to sector-specific and stock-level dynamics.
The precise identification of country- and sector-level tilts to reflect our top-down themes necessitates bottom-up analysis. With regards to the Emerging Market space specifically, our quantitative work in this area aggregates information from the company onto the sector, country and global Emerging Market index levels so as to allow us to run rank-ordered valuation and earnings growth analyses on the Emerging Markets space. In addition, Glovista’s sector analysts provide outlooks on sector specific long-term trends and valuation dynamics.
The countries and sectors identified in prior steps are filtered through our company screens which seek to identify any qualitative stock specific issues within a particular country or sector ETF. The qualitative issues this step identifies are company specific issues such as concerns about general business strategy, quality of management or upcoming changes in the regulatory environment that would create headwinds for earnings growth or multiple expansion. Prior to the final implementation of the portfolio, risk management and ESG parameters are verified and checked for suitability.
The strategy exploits the belief that value metrics trump growth over time including in the Emerging Markets universe. Decisions to add positions are almost always triggered by valuation considerations tied to currency movements or shifts in relative valuations across country- and sector- levels. Such shifts in relative valuations may be fueled by local political dynamics, outsized market responses to economic releases or sudden shifts in asset classes and style preferences (value versus growth, large cap versus small cap, international versus domestic plays within national markets). In adding positions, consideration is also given to the institutional market’s positioning towards the largest national and sector indices. Conversely, the decision to cut or reduce positions is based either on a material change in the investment thesis (in turn, fueled by notable changes in the macro calendar versus the team’s expectations) or risk management considerations.
The Emerging Market Equities portfolio is normally comprised of 10 to 15 ETFs—which represent more than 400 underlying stocks—and a handful of large capitalization Emerging Market-based ADRs.