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Topical observations from the Qi macro lens. Build your investment roadmap with the best-in-class quantitative analysis and global data.

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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.

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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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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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.

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:

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:

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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07.11.2022

Sales exposure to China

The Watchlist below is not exhaustive but it shows a number of blue chip stocks that generate a high percentage of their revenue from sales to China. From different countries & sectors, they represent classic China plays for Western investors.

Qi Watchlists provide an instant snapshot. Which of these names are in macro regimes, versus those that are driven by idiosyncratic factors. And then which are rich or cheap versus prevailing macro conditions.

Semiconductor companies – Qualcomm, Broadcom, STMicroelectronics, Lam Research - dominate the cheap end of the range. Yes politics plays a big part here but even with Biden’s restrictions several of these companies are in macro regimes &, on Qi, have discounted a fair degree of bad news.

The rich end of the range is more of a mix. Advertiser JCDecaux, Swatch watches, while Glencore & Umicore capture the commodity/industrial complex.

Macro model confidence is less at this end of the spectrum but note, for example, Glencore is 6.0% rich to macro while its peer Fortescue sits at fair value.

04.11.2022

How to play any China bounce

Even if you are sceptical, the price action in China this week has issued a stark warning: with valuations this cheap & positioning so defensive, any policy pivot from Beijing could spark a strong market reaction.

Investors need to be on watch for any changes in Beijing's stance on the economy, on Zero Covid & a potential re-opening scenario. One way to do that is to employ / follow a China expert who will work through the long & dry Chinese Communist Party's dictums.

Another is to use the Qi framework to see how various Chinese assets are trading relative to overall macro conditions.

Here we present a short 5minute video showing how Qi Watchlists can help any investment process & can be especially useful when looking at specific themes.

28.11.2022

No margin for error

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.

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.

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.

17.11.2022

Updated observations on China re-opening

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.

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.

15.11.2022

US equities - a shift in factor leadership?

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).

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).

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.

10.11.2022

How to trade the CPI undershoot

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.

07.11.2022

Sales exposure to China

This Watchlist is available upon request. Build your own lists to customise your Qi experience.

PDF download

04.11.2022

How to play any China bounce

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