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Investment: Know your macroeconomic risk

There’s investment advantage to be gained from a rational macroeconomic viewpoint.

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.

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