Step 1: Where
Fundamental Analysis
Where do prices differ from fundamental value?
Fundamental Analysis Identifies Value/Price Discrepancies

Macro inefficiencies exist across markets and currencies. Prices vary above and below fundamental values but historically revert to fundamental value over time. Our first step is to use fundamental analysis to identify these value to price discrepancies. In turn, these value/price discrepancies reveal where investment opportunities exist.

For assets (equity and bond markets), we identify the present value of future cash flows. We then discount those cash flows to the current value to ultimately determine what is fundamental value. For currencies, we use purchasing power parity—the exchange rate finds its fundamental value when it equalizes the prices of goods and services in different countries. If prices are below fundamental value, we will buy. If prices are above fundamental value, we will sell.

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For equity and bond markets we identify the present value of future cash flows then discount them to the current value to determine what is fundamental value.