Your portfolio may also have concentration risks if you’re focused on countries or sectors rather than diversification. Top-down investors benefit from access to a diversified portfolio of assets within a given country, region, or sector. Conversely, suppose you believe there will be a drop in interest rates. Using the top-down approach, you might determine that the homebuilding industry would benefit the most from lower rates since lower rates might lead to a spike in new homes purchases. As a result, you might buy stocks of companies in the homebuilding sector.
In any market, the large cap stocks tend to be more vulnerable to macro factors than the smaller companies. For example, when the interest rates move up, the large rate sensitive stocks get impacted more. Similarly, when the pharma scene in the US got tight, it was the large pharma companies that got hit more than the smaller niche players. A top-down analysis involves making decisions based on the state of the economy and various markets.
