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Pexels Sam Willis 3934512
06.09.2022
Avoid macro "landmines"
- what if credit spreads widen?
US High Yield spreads have risen 100bp since the mid-August lows, & are now 50bp from the wides of 2022.

As the Fed have reiterated their intention to tighten financial conditions to fight inflation, fears about rising default rates & wider credit spreads have re-emerged as a key risk.

How can a bottom-up equity manager navigate such a scenario?

The first step is to identify which holdings within your portfolio are most exposed to stress in credit markets.

Qi’s Optimise trade selection tool can isolate the independent impact of US High Yield spreads on US single stocks. The chart below shows a sample of some of the S&P500 stocks currently in a macro regime with a range of sensitivity to credit spreads.
Screenshot 2022 09 05 At 142641
Look at the cluster of green dots on the far left of the chart. These are the stocks with the greatest negative sensitivity - they are the most reliant on credit spreads staying tight.

Chipmakers Nvidia NVDA & Applied Materials AMAT, software firms Adobe ADBE & Salesforce CRM, but also First Republic Bank FRC, cosmetic giant Estee Lauder EL & Domino’s Pizza DPZ screen as those names most vulnerable should credit spreads re-visit the wides.

Which names lie at the other end of the spectrum? Activision Blizzard is an outlier – it has positive sensitivity to US High Yield.

Most of the focus on ATVI is on regulatory risk & its pending merger with Microsoft. But, from a macro perspective, it has the unique characteristic of being fine with wider credit spreads.

There are a handful of names – Marathon Oil MRO, T Mobile
TMUS, AT&T T, Loews L, Chubb CB – where the stock is comparatively indifferent to moves in the credit market.

Once a month screen your portfolio for sensitivity to US credit.

Then, shift allocations away from the names with the greatest credit exposure, to those with the least.

Adding in macro valuation could provide further value. Chipotle Mexican Grill CMG has the distinction of being vulnerable to wider credit spreads & it is 0.9 standard deviations (7.9%) rich to overall macro conditions.
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Goldman Sachs is embedding Qi’s data-science-driven
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management capabilities that help provide clarity to your
investment analysis as you navigate your portfolio exposures,
asset by asset, through dynamic market conditions.
Goldman Sachs is embedding Qi’s data-science-driven macro factor risk data into Marquee to offer risk management capabilities that help provide clarity to your investment analysis as you navigate your portfolio exposures, asset by asset, through dynamic market conditions.