There was a time when carrying out solid research on company fundamentals would give investors at least a chance of picking the right stocks and making money.
Not any more. The slightest negative news about economic stability, and all stocks are hit. The poor performance of hedge funds that built their models on stock picking is evidence of the new world order where macroeconomic viewpoints now rule. Long/short funds that have valuable insight into company fundamentals have barely made returns this year. The funds’ analysts are left scratching their heads.
Perhaps the best example of this new world order where panic over macroeconomic issues outstrips rational investment behaviour is the US municipals market. A glance at CDS prices of California and Illinois compared with EU sovereign risk suggests that US states are near to default.
That is simply not the case. California’s debt load is 5% of the state’s $1.8 trillion GDP. That is not a cause for concern. Nor is a default. Debt holders have to be paid back. In the fiscal year 2009/10 California’s debt repayments were just $5.2 billion. Sure, California has been treading water fiscally for years but it is not going to default on its debt. In fact, municipalities have been reducing the level of new issuance since 2007.
Budgets are under pressure and it is hard to see a light at the end of the tunnel while the recession rages on. But applying macro analysis in investing is a unique skill. It’s much more complex than saying EU sovereigns might need bailing out, and so too therefore must US states.
That leaves those who maintain a rational macro-perspective in their investing in an optimal position. In the case of US municipal debt that advantaged group seems to be foreign investors. The fact that they are ignorant about daily news of small US cities on the brink of bankruptcy means that they have been able to keep in perspective the risk versus returns of lending to US states. An increasing proportion of investors in Build America Bonds are from outside the US. Given that Californian yields are significantly higher than those on treasuries or EU sovereign debt, foreign investors’ detachment from sensational headlines is an investment advantage.
