What are macro factors?

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Macro factors: growth, inflation and rates

• Macro factors affect all asset classes
• Growth, Inflation and Rates are key macro drivers
• Asset allocation should adapt to changing macro factors

The main macroeconomic factors (rewarded risks) inform portfolio construction and can affect all asset classes.
The three key macro drivers that impact markets are Growth (“G”), Inflation (“I”), and interest Rates (“R”) the policy rates set by the Central Bank.  Every economic data release is relevant in as much as what it means for the direction of these three key macro drivers.
Monitoring these macro factors
The chart shows the recent evolution of these three macro factors for the UK.
What about other macro factors?
Other key macro factors that impact markets include Sovereign Risk (e.g. higher risk premia for Emerging Markets), Credit Risk (higher risk premia for lower quality debt) and Liquidity Risk (higher rewarded return for less liquid investments).
Macro factors affect all asset classes
Macro factors impact equities and bonds alike.  Macro factors impact the risk premia (and hence return expectations) on different asset classes.  As these premia shift, so do expected returns.
For example, corporate bonds are impacted by interest rates premium, inflation risk premium and credit premium. Small cap equities are impacted by interest rate premium, inflation risk premium, growth premium and liquidity premium.
Macro factors are inter-related
Macro factors are inter-related.  In the text books, when economic growth is strong inflation pressure builds.  Interest rates are raised to contain inflation.  When interest rates fall, that can stimulate growth.  In reality, it can be more complicated (and has been).  The relationship between macro factors is key, as a read of the Bank of England’s Monetary Policy Committee minutes will show.
Why we believe in an adaptive approach
A static-allocation “cruise-control” portfolio had worked well until the bond market dislocation of 2022 driven by the inflation and rate-hike shock.  But as markets don’t stand still, nor should portfolios, in our view.  We believe in an adaptive approach adaptive approach to navigate market risks, rather than leaving portfolios in cruise-control.  This categorically does not mean trying to time the markets.  What it does mean is trying to steer away from potential hazards along the way.
Conclusion
Keeping an eye on the key macro drivers is therefore key to asset allocation decision-making.