Qi MacroVantage - 30th January 2025

1. US Exceptionalism at risk = Momentum at risk relative to Value = Risk to Dollar

Earlier this week we wrote a note questioning if US exceptionalism was now at risk.Technically, the US bull market started in 2023 following the >20% correction in 2022.Incidentally, soon after the release of ChatGPT in Nov22. History may not repeat but thethird year of a bull market is associated with single digit returns. Couple this with an equityrisk premium at 20yr lows, Trump policy execution uncertainty and now it seems questionmarks on what multiples to pay for Tech given the DeekSeek news.

If we are in a single digit US equity return world, RoW has room to outperform. Considerthat when the US is up 20% no one cares about RoW. When the US is down 20%, you selleverything. So, in a single digit return world, do we have room for RoW?With this in mind, we note that the relative performance of the S&P500 vs. MSCI Worldex US is synonymous with the relative performance of Momentum vs. Value. See the firstchart below.Delving further, Qi’s models shows that Momentum is a bet on higher real rates, higherdollar, higher economic growth – it is the style synonymous with the Trump boom trade.See the following 2 chart charts below highlighting these relationships. The dollar willplay a clear role in determining if US exceptionalism is indeed at risk.

2. COPX – efficient cyclical long

Reversal or rotation? Does DeepSeekblow up a richly valued tech sector &, by extension, threaten the broader US equity market? Or is this a micro story - it hurts Nvidia, butcheaper access helps plenty of end users of generative AI & therefore the broadereconomy?For those who believe in rotation, the copper miners ETF COPX now sits 11.7% cheap toour model. Overall macro conditions are moving sideways within a broad range.

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The miners were hit hard this week as President Trump threatened to include copper,aluminium & steel amongst the areas where he would impose tariffs.There is no escaping the volatility a Trump presidency brings. Policy announcements willcome thick-&-fast via social media posts. Markets will gap up & down accordingly.The only thing investors can do is stick to a framework where they identify what they likeover the medium to long term. And then await a headline to provide an attractive entrylevel. We may have that now with COPX.

3. Government bonds – where next?

The question of whether the DeepSeek story is a macro or micro shock is critical for bondinvestors. Monday’s equity sell-off prompted a sharp safe-haven driven rally in govvies.Is that justified?Qi’s models for government bonds includes economic fundamentals (the growth /inflation outlook) plus measures of risk appetite. That provides an instant ready reckonerof where markets are priced relative to both dynamics.

Right now:

• the most effective trade for bond bears looking to fade this week’s move is in 2yUSTs where yields sit 0.3 sigma (12bp) below macro fair value.
• hard “risk off” proponents should look at 10y Bunds where yields sit 0.9sigma(15bp) too high to aggregate macro conditions.
• a risk off “lite” scenario favours 10y OATs & BTPs. For yield hungry investors, theFVG for both 10y French & Italian bonds looks similar to Bunds – almost 1 sigmatoo high.

4. European Bulls should favour Tech over Luxury

Since the US election, the best performing sector in Europe is SXQP – personal &household goods – dominated by luxury goods. Banks and Technology have alsooutperformed but the relative winner has been European luxury goods. However, the most recent results of LVMH saw overall Q4 revenues only rise 1% y/y. Sales in the regionthat included China fell 10% y/y. While recurring operating income missed estimates. Theresult is that the stellar performance of the sector relative 12mth fwd earnings expectation is likely now questioned.

The same disconnect between price and earnings is not seen for technology names. Weposed the question in our note earlier in the week if Trump is actually a catalyst for RoWto act more forcefully on investment in AI to maintain competitiveness, particularly inlight of the Stargate initiative.Scanning Qi’s models, we see a large disconnect open up in the macro warrantedvaluations of SXQP relative to SX8P (Technology sector). The valuation gap of SXQP vs.SX8P is at +1.9 sigma. The mean-reverting relationship of the FVG to the price relative has remained intact over the year, implying that European bulls here should favour Tech overLuxury.

5. XLK vs. SPY - tactically oversold

Any focus on Technology stocks inevitably requires a focus on the US outlook. On Qi,screening US sectors versus the broader market, the cheapest RV pair currently is XLK vs.SPY.It sits 1.5 sigma (3.7%) cheap. Qi model value has been flatlining in January, so theDeepSeek sell-off looks like it has overshot somewhat relative to macro fundamentals.Decent corelation between the RV pair & Qi's FVG suggests there's scope for aprofitable mean reversion.

6. GBP - worst G7 currency in 2025

The mood music in the UK remains downbeat - the post Budget fallout for jobs & growth continues to weigh despite the government's attempts to talk a positive game. Thelatest bearish narrative comes from the weak Pound (the worst performing majorcurrency year-to-date) & its potential to make imported inflation worse & limitthe BoE'sability to cut rates.

On Qi, Sterling screens as cheap versus its peers. Cable especially which sits over 1standard deviation below model fair value.Over q4 last year Qi model value for Cable fell 4.7% but macro momentum is turning. Model valuebottomed on Jan 15th & has bounced 3% since then. In short, there's a fair amount of bad newsalready priced in & macro conditions are showing signs of improving.High conviction bears determined to overrule a quantitative framework should look atGBPAUD rather than Cable. Aussie is another unloved currency in 2025 – proximity to China &RBA rate cuts tend to dominate qualitative commentary.

On our metrics GBPAUD is the one G7 cross where Sterling screens as rich. The FGV is+0.74 (+1.2%). The chart below overlays spot with the Qi FVG - it shows the Valuation Gapcan extend further, but a strong correlation suggesting its done a decent job ofcapturing local highs & lows.