Valuation & Discretionary Global Macro Investing
As someone coming from a fundamental equities background, I have a lot of trouble understanding how macro investors know if an idea is priced in.
I know valuation is an art even in equities, but when I look at a business I can at least ball park if my thesis is priced in, but I don't understand how a macro investor can for example look at the fx market and trade USD/JPY because their view on the election in Japan wasn't priced in.
Even if a macro investor is expressing their thesis with equities - do macro investors buy baskets of stocks/indexes vs single stocks? I would assume it's the former given that you take on idiosyncratic risk by buying a single stock, but if you buy a basket how do you know what's priced in? For example we've all heard people on financial news talking about how the S&P500 is overvalued because it's trading at x multiple vs the historic average, but that's meaningless if the composition of the index is completely different than it was previously. And even if it wasn't - how do you translate a macro level forecast all the way down to companies' earnings and then compare that to what's priced in?
Also if anyone has any resources for this that would be great. I've read some fund letters which give a general idea of global macro, but of course the letters don't walk through "we know our idea x isn't priced in because y" in the same way a L/S hedge fund isn't attaching a picture of their model to their letter
would also be very interested in resources
My experience with discretionary is, verbatim from PM, “secondary derivative of a finger in the air”
there are actually "global macro" valuation models for FX, yield curves, sovereign credit, and commodities (idk about equity indices) they are just more econometrics/machine learning based deriving fair value as a product of other variables (can be other market and/or fundamental econ variables). Similarly you compare these outputs to market pricing, look for risk/rewards and overlay technicals/sizing. E.G. in rates you can literally see what the market is pricing as the future path of monetary policy and if you disagree bc of your view on growth/inflation/monetary policy reaction function you can take a view. For your JPY angle you could make an assumption about monetary/fiscal policy and infer. If what you are getting it is that it is not so much "discounting future cash flow" then this is mostly correct perhaps with the exception of distressed sovereign credit in the FICC world
Agreed. Macro often trends more towards debt/bonds/inflation/FX. Equities would be downstream of those often (eg. if you have a view on inflation, it leads to a view on central bank behaviour, which impacts debt, so you could get exposure via a REIT... or smth)
Thanks for the insight. Do most/all discretionary macro investors use these or is this something only the more quant focused investors use? If the former is this something I could learn on my own (kind of like how anyone can learn how to build a DCF with some basic accounting knowledge) or are these incredibly complex models?
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