The top-down approach: rates and sector first, the individual security last

The top-down approach is a sequence of filters in which the security is chosen last. The trader begins by pinning down the macro backdrop: what is happening to the key rate, inflation, the rouble exchange rate, prices of export commodities and the fiscal impulse. That backdrop determines which asset class makes sense to hold: equities or debt. Within the chosen class, the next step is to select the sector that benefits from that particular state of the environment. Only at the very end, inside the sector already selected, are individual issuers compared. The opposite logic, starting with a single company and analysing it regardless of the environment, is called the bottom-up approach. The direction of travel is precisely what separates the two procedures.

What sits at the top layer of the Russian market

The main switch here is monetary conditions. The key rate sets the opportunity cost of money. When the risk-free yield is high, OFZ compete directly with equities, and shares of highly leveraged companies are re-rated downwards more sharply than the rest: their debt-servicing costs rise and the share of profit that reaches shareholders shrinks. When conditions ease, the mechanism works in reverse, and long-dated debt is repriced before company financial statements have had time to show any improvement.

The second block of the top layer is external: commodity prices and the exchange rate. For an exporter, a weaker rouble boosts rouble revenue when the product is priced in foreign currency and costs are in roubles. For a company that sells domestically and buys imported equipment, the same shift works against it. This is not a forecast but the mechanics of translating revenue and costs, and it is checked against financial reports, not against expectations.

The top-down approach does not try to guess the current levels of the key rate, inflation and the exchange rate. It requires you to write them down before you start looking at securities. For actual market figures, see the relevant sections of the site; what matters here is the procedure, not a snapshot.

The sector layer: who benefits from the stated backdrop

A sector is not a label but a set of shared sensitivities. It is useful to describe it through a series of questions: where does revenue come from (exports or domestic demand), is the price of the product regulated by the state, what share of capital is borrowed, how capital-intensive is the business, are there foreign-currency liabilities. Companies within a sector tend to give similar answers, so a macro shift hits them in step, and that is exactly what makes the sector layer a meaningful filter.

Most of the market is screened out at this layer. If your macro assumption is a prolonged period of tight monetary conditions, debt-laden growth stories drop out not because they are bad, but because they do not fit the stated backdrop. Rejecting by rule is a working part of the method.

Where macro ends and the security begins

Within the selected sector, macro no longer helps: the companies are already comparable in their sensitivities, and what separates them from here on is valuation multiples, debt structure, quality of corporate governance and dividend policy. In a dividend strategy, what matters is not only the size of the payout but also its timing: record dates determine when the money actually comes out of the share price and lands in the account. Upcoming payouts:

The full picture is in the dividends section and the payout calendar, and corporate events are in the events calendar.

Tax also belongs to the security level rather than to macro: the result is calculated from 13%, and frequent rotation between sector bets means turnover, while turnover means costs and a realised taxable result instead of a deferred one.

How it differs from the value and index approaches

The value approach works bottom-up: it looks for a gap between the price and the valuation of a specific business and is prepared to hold the security against the environment until that gap closes. The top-down approach does not allow this: a security that has not passed the macro filter is not considered at all, however cheap it may look.

The index approach gives up selection at every layer at once and buys the whole market, including through funds. It needs no macro assumption and therefore cannot be wrong about one. Going top-down, you deliberately take on the risk of your own macro view in exchange for the chance to differ from the market.

Where the approach breaks down

The second risk is curve-fitting. A macro view is easy to rewrite after the fact so that it justifies a position that is already open. The only defence is to write down the assumption and the conditions under which it is abandoned before the trade, not after.

The working procedure

Step 1. Write down the macro assumption and name the data that would refute it. Track them through market news.

Step 2. Derive from the assumption the winning and losing sectors, explaining the mechanism through revenue, costs and debt.

Step 3. Within the selected sectors, compare issuers on multiples, debt and dividends; this is where ordinary security analysis takes over.

Step 4. Decide in advance exactly what closes the position: the macro assumption being invalidated, not price movement on its own.

Unfamiliar terms from this procedure are explained in the glossary.