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Insights
Insights showcases topical observations from Qi. Pure signals highlighting where assets are rich or cheap versus macro. Or roadmaps to help provide the most efficient way to express any trade. Flags, in real time, highlighting changes in factor leadership or regime shifts.

See below for articles and analysis.
Zbynek Burival Grmwvnvssdu Unsplash
08.12.2022
Crude Oil
This latest down leg in WTI has taken it two standard deviations below trend on Qi metrics.

History shows it can go further. In April 2020, a Russia - Saudi Arabia dispute compounded Covid lockdowns & WTI futures briefly went negative. That was a six standard deviation event on Qi.

In Q4 2018, when the Fed was on autopilot with regards to rate hikes and risky assets feared a Powell policy error, WTI experienced a four standard deviation shock.

The 2015 lows (China devaluation shock, US oil production glut) was a similar size move.

So big macro shocks can have outsized impacts on the energy market. And a 2023 hard landing could certainly rival some of the above. But it is worth noting the magnitude of the move seen thus far.
See more
Daoudi Aissa Pe1Ol9Olc4O Unsplash
05.12.2022
Watching the defensives
The macro perspective on three defensive plays for equity investors:

Consumer Staples versus Consumer Discretionary

The chart shows macro fair value for the XLP / XLY ratio using our Short (blue) & Long (red) Term models.

Overall macro conditions supported Staples outperforming throughout the first half of 2022 but that trend peaked early summer, retraced over July / August and has been moving sideways since then.

Until recently.

In November macro conditions shifted and the trend for Staples to outperform re-established itself.
See more
Simone Mascellari Xnn42Lsnv28 Unsplash Copy
30.11.2022
Lockdown vs. Re-opening
How to understand your China exposure
The news flow in China is highly volatile. Headlines veer between street protests, the authorities cracking down on any unrest, increased vaccination programmes for the elderly, growing Covid case counts, more lockdowns and so on.

One way Qi can help investors navigate China dynamics is to screen your portfolio for sensitivity to our Chinese macro factors.

This case study is a replica of September's "How to outperform tighter financial conditions". It showcases how Qi's macro factor sensitivities can help:
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28.11.2022
No margin for error
Qi highlights some vulnerabilities hiding under the surface of US equity markets.

The first amber warning sign – it is becoming harder to explain equity price action through macro forces alone.

Since early October, model confidence has been falling in eight of the eleven GICS Level 1 sectors. Indeed, only three of the eleven sectors have a model RSq > 65%.

Model confidence has been falling hardest in two of the leading sectors – Technology and Energy. While Technology still trades below its macro warranted value, LT model RSq has fallen to 60% from 74% one month ago. Energy model confidence has fallen 11% to only 52% now.

In the case of Energy, the sector has continued to outperform in this rally from October 12th despite crude falling over the same period. The divergence is notable with the sector 5.4% above model value albeit with falling model confidence.
See more
Sunil Ray Aqprqg Ji3C Unsplash
21.11.2022
AUDNZD - potential upside
Heading into this week's RBNZ meeting, AUDNZD screens as one sigma (1.5%) cheap to macro conditions. That's the cheap end of the range for Qi's Fair Value Gap over the last year.
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David Moum Nbqlwhovu6K Unsplash
21.11.2022
DAX - a word of caution
On Qi, the DAX is now 0.8 standard deviations or 4.1% rich to prevailing macro conditions.

There is a health warning – at 62%, model confidence is just shy of our threshold for a macro regime – but that FVG is at the top of recent valuation ranges.
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Daoudi Aissa Pe1Ol9Olc4O Unsplash
17.11.2022
Updated observations on China re-opening
Last week our Sales exposure to China note demonstrated how Qi can help investors measure the impact of a potential China re-opening trade.

The Watchlist below is a curated list of Western companies across sectors who derive a large percentage of their revenue from sales to China.

We update now because the change since last Tuesday is notable. Then the picture was mixed - there was almost a 50:50 split between stocks that were cheap to macro versus that were rich to model.

Now valuations are skewed rich. Semiconductors (Qualcomm, Lam Research, AMT, Broadcom) remain the laggards &, for the bulls, offer the most efficient upside. The rest have all discounted a fair degree of good news on the macro front.
See more
Casey Horner Rmowqdcqn2E Unsplash
15.11.2022
US equities - a shift in factor leadership?
While the market’s attention has been focused on the inverse relationship between equities and bond yields, we should start paying much more attention to credit spreads from here – currently the largest driver of Qi’s S&P500 model value.

The price return of a stock over any period can be decomposed into:
See more
Simone Mascellari Xnn42Lsnv28 Unsplash Copy
10.11.2022
How to trade the CPI undershoot
Softer than expected US CPI data has rekindled hopes of a dovish Fed pivot. If an equity manager believes in a year-end squeeze scenario, where can they get the most bang for their buck?

Qi's S&P500 model shows that as important as inflation is as a catalyst, it is the Fed's reaction function that is key for equity markets.

The Fed's tightening of financial conditions has driven the 2022 bear market; in particular, higher real yields & wider credit spreads have been instrumental in driving macro model value lower.

As such, for those feeling bullish, the key question now is which area of the market is most exposed to these two drivers.

Qi's Optimise Trade Selection answers this question in a few simple clicks.

The short video below shows how you can train Qi on the universe of your choice - single stocks, sectors, ETFs - & very quickly identify:
See more
08.11.2022
USD - G10 fx: spot the odd one out
The eye inevitably gets drawn to the Fair Value Gap - the difference between spot price & Qi's model value. It immediately highlights any divergence between macro conditions & where an asset is trading. It is a huge time-saving tool, a way to quickly identify dislocations.

But that's the first step. The FVG needs to be broken down into the constituent parts.

An asset may be rich to its macro environment but, if model value is trending higher, then the market is simply moving quicker than fundamentals. That may be a reason not to chase the trade right-here-right-now. But it is not a reason to fade the directional move.

Qi portal users can see macro fair value versus the spot price on each model page via the "Historical Model Value" chart.

Qi API users may want to build a dashboard along these lines. A snapshot of Dollar G10 fx crosses as seen purely from a Qi model value perspective.

Spot the odd one out.
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Close
Zbynek Burival Grmwvnvssdu Unsplash
08.12.2022
Crude Oil
This latest down leg in WTI has taken it two standard deviations below trend on Qi metrics.

History shows it can go further. In April 2020, a Russia - Saudi Arabia dispute compounded Covid lockdowns & WTI futures briefly went negative. That was a six standard deviation event on Qi.

In Q4 2018, when the Fed was on autopilot with regards to rate hikes and risky assets feared a Powell policy error, WTI experienced a four standard deviation shock.

The 2015 lows (China devaluation shock, US oil production glut) was a similar size move.

So big macro shocks can have outsized impacts on the energy market. And a 2023 hard landing could certainly rival some of the above. But it is worth noting the magnitude of the move seen thus far.
See more
Wti
Qi's model for WTI saw confidence rise above our 65% threshold in mid November. A new macro regime has emerged.

Model value fell 15.25% over November but it has stabilised at the lows more recently. The ongoing fall in spot has taken it 0.8 standard deviations below model fair value.

The mainstream media narrative will talk about crude oil as a barometer of global growth. But it is also worth noting the pattern the machine is picking up which emphasises the role of geopolitical stress on broad risk appetite.

The Russia/Ukraine conflict hurts crude oil supply and prices spike; but that same news also hurts risky assets like equities and credit. That's the current pattern the Qi machine has picked up.
Daoudi Aissa Pe1Ol9Olc4O Unsplash
05.12.2022
Watching the defensives
The macro perspective on three defensive plays for equity investors:

Consumer Staples versus Consumer Discretionary

The chart shows macro fair value for the XLP / XLY ratio using our Short (blue) & Long (red) Term models.

Overall macro conditions supported Staples outperforming throughout the first half of 2022 but that trend peaked early summer, retraced over July / August and has been moving sideways since then.

Until recently.

In November macro conditions shifted and the trend for Staples to outperform re-established itself.
See more
Xlp Xly
Utilities versus S&P500

It's a similar pattern with Utilities outperforming the broader US equity market from January to June. There followed a retracement and a period of sideways price action.

Qi's Short Term model has just moved into a new regime - model confidence has risen from 27% at the start of October to 83% now.

Watching the blue line will be interesting. There are tentative signs it is basing. It could break either way but any upturn would suggest the broad macro environment is once again pointing to Utilities outperforming and a defensive allocation.
Xlu Spx
Infrastructure

PAVE is an ETF of US single stocks that benefit from US infrastructure projects. It is all about macro. Short term model confidence is 95%; Long Term model confidence is 89%.

And what does the macro picture currently say? There is a strong uptrend in macro-warranted fair value regardless of the look-back period employed.

There is no real valuation edge. PAVE is a very modest 0.5% below ST model value, and 1.0% cheap to LT model. But the aggregated picture of economic fundamentals, financial conditions and risk appetite point to a friendly backdrop for US infrastructure.
Pave
28.11.2022
No margin for error
Qi highlights some vulnerabilities hiding under the surface of US equity markets.

The first amber warning sign – it is becoming harder to explain equity price action through macro forces alone.

Since early October, model confidence has been falling in eight of the eleven GICS Level 1 sectors. Indeed, only three of the eleven sectors have a model RSq > 65%.

Model confidence has been falling hardest in two of the leading sectors – Technology and Energy. While Technology still trades below its macro warranted value, LT model RSq has fallen to 60% from 74% one month ago. Energy model confidence has fallen 11% to only 52% now.

In the case of Energy, the sector has continued to outperform in this rally from October 12th despite crude falling over the same period. The divergence is notable with the sector 5.4% above model value albeit with falling model confidence.
See more
Screenshot 2022 11 28 091454
The second amber warning sign - if model momentum has stalled in a leader of the market rally, value gap convergence is left vulnerable to changes in the macro backdrop.

Alongside falling model confidence, Qi’s model value for the Technology sector has flat-lined over the last month. A critical barometer of confidence in any Qi valuation gap is rising / stable model confidence alongside momentum in the model itself.

Macro conditions were improving for Technology over October but now they have stalled.
Screenshot 2022 11 28 092006
The third amber warning sign – spreads are the dominant driver of the equity market in Qi’s models. However, has the reduction in risk premia left us with little margin for error?

Where model prices are rising (for example in Materials, Industrials) at the epicentre is the rally in credit spreads. Credit spreads saw their wides at the end of September and the equity low soon followed thereafter.

The largest driver of credit spreads are measures of risk aversion. The chart below shows the breakdown of macro drivers for US High Yield spreads. Risk aversion is the biggest accounting for 22% of model value.

A cursory glance of CDX HY and VIX would show both already at levels seen in mid-August when SPX was trading closer to 4200.

As another indicator of low risk premia, the SPX 12mth fwd earnings yield / bond yield gap is now at 15yr lows, last seen in 2007. One would reasonably expect that while rate volatility may well normalise next year, growth volatility will likely move higher - hence an almost unanimous Street focus on IG credit / balance sheet strength.
Ushypng
The fourth warning sign – factors that contributed to rally strength may now come under pressure. Unless other factors come to the fore this in turn puts macro-warranted valuations under pressure.

We monitor for which drivers are increasing in importance to explain the equity market. USDCNH is now a top three driver of SPX model value over this last month after real yields and credit spreads.

After initial enthusiasm around a re-opening trade, China's daily Covid case has hit an all time high, large parts of Beijing are under effective lockdown & protests are spreading.

Commodity cyclicals (e.g. XME in addition to Copper and Energy) already screen as rich on Qi.
Daoudi Aissa Pe1Ol9Olc4O Unsplash
17.11.2022
Updated observations on China re-opening
Last week our Sales exposure to China note demonstrated how Qi can help investors measure the impact of a potential China re-opening trade.

The Watchlist below is a curated list of Western companies across sectors who derive a large percentage of their revenue from sales to China.

We update now because the change since last Tuesday is notable. Then the picture was mixed - there was almost a 50:50 split between stocks that were cheap to macro versus that were rich to model.

Now valuations are skewed rich. Semiconductors (Qualcomm, Lam Research, AMT, Broadcom) remain the laggards &, for the bulls, offer the most efficient upside. The rest have all discounted a fair degree of good news on the macro front.
See more
Screenshot 2022 11 17 At 112919
Of the five with the richest valuations on Qi, three are mining stocks. None are in regime so there's an immediate health warning.

But it does prompt the question - is there a message from the commodity sector about the China re-opening trade?

It doesn't matter if we look at spot commodities, tracking ETFs or mining / resource stocks, the answer is the same. The sector is rich to macro.

This time everything is in regime & we can see:
* Both spot copper & the JJC ETF are around 16% rich to model.

* The nickel ETF JJN is 23% above model.

* Copper miners ETF COPX is 24% rich to macro & back-tests best (73% hit rate, +6.8% average return)
Each time the valuation gap has arisen because model fair value is moving sideways - the recent moves higher have not been supported by macro fundamentals.
Screenshot 2022 11 17 At 115410
There are slight differences between assets & their key drivers. Some emphasise inflation, others the policy stance of Central Banks.

However, a consistent theme throughout is all these models show USDCNH as the biggest negative driver. They all want a stronger Yuan - a reflection of a stronger Chinese economy.

USDCNH has now retraced around half of the fall seen thus far in November. If the Dollar bounces more, these China re-opening plays could be vulnerable.

Qi has no insight on whether Beijing will ease its Zero Covid policy. China watchers are your best bet there.

But we can provide a framework to help investors identify any laggards for China bulls, & the markets that have potentially overshot & look vulnerable if this story loses momentum.
Casey Horner Rmowqdcqn2E Unsplash
15.11.2022
US equities - a shift in factor leadership?
While the market’s attention has been focused on the inverse relationship between equities and bond yields, we should start paying much more attention to credit spreads from here – currently the largest driver of Qi’s S&P500 model value.

The price return of a stock over any period can be decomposed into:
See more
  • the change in the earnings multiple the market is prepared to pay for that stock
  • the change in the earnings forecast of that stock
History shows the former is the most significant driver of returns. This year is no exception – the S&P500 has fallen 17.5% YTD: The PE ratio has contracted 21% while 12mth fwd earnings have risen 3.5%. The tables likely will turn next year.

Now in simple terms, think of the PE ratio currently as a confidence barometer on growth vs. inflation. The sweet spot of course for stocks is when consensus GDP growth expectations are rising faster than inflation – earnings prospects are improving relative to the cost of capital.

This year has seen the reverse - a deteriorating growth / inflation trade-off. Indeed, in Qi’s language, the largest driver for the decline in the S&P500 this year has been rising real yields (click on the chart below to expand - it shows YTD attribution for S&P500 model value).
2022 11 15 10 08 15
Now the big concern in 2022 has been on rising inflation; the big concern in 2023 will be the lagged impact of tighter monetary policy on growth.

Are the tables turned next year where earnings forecasts are cut aggressively with growth expectations are falling even though inflation is falling also? The risk is then that PE multiple expansion will be put on hold until investors have more clarity on the outlook.

On cue, a bigger driver than real yields has come to the fore in Qi’s S&P 500 model value – credit spreads.

Credit spreads have a history of leading equities at turning points, especially when we nearing the start or end of a business cycle.

Note HY credit spreads saw their YTD wides on 27th September; the S&P500 saw its low 2wks later on 12th October – this was part of the reason why Qi’s model value for the S&P500 began rising faster than the index price itself in early October (the chart shows attribution of Qi model value since that Oct 12th low).
2022 11 15 10 15 04
So maybe 2023 is a year where good economic news is good news for the market and vice versa.

In 2022 bad economic news has been welcomed by the market allowing the Fed to take the foot off the tightening pedal. This regime change is not going to happen overnight – the battle with inflation is not over.

However, Qi will likely show any such change by the negative market sensitivity to real yields falling relative to the market’s sensitivity to credit spreads.
Simone Mascellari Xnn42Lsnv28 Unsplash Copy
10.11.2022
How to trade the CPI undershoot
Softer than expected US CPI data has rekindled hopes of a dovish Fed pivot. If an equity manager believes in a year-end squeeze scenario, where can they get the most bang for their buck?

Qi's S&P500 model shows that as important as inflation is as a catalyst, it is the Fed's reaction function that is key for equity markets.

The Fed's tightening of financial conditions has driven the 2022 bear market; in particular, higher real yields & wider credit spreads have been instrumental in driving macro model value lower.

As such, for those feeling bullish, the key question now is which area of the market is most exposed to these two drivers.

Qi's Optimise Trade Selection answers this question in a few simple clicks.

The short video below shows how you can train Qi on the universe of your choice - single stocks, sectors, ETFs - & very quickly identify:
See more
  • which models are most sensitive to our chosen factors
  • which models also offer a valuation edge; in this instance are cheap to macro-warranted fair value.
Running these scenarios is entirely customisable.

Train the search on a different universe. Choose a different macro factor - the Dollar rather than real yields or credit. Take the other side & look for the best trade to fade this move if you feel bearish.

Qi empowers you to run your own macro scenario & find the most efficient trade expression.
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