Macroeconomics is important to investing in bonds, currencies and commodity-like equities. However, most great equity investors are great micro-, not macro-, economists, because many businesses’ unique microeconomics operate largely independent of the macro.
Growth is an aggregate affair: it’s one big number with a lot of little numbers rolling into it. Within this aggregate, some things are growing as a percentage of total output, and some are shrinking. In either case, what grows and what shrinks may have little to do with the macro environment.
For example, electronic publishing and mobile delivery have caused great upheaval in both the music and publishing businesses. Would these changes have occurred regardless of the recession? Yes, likely so. Apple, and Apple’s myriad supply chains, won big from this, as did Amazon, and Google rendered phone books unnecessary. Meanwhile, were it not for a debt-free balance sheet, Barnes & Noble may have gone the way of Borders and Circuit City; as it is, Barnes & Noble is working hard to reconfigure itself. The move to electronic delivery was a huge productivity enhancement that squeezed a lot of excess out of the system; costs fell, and choice went up.
Europe is a challenge for investors right now. However, some European stocks operate in healthy microeconomic environments, despite the poor macro backdrop. Inditex, the Spanish apparel retailer, is up more than 50% this year; 70% of its business is in Europe.
The U.K.’s economy is pretty weak too, yet Telecity is up 38% this year. Data traffic is doubling annually, and Telecity’s co-location facilities handle around 90% of all Internet traffic into the U.K. As the traffic grows, the price goes up.
Meanwhile, Luxottica, an Italian optical company, is up 35% year to date. Though domiciled in Italy, the company owns Lenscrafters, Pearl Vision Centers, Ray-Ban and Oakley, among others. Essentially, this Italian company’s sales come from everywhere, including a big chunk from the U.S.
In short, macroeconomics makes headlines, but microeconomics makes money. Equity investors please take note.
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