NEW YORK -- The AFP Executive Forum opened Monday morning with a look at global macro analysis and how corporate treasurers can use it as a tool. Mario Manna and Birgir Haraldsson, co-founders of consultancy Nightberg, discussed their analysis process—which predicted such events as the Brexit vote and the outcomes of the U.S. and French elections—and how treasurers can use it to develop a more strategic framework by following the principles of so-called “global macro.”
Global macro, Manna explained, is the study of global affairs for financial speculation. It originates at the country level, and then drills down to measure a nation’s economic vibrancy, its political pulse, and its financial asset performance. Collectively, these country portraits provide the lens Nightberg uses to view the world.
“What does it mean for you, the treasurer, to become more strategic?” Manna asked. “The way we understand it, becoming more strategic reflects your desire at being more proactive in identifying emerging risks to your core business responsibilities and in identifying times when plans and forecasts need to be updated.”
For treasurers to become more strategic, they must:
- Avoid anchoring to outdated analysis.
- Incremental changes in macro conditions are the sources of opportunities and risks.
- New innovative big data tools need to become part of the strategic toolkit.
The problem with anchoring yourself to outdated analysis is that it results in treasurers being unprepared to deal with business risk. But if treasurers can embrace the adaptability of global macro portfolio managers—which must constantly adapt to the evolving world of economics, finance and politics—they will likely find themselves less surprised by new events and better suited to mitigate risk.
Manna and Haraldsson shared the framework and tools that drive Nightberg’s process, to help treasurers present develop a clear line of sight into potential risks and find opportunities to become more strategic. The framework consists of four pillars that comprise macro conditions—economics, monetary policy, politics and capital flows.
“What we’re really pursuing with this framework is to gain clarity on three dimensions in particular—the longer term context of countries; the short-term assets of countries; and the market-related assets, such as capital flows, going in and out of a country at a particular time,” Haraldsson said. “We apply this framework to one country at a time, and those country portraits come to build up our broader, independent world view.”
Depending on certain events, it can vary which one of the four pillars is dominant. In the wake of the Brexit vote, politics clearly dominated. But one area that is often overlooked, and one where treasurers can gain valuable insights, is the capital flow pillar, Manna said. “We believe measuring both the stock of outstanding exposures and global investment portfolios, and where capital is flowing, is an important exercise to clearly assess opportunities and risks,” he said.
For example, when it comes to assessing emerging market currencies, capital flow analysis can be a very powerful tool, Manna continued. “There is a strong connection between the performance of emerging market currencies and fund flows overall,” he said. “We monitor these capital flows on a weekly basis. If we believe that the fund flows into emerging markets will be weak over the tradable horizon, then we’d be cautious on the outlook for emerging market currencies. However, if we believe that the fund flows into emerging markets will be strong and spirited, then we’d be more prone to have exposure to this asset class.”
Nightberg also uses capital flows to place the prevailing market narratives into context. “For example, when market narratives gain traction, we like to measure the current exposure in global portfolios to assess whether the price action of the underlying instrument driving the narrative has staying power,” he said.