Second Quarter 2015

Periodically, we are asked if we approach our investment analysis from a “top down” (macro view) or “bottom-up” (company specific) orientation. Our answer to this is: we prioritize the “bottom-up” approach. We feel that we are best trained and suited to analyze public companies and consider them for inclusion in our client’s portfolios.

Having said that, it would be naïve for us to ignore the macro environment in which we operate. One need only recall the global financial crisis of 2008-2009 to be reminded of the importance of how these types of issues affect global economic growth.

Over the past while, there have been a number of macro factors that have caused instability in the global equity markets. There is the well documented and perhaps inevitable slowdown of Chinese economic growth, which is negatively affecting commodity driven economies worldwide. Russia’s belligerence in its dealings with the Ukraine has also created uncertainty, while the ever-strengthening US economy and its currency has left other developed economies behind. As a general rule, equity markets favour stability and abhor uncertainty. It has been these macro-economic and political uncertainties that have contributed to flat performance in the equity markets over the past few months.

The most recent source of global uncertainty, and the focus of international media, is Greece. More specifically, the default of Greece’s debt and the implications to its own deteriorated economy and the European Union as a whole. Greece joined the European Union in 1980, but only adopted the Euro currency in 2001, likely under false pretenses.

Greece recently defaulted on a substantial loan repayment to the International Monetary Fund (IMF). This was followed by a referendum where 61% of Greek voters rejected an austerity program that had been proposed by the European Union. Why should the Greek situation even matter? Greece only contributes a miniscule 2% to Europe’s GDP. Greece matters because of the precedent its sets for several of the bigger much more important members of the EU. If austerity cannot be imposed on the Greeks, then how can it be legitimized with Italy and Spain? In addition, a significant portion of Greece’s debt is held by the other European countries and the European Central Bank, who welcome neither a write-down nor a write-off.

The Greek situation will go one of two ways. Scenario One has it leaving the Euro monetary union, re-establishing its own currency, and causing its people to suffer through a further collapse of both its economy and banking system. Scenario Two sees it re-negotiating, yet again, another financial bail-out from its European brethren.

We have no prediction which of these two very different scenarios will emerge. We are of the opinion, however, that once a scenario has presented itself, this will remove uncertainty from the equity markets. This in turn, should be positive for equity investors, who, as we wrote earlier crave stability.

While these macro factors certainly cause a level of disruption in the equity markets, they can also generate opportunity. Many fine companies tend to see their equity share prices negatively affected during these times, providing us with buying opportunities. It is times like these where we can best use our “bottom-up” orientation to find solid investments for our clients.



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