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The Macro Trumps the Micro

Atlas Invested

You can't buy stocks on merit anymore. You can do the most beautiful analysis about a company that owns a toll bridge, and how many cars pass through it every day, and how they can increase the toll fees every year by 10%. And how there is this airport proposal which, when cleared, will dramatically increase toll fee collections. Finally that the contract with the government guarantees a 20% return on investment.

And all of this analysis tells you that the stock should be worth five times the current value in a few years. Yet, it all amounts to nothing when suddenly, the government decides not to allow any toll fee increases because of the bad political mileage they are getting for not keeping onion prices in check. And then the government runs out of money because of profligate spending on random other causes, and investment flows into the country stop because no one in power can take a decision anymore, and the powers decide to tax everyone they earlier hadn't taxed. To gather more money they introduce special taxes on toll collections that crimp margins further. Adding even more misery is that the rupee-dollar equation has changed by 30%, creating a huge gap in the repayment of loans borrowed in dollars. Something that happens in Spain causes a foreign company to go bust, which it turns out was a key shareholder in the stock — their liquidation floods the market with shares and in turn, destroys the stock price.

Spain, Government finances, rupee-dollar or political problems are not something you ever would factor into an analysis of a company whose only business was to let cars go over a bridge and collect toll. You've just been trumped by the macro.

The macro, in my mind, is the broad area that comprises macroeconomics, like the European debt crisis or the U.S. housing slump, which has an indirect but substantial impact on stocks that otherwise seem unlinked. The micro, on the other hand, is directly related to the company you want to buy — sales, profits, business prospect or market share. Investing through the micro has been a preferred path for many; for instance the rural story in India is about FMCG and motorbikes. But the macro now seems to have added itself as a parameter, almost like an uninvited guest, so now you have to think of FMCG, motorbikes and potential Greek default.

Crude oil prices used to change with supply or demand imbalances. It's no longer just about supply and demand; even large countries are buying crude as an investment, sometimes even hiring ships to store them in the open sea on anchor — when the time is ripe, they will sell, they think. Much of that is fuelled by cheap loans given to banks and financial institutions, in some kind of "quantitative easing" which to the banks sounds like, "heads I win, tails you lose". Another macro that trumps the micro.

The trouble in Europe is turning out to be so large that nearly every statement that involves looking forward into the markets ends with a disclaimer like "Will not apply if Europe'situation deteriorates". How Greece affects a company selling quilts in Andhra Pradesh isn't apparent now, but it will be in hindsight when the bad stuff does hit the fan, prompting you to wonder, "Now why didn't I anticipate that?" The answer is that you simply can't, just like you don't think of whether the metal wires holding up your elevator are strong enough to take you up.

And what's happening now is that the picture is all about posturing and anticipation rather than the fundamentals. Housing prices have fallen? Well, the market will now go up, because they believe that the authorities will introduce another round of "quantitative easing". The rupee fell some more? Oh, the RBI will protect it. The words that powerful people use in their carefully rehearsed statements tend to roil markets — so the powerful people try to use words to manipulate markets in the direction they want, rather than following those words up with action. It's a world with financial systems that are of such stupendous size that even a tiny problem with "confidence" can rattle entire countries. Case in point: Spain's bank deposits fell by 31.44 billion Euros in just April, on the fear that like Greece, there may be the need to invest away from the local economy.

You wouldn't be alone wondering if the macro impact remains an unfounded fear or is really a train wreck in slow motion. The sane reaction is to stay out of it until there is more clarity, which unfortunately exacerbates the crisis — to the extent that certain governments, including India's, believe that things would be perfectly fine if we simply didn't have access to bad news.

But news has a way of finding its way home, and there's no sense pretending that we are unaffected or, in investment parlance, "uncorrelated". The reasons to buy companies or sell them must include a check on the "macro". The rupee creates a problem for everyone if it slides so much (more than 20% in a year). The government's lack of tax collections and affinity for overspending will result in their taking on even more debt from the market; thus impacting the borrowing costs of your company. The European equation is an unknown-unknown — we don't even know how much a "contagion" will spread, should the bad stuff hit the fan.

It's no longer about companies or places or people anymore. The macro is today a much bigger factor. And that is indeed sad.

Deepak Shenoy writes at Capital Mind, and is co-founder at MarketVision, a financial knowledge company. You can reach him at deepakshenoy@gmail.com or @deepakshenoy.